International Relations

Flaws in regime for dealing with failing banks put EU economy at risk

Brussels, 1 June 2016 - The EU’s economy is at risk because of flaws and gaps in the EU’s bank resolution and recovery framework, said speakers including Sir Paul Tucker and Avinash D. Persaud at Finance Watch’s conference in Brussels today, “Between a Rock and hard Place – The Future of traditional Banking”.

Sir Paul Tucker, chair of the Systemic Risk Council and former deputy governor of the Bank of England, warned of serious consequences for the EU’s economy if lawmakers weaken the rules for dealing with troubled banks, and said that the financial system is years from achieving a ‘steady state’ since the crisis. He said:

“I think it will take the best part of a quarter century to find our way back to a sustainable steady state. This suggestion can cause a degree of bewilderment, even anger, but I don’t think it should be so surprising. The new regimes for banking, shadow banking and capital markets are not yet fully articulated; once they are, it will take years for intermediaries to tailor their business models, including their cost structures, to the new ‘rules of the game’." 

He warned that unless the rules on dealing with failing banks are strengthened, global “confidence in European finance would be damaged, with investment in the economy further deferred”.

Sir Paul also made technical recommendations, including not abandoning plans to subordinate bank bonds to other senior creditors, and not diluting existing rules on how much loss absorbing capital banks should have.

Avinash D. Persaud, senior fellow at the Peterson Institute, warned further against placing too much reliance on so-called “bail-in” instruments instead of equity. He said:

“Solving a market failure with market instruments whose prices will spike dramatically upwards in a crisis means you are already on the back foot. Bail-in instruments will not work. Worse, they will bring forward a financial crisis and spread it to places that will be harder to tackle.”

Christophe Nijdam, Secretary General of Finance Watch, said:

“We are on a worrying track: another financial crisis will have political consequences. Today’s discussions show agreement that we need to move beyond the current thinking: we need to cap leverage and implement structural reform at the EU’s systemically important banks, as well as plugging the gaps in the bail-in rules.”

ENDS

For further comment, please contact :

    * Greg Ford at greg.ford@finance-watch.org, telephone +44 (0) 7703 219 222
    * Charlotte Geiger at charlotte.geiger@finance-watch.org, telephone +32 (0) 474 33 10 31

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