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EU Debt Office, Authority for Bank Resolution Funds & European Financial Stabilisation Mechanism

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Michel Barnier, Commissioner in charge of the Internal market and Services presented last week a proposal for Bank Resolution Funds. This came two weeks after the EU Heads of State presented the 750 bn euro rescue package with that mysterious Special Purpose Vehicle (SPV), which aimed at calming down the markets. The turmoil continued and it felt kind of weird that there were no panic news this last Friday (no bad news is good news).

Last week Asymptotix pleaded for a European Debt Bank, or European Union Debt Office, which the Swedes would call it. John A Morrison said:

We are where we are, capital has transitioned to the state, we need public institutions which can properly manage us through this second phase sovereign debt crisis and develop a roadmap for free markets beyond a properly constituted European "Bretton Woods" style "Public Debt Bank" (its not for me to coin the name); philosophically in line with Keynes' thinking.

During the weekend Asymptotix read through a paper that our contributor Robert McDowell sent us. That paper triggered us to write this post. Any state like Sweden and the UK has the following structure (bodies) to manage finance: 

  1. A Ministry of Finance (Swedish Ministry of Finance, UK HM Treasury)
  2. A National Bank (Swedish Riksbank, UK Bank of England)
  3. A Financial Supervisory Authority (Swedish FI Finansinspektionen, UK FSA Financial Services Authority)
  4. A Debt Office (Swedish Debt Office Riksgälden, UK Debt Management Office)

So what do we have at EU level? We can try our best to map this:

  1. The European Commission basically have three "Directorate Generals" that handle policy related to financial affairs: DG Internal Market and Services. Its main role is to coordinate the Commission’s policy on the European Single Market and to seek the removal of unjustified obstacles to trade, in particular in the field of services and financial markets. The Directorate General for Economic and Financial Affairs (DG ECFIN) strives to improve the economic wellbeing of the citizens of the European Union, by developing and promoting policies that lead to sustainable economic growth, a high level of employment, stable public finances and financial stability. DG Competition works to enhance competition in Europe’s banking, insurance and securities markets.
  2. The ECB is the European Central Bank for the eurozone countries, but not for non-eurozone countries such as Denmark, Sweden and the UK.
  3. There is no European Financial Supervisory Authority, although the McCreevy paper (see below) proposes a European Banking Authority.
  4. There is no European Debt Office

Asymptotix simple message is the following: New institutional structure needs to be planned and implemented now!

The Swedish Stability Fund for Financial Institutions

In Sweden, a special stability fund has been set up as a part of the Government’s stability plan for financial institutions. The purpose of this fund is to finance measures needed in order to counteract the risk of serious disturbance to the financial system in Sweden. The fund, which in 15 years is targeted to reach 2.5 per cent of GDP, will be built up with the help of fees paid by banks and other credit institutions. The Swedish Government has initially allocated funds from the central government budget to the fund, but the aim is that the costs should be carried by the industry itself. All banks and other credit institutions incorporated in Sweden that are covered by the Act (SFS 2008:814) on state support to credit institutions will pay a stability fee to finance the stability fund. The fee, which amounts to 0.036 per cent per year, is levied on certain parts of the institutions' liabilities according to an approved balance sheet. The basis for calculating the fee is all liabilities excluding equity capital, junior debt securities that are included in the capital base, according to capital adequacy rules, and group internal debt transactions. To develop the system further the Government intends to make the fee risk differentiated and considers a combined system with the deposit guarantee scheme.

The Swedish National Debt Office has been appointed Support Authority and is responsible for managing the fund.

Letting banks and other institutions finance the stability fund creates a financing system that is similar to a funded deposit insurance system. Costs for reconstructing banks will primarily be paid by the credit institutions, which increases the protection of the taxpayers’ interests. In the case of a truly systemic event where several major banks have to be rescued, the reconstruction cost might exceed what has been funded ex ante and what the industry could bear going forward. In these cases it will be necessary to supplement the stability fund with other public funds; a systemic financial crisis almost inevitably has effects that touches national fiscal responsibilities. This implies, for example, that a stability fund does not eliminate the need to have procedures for ex post burden sharing. Building pan?European funding should not be a priority at this stage as there will be clear difficulties to combine such a system with national supervision and powers of taxation. However, a harmonisation of the funding within a revised directive of the DGS is clearly warranted.

On the issue of how to make the financial sector contribute, the debate has narrowed the alternatives down to some form of stability fee, and a tax on financial transactions. Both the IMF and the European Commissions seem to favour a stability fee and the issue is on the G20 agenda. The US, UK, Germany, France and some other countries have proposed similar fees on their financial sectors. Compared to a transaction tax, the stability fee has a number of obvious advantages: it addresses risk; it does not hurt liquidity in the financial markets; it can mitigate the ‘too big to fail’ problem by capturing an institution’s contribution to systemic risk; and, most importantly, it does not require global participation.

Introduction to Robert McDowell's Paper

It's no jack-in-the-box document laid out by DG Markt following the 750 bn euro rescue package, it's a product from an old process that we learn about in November 2008 when we visited the top floors of the Berlaymont building. The former Commission, with Charlie McCreevy prepared the early stages of the Bank Resolution Funds proposal, Commission Communication ‘‘An EU framework for Cross-Border Crisis Management in the Banking Sector’’ in October 2009.

European Commission Initiatives

This proposal was a product of the Larosière report. The Larosière report concluded that “The lack of consistent crisis management and resolution tools across the Single Market places Europe at a disadvantage vis-à-vis the US and these issues should be addressed by the adoption at EU level of adequate measures”. In January 2010 the Member States, including Sweden, sent comments on the specific questions posed in the Commission Communication. This proposal will now be scrutinised and politicized.

European Commission Bank Tax Proposal - Introduction 

The European Commission proposes a tax on banks to build Resolution Funds to pay for orderly winding down of banks that have failed (become insolvent) and cannot be saved. This is proposed as part of a new EU-wide Crisis Management Framework that includes setting up an European Banking Authority. Note that the word banks includes investment firms as well.

The proposal is pictured in a very big context, coloured by a grand statement: “…governments throughout the European Union and internationally have provided massive amounts of public money to support their financial sectors. This support was necessary to ensure financial stability and to protect depositors, and was accompanied by measures to support the real economy. However the overall effect has been to impose a heavy economic burden to be borne by today's taxpayers and future generations.”

No data is provided to support the grandiosity of this, perhaps because it is a popular presumption! It is easy to misread, to conclude that the cost of supporting the financial system is by itself the cause of, “a heavy economic burden to be borne by today's taxpayers and future generations”; no mention of the words recession, nationalisation or asset swaps. Could public funding to aid banks (finance sector) have involved taxpayers’ money directly (plus cost of measures to support the real economy) on such a scale of fiscal loss that it will take numbers of generations to recover? This seems a very long time; longer than one lifetime perhaps? Banks and central banks will know this is not so.

All governments expect to get aid funding recompensed over the medium term (3-5 years), and to earn a profit or only minimal loss. The Commission should know this from its evaluations of bank aid schemes and individual cases that it must approve. It knows state aid is secured and that fees, rates and other charges on banks are at commercial rates, as per EU state-aid rules.

The hyperbole equates high national debt ratios with aid to the banks, but is this generally so? The UK, by far the biggest provider of funding support to the banks, has almost none of the aid to banks in the government budget, in its budget deficit or in UK national debt. The IMF Fiscal Report that the Commission defers to support its assertion, paragraph 10 says, “Taking into account asset recovery through end-2009, the net cost of direct support in advanced G-20 economies is estimated at 2.7% of GDP. Given the gradual cost recovery in past crises, the medium-term net cost is likely to be even lower, including in countries at the center of the financial crisis, and well below historical norms of 8%t of GDP.” The Commission or the IMF must be wrong; they cannot both be right?

The Commission's reference to heavy long term burdens on taxpayers does not make obvious sense in the context of Resolution Funds given the conditions attached and the narrow scope of applying the funds only to banks after they have failed (as discussed below). Of 39.1% increase in G20 countries' public sector debt by 2015 (IMF forecast), only 3.2% is finance sector support.

Our argument here is that we are deceiving ourselves if we fail to examine how measures to mitigate the effects of the Credit crunch were actually funded. This should be done before finalising a policy for Resolution Funds to pay for orderly winding up of failed banks. If the Commission looks carefully at this aspect, perhaps with the assistance of the ECB and the BoE, it may appreciate that its policy aims and objectives can be satisfied in better ways?

Semantic Confusion?

After considering how aid has been funded, we may find, aside from questions of how big the Resolution Funds should be and if internalised within government budgetary finance or not, that this tax (a bank levy from which bank customers are to be protected) is not efficacious from the point of view of taxpayers or banks.

Note: I have argued in the past for bond issuance rights for The European Commission and the ECB up to €1 trillion. In the 80s and 90s ( before The Lisbon Treaty introduced majority voting) this idea came up three times in different forms at IGCs, only to be voted down by UK and Germany, despite the self-financing nature of each proposal. Therefore, I am not making a case against The Commission finding a way of securing a large facility of sufficient size to iron out macroeconomic imbalances or other disparities.

At work here, in the Commission's proposal, is a political-economic or semantic confusion between public money and funding where the latter covers guarantees, insurance and asset swaps, where no net payments by government to banks were involved and using transactions off-budget and off-balance sheet.

What is missing but critical is to consider how massive government interventions were financed when they do not appear in government budgets, and then to ask if it is correct to call off-budget funding public money or taxpayer's money, or something else entirely? The difficulty for the Commission and the Euro Area is that the range and flexibility available to the UK, Sweden and USA central banks is not available to Euro Area central banks.

Therefore, when The Bank of England (BoE) purchased 20% of UK National Debt under the Quantitative Easing (QE) programme, even though the bank is 100% government-owned, this was not subtracted from government borrowing in the same year, which had it been would have netted off all UK net borrowing on-budget in tax year 2009-10. The news media and market analysts, however, neglected to ask publicly how QE was funded. To the authorities involved there seemed little purpose to be served in enlightening the media on this point? When BoE took £285bn of RBS assets into its Asset Protection Scheme, this was publicly described as an asset insurance scheme, notwithstanding central bank speech and announcements, including by the IMF, describing this as off-balance sheet asset swap (actually a repo agreement) where BoE purchased the assets, which it heavily discounted, for a number of years, and annually renewable. Added to this are agreements between bank and central bank regarding division of liability for any loss of market value and cash-flow in those assets between first-loss borne by the bank and second loss by the central bank. Only this latter aspect can be defined as publicly provided insurance, but which in reality is a very small insurance risk. It meant that net income from the assets are tax-free until the scheme ends.

Central banks are public enterprises, not government. Their asset and liability balances, income and expenditure, are not part of governments? budgets. In the EU, under the Maastricht Criteria of the Stability and Growth Pact, only gross government fiscal deficit and national debt are counted in ratio to GDP, while the balances of public enterprises are excluded.

No one publicly asked how BoE funded QE on or off its balance sheet? The IMF in its Fiscal Report judiciously notes that these QE assets can be resold back into the market at some time. If so, this would increase supply to the market without increasing UK or USA national debts. In the UK?s case this is 14.5% ratio to GDP not counting government bonds held in government accounts of roughly the same again.

Note: It may be that the balance facilitating QE derived from the discount haircut exerted on banks' assets pledged as collateral to the central banks (BoE and Federal Reserve).

There are valuable questions regarding the flexibility of the UK to intervene in the crisis, using off-budget treasury bills and off-balance sheet repo asset swaps, as by far the largest provider of public sector aid to banks. The European Central Bank (ECB) took a long time hesitating to follow the US and UK examples, before it announced on May 10, 2010 that it too will conduct interventions in the euro area bond markets, but „sterilised?, having previously only provided liquidity at the short dated end of the markets.

Note: It began these operations the same day. The presumption until March of this year was that the Euro system provides implicit security for cross-border sovereign lending and borrowing within the Euro Area. in cross-border financing in the early months of the financial crisis, the ECB?s governing council insisted “the euro area does not suffer from major imbalances”, and as recently as March, Mr Trichet continued this line lauding the security provided by the “special” virtue of the euro. To reassure German opinion, Jean-Claude Trichet, told Der Spiegel magazine that it was “ridiculous” to believe that ECB's decision to buy bonds, in the early hours of May 10th, was bowing to political pressure. Mr Trichet said the ECB?s operations are “totally different” to QE as practiced by the Federal Reserve and the Bank of England, because ECB's bond purchases are sterilised. The ECB has to avoid the charge of providing support for governments? fiscal stances, a criticism leveled by Axel Weber, President of the Bundesbank. In the Euro Area system there is no institution other than the ECB to help individual countries in crisis. The mutual-support package announced on May 10th, of €440bn “special-purpose vehicle” to guarantee loans to governments, will fill a gap, but in the meanwhile the ECB has to mount a holding operation.

The scale of what the ECB has foregone maybe shown by this very relevant table in the IMF Fiscal Monitor report of 14 May:

The IMF table above excludes ECB interventions. It shows the much larger scale of UK intervention compared to other countries including the USA. This scale is created by asset swaps and guarantees with fees and insurance premia used to fund capital injections. Arrangement fees charged to UK banks were paid in preference and ordinary shares. Net Utilised amounted to only 0.1%/GDP = c. £1.4bn cash (taxpayers' actual money) while in the USA case the most recent figure is $672bn from TARP.

Note: In hindsight the US Treasury regretted going the on-budget TARP route after recognising the greater scale, flexibility and efficiency of Asset Swap purchases that eventually became TALF, a policy for which BoE provided the blueprint.

With the launch of the Euro, national central banks of the Euro Area no longer possess money market operations or bank reserves since these are vested in the national independent (or supra-national) ECB. Consequently they no longer possess the range of intervention choices available to BoE, Sveriges Riksbank and others outside the Euro Area. In the Euro Area, only the ECB, not its constituent central banks, may engage in asset swaps and purchases paid for by treasury bills or by crediting the banks with assets (deposits) held at the central bank.

The ECB, unlike the Federal Reserve or BoE, is less politically motivated to intervene; it lacks regulatory definition in respect of securing the solvency of national financial systems unless there is a palpable EU-wide systemic risk and a Euro risk, and it must otherwise above all retain its much vaunted political independence that in some quarters is highly prized.

Euro Area member states are obliged therefore when providing emergency aid to their banks (recapitalisation and asset swap purchases etc.), beyond the level that the ECB could agree to do by itself, to do so only on-budget financed by tax revenues and by borrowing (issuing new government bonds). Only in these cases it is valid to describe intervention as using taxpayers? money or public funds, similar to the US TARP scheme with the difference that Euro Area member states may not first have to pass a bill in parliament, but they must obtain Commission approval, which takes longer. Whether a bill is passed or not to authorise emergency aid, all bank aid schemes in the EU are subject to Commission scrutiny regarding macroeconomic and competition issues, and, furthermore, any resulting breaches of Maastricht borrowing and debt ratios are examined and may incur penalties.

We can see further confusion in the political debate and media comment on Europe’s sovereign debt crisis as to how much EU states' fiscal embarrassments are due to four factors:

  1. aiding the banks; and/or
  2. securing recovery in economic growth; and/or
  3. deficient competitiveness in external trade and balance of payments; and/or
  4. improvident impecunious governments.

It is easiest to lard all or most blame on the last (4), when it is the hardest of the four to analyse, but the only one covered by the EU Stability and Growth pact when read sans caveats. It is an enormous irony for the Euro system, set up to protect against currency and government bond speculation, that its central agreement is now used very effectively by currency and capital market speculators to hold the Euro Area to ransom.

In these respects, the Credit Crunch and its sovereign crisis successor have exposed Euro-member governments and their national central banks to the cost of having given away domestic funding flexibility compared to that demonstrated by the UK, USA, and others, which, in extremis such as the Credit Crunch lasting as long as the life of a parliament, has been shown to be so serious that non-Euro EU members will now not join the Euro so long as the present system retains its inflexible shape.

Note: The ECB cannot be blamed for operating within its constitutional charter. It provided short term liquidity facilities of over €1 trillion. It how its operations were framed the role of central banks in support of short term government financing was for some reason either overlooked or deemed no longer relevant?

Reducing the probability of bank failure

The Commission announcement says: “A clear political message that emerged from the G-20 meeting in Pittsburgh in September 2009, strongly backed by the EU, is that taxpayers' money should not be used again to cover bank losses. The European Commission is working to achieve this in at least two complementary ways by:

  • reducing probability of banking failure through stronger macro and micro-economic supervision, better corporate governance and tighter regulatory standards and;
  • ensuring that, if in spite of these measures, failure does occur, appropriate tools including sufficient resources are available for orderly and timely resolution.

The establishment of resolution funds constituted from private sector sources are an important part of this response (to)…avoid contagion, allow the bank to be wound down in an orderly manner and in a timeframe which avoids the "fire sale" of assets ("principe de prevoyance"). Problems facing these laudable objectives in our view are:

  1. Neither the Commission nor the ECB have a macroeconomic model to support financial sector supervision and they are not in the process of building one. Therefore commitment to macro-economic supervision has to be advised from elsewhere. The IMF, Cebs and national financial sector regulators are not equipped to help. BoE is building a macro-model and the Federal Reserves has some related projects in train that will take a few years to complete.
  2. The Commission is not equipped to anticipate and reduce probability of banking failure. That too has to be advised elsewhere, by central banks and regulators. The IMF, Commission and Euro Area may intervene macro-economically as per Greece but that does not translate into „reducing probability of banking failure’.
  3. Micro-economic supervision of banks is either without precise meaning in the absence of a macro-economic model or it means micro-prudential supervision, which is what regulators do, and already fully scoped and half-implemented, but not fully detailed in Pillar II of the CRD (Basel II), and in Solvency II for insurers, and Pillar II is not fully implemented yet for compliance purposes by any banks or insurers.
  4. We know, technically and in practice, that there are at least six distinct ways of determining solvency/insolvency, but that regulators and central banks will intervene before insolvency, when many matters remain unclear. Therefore precisely determining what may trigger the release of emergency funds cannot be precisely specified and is a matter of judgement. This may be why the Resolution Funds are conceived for action ex ante.

Note: The concept of living will (implied but not directly referred to by the Commission) will be applied to the biggest banks that pose the biggest cross-border systemic risk. This idea is deemed necessary to ensure a more orderly failure of banks. It is in reality no advance on the three pillars of Basel II. The „living will? perspective is implicit in Pillars I & II of Basel II regulation, which applies more widely than just the biggest firms. But, as we have seen in the Credit Crunch, the biggest failures coincide with failures in accuracy of financial and risk accounting, which are operational risks, as well as in failure to comply with Basel II prudential principles.

In response to moral hazard concerns, the Commission strongly says, “A number of countries have already introduced, or are in the process of introducing levies on banks, although these differ across jurisdictions… resolution funds must not be used as an insurance against failure or to bail out failing banks, but rather to facilitate an orderly failure.” The resolution funds may not be used to recoup losses for taxpayers in the current crisis or shareholder or creditors or depositors (except depositors secured by Deposit Guarantee Systems). But, if creditors are not recompensed and there is no funding to cover excessive risk-taking then the systemic risk of failure is not avoided and the resolution is unlikely to be orderly?

It follows from the above that national governments and regulators are the first line of intervention. Their interventions will tend to pre-date failure to cope with systemic risk and restore confidence. The biggest interventions in the Credit Crunch substituted government and central banks for private sources of loans to banks to refinance banks' funding gaps, and this involved asset swaps as collateral for government money market paper.

The Resolution Funds are not in this category. If national governments levy taxes for emergency funds to bail-out banks or otherwise to prevent failure, these are not the same as Resolution Funds.

Only when the costs of intervention crystallise and there is failure to find a way to save a bank from insolvency, which usually means buying time, and when resolution of that failure can be costed, then application to the Resolution Funds can be made. But, it is not clear why funding may not be raised at the time instead of ahead of time or why it needs to be substantial if a bank's creditors are not to be recompensed?

If there is a hole in the roof and it is raining the resolution fund is available to pull the house down in an orderly manner if the hole in the roof cannot be fixed? But, if the hole cannot be fixed the likelihood of an orderly resolution must be remote, legal costs and liquidation fees will be enormous? When Lehman Brothers failed the orderly resolution involved indirectly $1.5trillion of interventions in the money markets to solve transaction delivery failures! It is unlikely that this is what the Commission has in mind for its proposed Resolution Funds.

The Commission says its proposal is to levy taxes on banks to build resolution funds is a response to growing political support to apply the polluter pays principle as one of several options in setting up its new crisis management framework. The media picked on this to wonder aloud if this is gesture politics more than fully thought-through policy?

Thinking the matter through?

The idea of a new Crisis management Framework began with a Commission Communication in October 2009. The Commission proposal page 7 says that the idea of a levy on banks was not considered until April 2010. It is unreasonable to place a lot of weight therefore on the first communication about the idea. Page 4 says, “The establishment of bank resolution funds will form a part of the new crisis management framework. It is acknowledged that this will entail costs for banks at a time when they are in the process of implementing additional measures in response to the crisis. The Commission recognises that it is essential to develop a clear understanding and careful assessment of the cumulative impacts of the broad set of reforms dealing with levies, deposit guarantee schemes and bank capital, and adjust the individual elements of the reform package accordingly. It is necessary to ensure that the costs are calibrated in such a way as to avoid stifling the economic recovery and increasing the cost of credit to the real economy. It should also be avoided that increased costs are passed on to bank customers in the form of higher charges. The Commission will ensure that all these elements are properly taken into account in the accompanying impact assessment work.”(my emphasis)

It is as yet unclear how a Resolution period may be delimited separate before a Liquidation period unless, in our view, the Resolution period includes nationalization; otherwise liquidation winding-up would normally start as soon as insolvency is determined?

Note: The Commission report makes no mention of nationalisation; we do not know if there is a particular objective, implicit, not stated, to avoid that? Examples that the Commission must have strongly in mind must include Northern Rock (nationalised and split into good bank/bad bank), Anglo-Irish Bank (bankrupt/ nationalised) and, above all, Fortis Group (nationalised in 3 parts by 3 governments and then the Belgian part sold to a French bank with a bad bank retained for work-out), and a number of small mortgage and savings banks failures. The Commission envisages, “For practical purposes, management of bank resolution funds should be entrusted to authorities that would be in charge of resolving financial entities and which would act as independent executive bodies. Clear lines of accountability will be needed where new powers for the allocation of funds are granted. Functional independence from government would ensure that the funds were strictly reserved to pay for resolution measures. The details of the governance arrangements will have to be further developed.” We cannot tell from this if the Commission believes national governments, national regulators and central banks are to be kept at arm's-length or left out of the loop, or, given the limited scope of the resolution funds, who other than government would apply to the Resolution Funds, and if so why any government should need recourse to such funds for an arm's-length resolution executive of competent authorities or a college, additional to the problem of defining where orderly resolution ends and liquidation winding-up begins?

Application of funds

The Commission has not indicated how big the funds might be and clearly states that many details need to be worked on. This caused some exaggerated notions in media comment, especially when the narrow scope of the funds was missed and the idea took hold that these funds would deal with all intervention costs of failing banks as in another credit crunch i.e. €trillions? When Lloyds TSB took over HBoS, which could be classed as a resolution of a failed bank, HBoS the legal costs alone were hundreds of £millions. Some resolution funding might conceivably also be repayable? There are uncertainties all across the accounts of a failed bank that may take years to unravel. For example, financial audits of the failures of Lehman Brothers and Fortis in different ways are not yet complete. The Commission paper states:

The details of the governance arrangements will have to be further developed. In this context, three questions are particularly relevant for the management of a fund:

i) How should the money collected be held,
ii) Under which conditions should the funds be used to resolve banks and
iii) How to decide the allocation of costs payable by funds in case of a cross-border resolution:

(i) Investment of funds would need to be in a geographically well diversified portfolio in highly liquid non-bank assets with low credit and market risk and in a way that supports the real economy.”

This suggests the fund will be invested in government bonds, but which are currently in high demand by banks in which to hold their new higher buffer reserves.

(ii) With regard to the use of funds, the Commission intends to put in place a harmonised resolution framework which should aim to avoid any differences resulting from the way national authorities apply resolution powers and tools, thus limiting competitive distortions. This will determine when and how resolution funds can be used.

This follows the framework for Commission evaluation and approval of government bank-aid schemes and cases (“use of bank resolution funds will need to respect the EU state aid rules.”)

(iii) With regard to arrangements in case of a cross-border resolution, the Commission intends to come forward with proposals to establish clear rules on how coordination will be expected to take place. At the core of these arrangements could be colleges involving authorities in charge of resolution with a view to taking joint decision on the preparation for the resolution of a cross-border banking group under the oversight of an entity such as the future European Banking Authority as proposed by the Commission. Such resolution plans, based on clear principles to be established by law, would include discussion about how burdens might be fairly shared and the sharing of costs between privately financed resolution funds.

Colleges involve governments, regulators, central banks, the Commission, the banks and everyone's advisors.


The context for which Resolution Funds are proposed appear hubristic. The necessity for a levy to provide cash money is not demonstrated. The scale and usefulness to governments or banks or taxpayers is not determined and are conceptually unclear and questionable. At present, it is conceivable that in the Euro Area when banks have had to be placed in what appears similar to the resolution period there are costs borne by government, but the banks are nationalised. There could be relevance to the Euro Area given the difficulty of fewer options for funding aid to banks.

It seems to us that the Resolution Fund idea distracts from due consideration of the competing ways how the financial crisis has been and continues to be resolved. Such an examination might posit the limitations of the Euro system. Those limitations are already under scrutiny because of the sovereign debt crisis and speculators shorting the Euro and national debt of Greece, Spain, Portugal, and Ireland.

According to the FT, the UK and USA, Osborne and Geithner, rejected the idea, arguing it introduces “moral hazard” by encouraging banks to think of the levy as an insurance premium that entitles them to help if they got into trouble.

This critique does not appear closely related to the actual proposal of funds only to pay for orderly winding-down banks in a resolution period. The Commission wants to offer the basis for a standard collectively agreed approach by EU states that in the context of G20 agenda would agree with a global standard framework. US Treasury Secretary Geithner said countries are likely to implement it differently: “It’s not going to be perfectly uniform.” UK Chancellor Osborne insists his own bank levy – which could be in his first Budget on June 22 – will go into government accounts.

French finance ministry official said privately that Paris supported the principle of a tax but did not want to create a standalone “resolution” fund and was also reported as fearing moral hazard.

The German finance ministry said the package appeared to be “moving in the right direction”. Finance minister Schäuble wants German banks to pay about €1bn per year into a fund to wind-down troubled banks. German government officials noted that Franco-British concerns about “moral hazard” issues around a bank resolution fund might have more to do with the fact that both countries needed the cash from a bank levy to ease their budgets. The German banking association, the BDB, welcomed the levy proposals but warned against countries taking a “piecemeal approach” by building a series of national funds.

Commissioner Barnier said he is conscious of moral hazard adding: “It is unacceptable that taxpayers should continue to bear the heavy heavy cost of rescuing the banking sector – they should not be in the front line.” Our view is that they are not in the front line. He also said, “The purpose of the bank levy is to raise money for general expenditure purposes.” This is not quite what the proposal states; it insists on a narrow precise set of uses. Barnier believes his plan can c be agreed by qualified majority voting under the EU?s single market rules. The UK insists this is about taxation and must be agreed by unanimity.

The plan will be discussed by EU Council in June, and if green-lighted will go to the G20 at the end of June.

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