The new European Banking Liquidation Fund, another mechanism for socializing bank losses

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Sergi Cutillas, Javier Soraluce and Carlos Sánchez-Mato.

The Ecofin (European Council for Economic and Financial Business) has agreed to create the fund for liquidating banks in Europe or, in other words, to insure depositors’ money, which will be called Single Resolution Mechanism (SRM).

In this new pact there is, as there has been lately, a clear winner. Germany has assured itself that the European Commission will not have the last word in order to avoid the liquidation of German banks, and has guaranteed that during the next ten years it will not have to rescue foreign banks with its taxpayers’ money unless there are new agreements to make progress towards European integration.

The European banks will contribute 5.5 billion Euros to the fund per year, until it reaches 55 billion Euros by 2026. This is an absurd number considering the amount that the banking sector manages. The fund will be subdivided by countries until that date. This means that if a Spanish bank goes bankrupt before 2026, the money that will be used shall be the part which has been contributed to the fund by the Spanish banks. If this were the case, it is obvious that there would not be enough money since the contribution of the Spanish banks will be 8.5 billion over the next ten years. The total value of Spanish funds protected by the European deposit insurance scheme (that covers the first 100,000 Euros deposited) increased to 795 billion Euros on December 31st, 2012 (Source: Memoria Fondo de Garantía de Depósitos). Crunch the numbers. If a medium-sized bank goes bankrupt, 8.5 billion would not even be enough to get started. We have an idea of how the Spanish State’s banking system’s liquidity needs exceed, in several ways, the magnitude of the SRM’s 8.5 billion euros according to this PACD report: “La ilegitimidad de los Rescates a la Banca en el Estado español“.

We also would like to note that the new directive points out that “the member states must ensure that deposits resulting from transactions regarding private residential real estate or linked to private life events such as wedding, divorce, retirement, contract resolution, layoff, disability or death during the following twelve months as of the date they are entered into the clients’ accounts are completely protected”. This extends the amount of protected deposits in the Spanish State and also in other states. To sum up, protection is extended without the means to provide that protection.

Also, the agreement includes the bail-in formula, or the internal bailout, already applied by Troika in the Cyprus bailout. The thing is, the depositors with more than 100,000 euros suffer part of the losses in the liquidation. This bailout model was sold from the European Commission as “unique for a number of reasons”, although soon afterward they recognized it as a model for future banking crises, despite the working middle class, and now we see how that is integrated within the SMR.

In the event that there is not enough money, the fund can access money from the European Stability Mechanism (ESM), which is the taxpayers’ money. If this is not enough, it will be financed in the debt markets, in other words, going into debt with the guarantee of the state. The fund sometimes works in a similar way as the bad bank SAREB (Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria). The bad bank took on the bank’s assets at an overrated price and left the losses on the state’s account, which caused more public debt. In this case, the guarantee fund will directly give the money to the bank so that it returns the money to the depositors, also over the public debt. With this interpretation we can say that the new SMR liquidation fund is nothing but a bad bank elevated to European level. The amounts at which the fund is funded are only good for covering what is actually a mechanism of public guarantee to the banking sector.

In conclusion, the European directorate recognizes the unviability of private banking without the existence of a public safety net (either national or multilateral) that can finance the citizens’ savings at a reduced cost to the banks. No one would leave their deposits in private institutions at ridiculously low interest rates without public protection. That endorsement has a very low cost for the banks (0.8% for guaranteed deposits) for which it means a net and direct transfer of resources from the public sector to the private financial institutions sector. It is not an endorsement at “market prices”.

It would be interesting to make a point in the argument that holds the bail-in. The new bail-in system tries to justify itself by arguing that the depositors are partly guilty of the poor performance of the bank where they keep the money because they have not supervised it. The neoclassic economic theory, which is the basis of the decisions of European institutions, says that banks exist so that moneylenders don’t have to chase their debtors all the time. The bank exists as an institution specialized in gathering information and accumulating experience, which allows them to judge to whom they lend money in a better way than a family or another entity. According to this theory, this is the main reason why banks exist. This new bail-in doctrine tells us that this is not the case, that in reality the bank doesn’t know what it is doing and that we are the ones who should keep an eye on it. If this is true, we must ask ourselves, what is the purpose of a bank? The bail-in doctrine completely contradicts neoclassical economic theory, and according to this new doctrine, the bank should not even exist and private people and enterprises should lend money to each other and they should follow their debtors in order to ensure that the money is returned.

Here a picture of how the resolution system, which reflects the characteristic of the EU’s labyrinth-like bureaucracy whose sole purpose is to shadow itself in order to hide from the citizens’ view, works.

Source: The Financial Times

This agreement is an important step, although incomplete, towards the fiscal and political union of the European Union. The agreement involves a fiscal union, at least partially through the mutualization of the fund, in 2026. But this agreement, given the crisis that threatens the survival of the Euro, seems only like one incomplete step without a further agreement of fiscal union in which the fiscal transfers are allowed and the public state debts are mutualized. Definitive agreement does not seem close due to German reluctance, which continues to maintain hegemony over Brussels regarding the whole integration process.

Despite carrying in their history the rejection of the Maastricht treaty in the referendum made by Denmark, the rejection of the Constitution in different referendums made by France and Holland, the violation of the Stability Pact by the member states which today demand a fiscal discipline like Germany, the creation of funds and bailout mechanisms to the banking sector with public funds established in fiscal paradises under obscure and non-EU laws such as the MEDE, the destruction of the economies in southern Europe with neoliberal policies, and a very long etcetera, we see that the EU continues to advance, not without difficulties, in its imperialistic project.

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