Monday, May 28, 2012

Secret plan for Brussels to takeover ailing EU banks

The Telegraph carried an interesting article on a plan being developed in Brussels for both EU-wide deposit insurance and an ability to seize ailing banks in the EU.

Regular readers know that as part of the blueprint to save the financial system, your humble blogger has been advocating the creation of an EU-wide deposit insurance mechanism.  The initial source of funding for this mechanism being the available procedes from the European Financial Stability Fund and the European Stability Mechanism.

Regular readers also know that as part of the blueprint to save the financial system, I think an EU-wide ability to seize banks is unnecessary.

In a modern banking system with deposit guarantees and access to central bank funding banks can operate and make loans to support the real economy for years with negative book capital levels.  During this time, they can rebuild their book capital levels through retention of earnings.

If a bank is incapable of generating earnings, then the national government in its host nation should oversee its resolution.

Struggling European banks could be seized and controlled by Brussels as part of secret plans being drawn up, it has emerged. 
Politicians hope the proposals, which would be funded by a new tax on banks, will stem the rapid escalation in the debt crisis witnessed in recent weeks.
Please note, this plan will do nothing to address the escalation in the debt crisis caused by the EU politicians creating redenomination risk by insisting that Greece has to leave the EU if it rejects austerity.
The plan is being formulated alongside Italian Prime Minister Mario Monti's desire for a guarantee on bank deposits. 
Mr. Monti confirms your humble blogger's observation that so long as depositors think that the sovereign can perform on its deposit guarantee or that the sovereign is backstop by an entity that can perform on the deposit guarantee, depositors will leave their money in the banking system.

As soon as depositors believe that the deposit guarantee might not be honored, then you have a run on the banks.
The annual levy would be placed into a "deposit guarantee scheme", with the fund - backed by the EU, ECB or European Stability Mechanism - also having the power to take over struggling banks. 
"Once you have got to a point intellectually where you are comfortable with a central European guarantee on all bank deposits, it takes only another small step to accept that this fund should have broader powers," the Sunday Times quoted one financier working on the plans as saying.
As everyone knows, 100% of the advice offered by financiers/bankers is in their best interest.  The critical question that regulators and policymakers have to ask is this advice also in the EU's best interest?

Is the ability to take over struggling banks in the EU's best interest?

Alternatively, it takes only another small step to accept that this fund should only guarantee deposits at EU financial institutions that provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.

With this disclosure, the deposit guarantee scheme could piggy-back off the market's assessment of the risk of each bank and charge the bank a deposit insurance premium that reflects the risk of the bank.

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