Wednesday, June 5, 2013

ECB pushes ahead with plan to find out what is hidden on and off EU bank balance sheets

As reported by Zeit (hat tip Zero Hedge), prior to taking on responsibility for monitoring the EU's banks, the ECB is planning on finding out what losses are hidden on and off the balance sheets of the top 140 EU banks.

Not only does the ECB want to have the losses discovered realized, but it also wants the banks to be recapitalized either by taxpayers or by bailing in equity holders and unsecured creditors including depositors.

The ECB's plan is positive in that the banks will finally be forced to recognize upfront their losses on the excess public and private debt in the financial system.

The ECB's plan is negative in that it insists on an immediate recapitalization of the banks.  The plan would be much better if it allowed the banks to recapitalize themselves over several years through the retention of 100% of pre-banker bonus earnings.

The timing is already set. From the autumn of the monetary authorities will illuminate along with the national supervisory authorities, the balance sheets of major financial institutions in the euro zone. There is a total of around 140 banks, which together cover about 80 percent of the market.  
The ECB teams are already formed to examine the books as required directly into the banks. Thus, at the end come out reliable figures, is the intention of the central bank also independent consultants - to be on board - Wirtschaftsprüer or investment companies....
Regular readers know that your humble blogger dislikes regulators going into banks with teams of consultants to find bad debts.  As shown by Ireland, Greece and Spain, the combination of regulators and consultants never find and have the banks disclose all of their bad debt.

Your humble blogger prefers requiring the banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.  With this disclosure, all market participants can see just how much bad debt a bank is exposed to and that the bank recognizes the losses on this debt.

If the combination of regulators and consultants is really going to force banks to disclose and write-off all their bad debt, then regulators should be happy to have banks provide ultra transparency to confirm this fact.

A failure to require the banks to provide ultra transparency is the equivalent of waving a large red flag and saying the banks are still hiding losses.  The experiences of Ireland, Greece and Spain show that this is true.
Financial institutions that can not even fill possible gaps capital should be recapitalized by the Member States. If they are not able to lift the renovation alone, they can access loans from the ESM bailout fund to fall back. 
The risk should not alone bear the taxpayers: Even shareholders, creditors and customers of the affected banks will be first used to cover the losses.
Once the banks have been forced to recognize their losses on the excess private and public debt, they should be separated into two groups.

Those banks whose interest income is greater than the sum of its interest expense plus operating expense should be allowed to remain in business.  These banks have the capability of generating earnings that can be retained and used to rebuild their book capital levels.

Those banks whose interest income is less than the sum of its interest expense plus operating expense should be resolved.  Simply, they do not have a franchise that allows them to generate earnings to rebuild their book capital levels.

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