European banks are safer today because they have to follow a single set of rules.
The next step is to put in place a safety net so that if there is East big worries, the taxpayer is not the first to have to bail out the bank.
So what could a European safety net mean for taxpayers?
Let’s start by looking at what has changed since European banking union rules were introduced after one of the continent’s worst financial crises.
Euronews traveled to Italy to find out.
The financial crisis may be over in Italy, but deep wounds remain and legal investigations and trials are still ongoing.
Between 2013 and 2017, seven banks had to be rescued, three were recapitalized and bailed out, and four were bailed out.
Hundreds of depositors lost their money, unaware that, on the advice of their bankers, they had invested their liquid savings in risky bonds.
In addition to the money lost by investors, the public resources used for the bailouts have been registered as public debt, for a total of between 1 and 2% of Italy’s gross domestic product.
Where savers did not lose money, taxpayers had to pay.
But, in Italy at least, savers are no longer informed today, notes Duilio Borettini, scientific coordinator of the professional association of financial advisers Cofip.
“The Italian saver is not well informed, he struggles to take a role in the request for information; so basically the fear increased, but not the behaviors that might help eliminate or reduce the problems.”
Everyday savers still have to rely on their bank or financial advisor because in most cases they simply don’t have the knowledge to invest on their own. It is therefore essential to have a regulatory framework that clarifies who is responsible for intervening when there is East a problem.
“Certainly, from the point of view of general investors, it would be desirable to know, at least ex-ante, who is going to take care of it in the event of similar problems in the future and under what conditions,” says economist Riccardo Rovelli . “So it is important in the future, I think, to be able to distinguish between bank liquidation carried out by national authorities and bank resolution carried out by European authorities.”
This single rulebook of clear and common principles is cause for optimism, says Borettini, if we face another financial crisis.
“I am extraordinarily optimistic. I think that the work of the European Banking Authority, of all the bodies in charge, is advancing with great efficiency. They will accompany digitalisation, innovation, in European terms, in an absolutely positive way”.
common safety net
The system is much safer than it was before: European banks have much more capital for bad times and they are also healthier, with fewer bank loans outstanding.
But what happens when even the current rules are not enough to prevent a bank from failing? This is where the idea of a common backstop comes in.
Since the financial crisis, Europe has been building a banking union for its citizens to make banks more stable.
The first two pillars – single supervision and single resolution – are already in place.
But the third is not there yet.
Today, in the event of bad weather, a single resolution fund made up of contributions from the banks can somehow stabilize the situation.
But in very bad weather, this fund may not be enough and would require last resort support.
This would come in credit from the European Union via the resolution fund to the country most at risk.
It would be financed by both eurozone countries and non-eurozone countries participating in the banking union.
But the real owners of the house, the taxpayers, could still be protected since any relief money used during the crisis would be reimbursed by the banks.
Ideally, a safety net should be constructed when conditions are sunny and bright.
Step by step
The European Central Bank, which acts as the sole supervisor of our banks, says the risk reductions put in place so far are essential to protect the taxpayer. However, the consequences of potential bank failures are still national, and therefore always borne by the taxpayer.
Euronews spoke with Pierre Moscovici, European Commissioner for Economic and Monetary Affairs.
He began by comparing a deeper economic and monetary union to a bear: the Eurozone and the European Monetary Union (EMU) are strong and sturdy, he explained, but they can also bite.
Moscow: We already have all the security tools, almost all of them. But we do not yet have the capacity to revitalize our economy. If there is a safety net, it means that if the immediate solutions do not work, you ultimately have financial and budgetary support which prevents the risk of bank failure from being too high.
euronews: But does that mean taxpayers are always responsible for a bailout?
Moscow: The safety net is budgetary – it is based on the (European Stability Mechanism). Since we have a banking union, we need a European solution.
euronews: How do you think the solutions we have found through the banking union have helped a normal citizen at home?
Moscow: First, the balance sheets of the banks are much better than before. And when there is a difficulty, then there is discussion between the (European) Commission and such and such a bank. It happened for Italian banks, for example, or Spanish banks. Thus, we could avoid systemic risk. And we were able to anticipate and find solutions, and therefore there was no bank failure.
euronews: Would this safety net work even when it has been decided that a certain bank has no impact on the Eurozone economy or on other Eurozone banks? What happens at that time? Would it then fall to the national authorities?
Moscow: First, let’s establish the safety net—it’s not there yet!
euronews: Tell me what you think might work.
Moscow: First of all. You know, my experience is that we have to go step by step. I don’t want to elaborate; I think it is now up to ministers to make their decisions and there is a Commission proposal on the table.
The European Stability Mechanism would be transformed into a European Monetary Fund. This “European Monetary Fund would be an EU institution, so that it could be democratically controlled. I think we could have a decision by this summer and we could have something much simpler and faster.
3. The Commission believes it can integrate the #ESM in the EU Treaties without a full treaty change; but the European Parliament will have to give its approval to the regulation transforming the #ESM in #EMF.
— Agata Gostyńska (@AgataGostynska) December 7, 2017
euronews: What convinced people to move towards it?
Moscow: I think the ministers are still divided, yes, but well aware. When Paris, Brussels, Berlin are, I would not say aligned, but go in the same direction, things become possible.