EU Moves to Protect Financial System from Failing Banks

Too Little, Too Late?

The European Commission gave its blessing to a plan proposed by Italian authorities to liquidate small troubled banks in Italy with total assets of less than €3 billion. Under the plan, as a failing bank is “resolved,” its assets and liabilities will be transferred to another lender under national insolvency proceedings.  When liabilities (including deposits) exceed the value of good assets (mostly loans), the gap would be dealt with by giving haircuts to unsecured creditors — including insured depositors who would then be made whole by the respective national deposit guarantee fund — and by mobilizing taxpayers.

The new resolution plan will be available not only to Italy. Each Eurozone member state will have the option to “set up schemes to support the orderly exit of small failing banks, adapted to the conditions in each market.”

Italy, like many other EU countries (including France, Spain and Germany), has pathetically inadequate funds in its deposit guarantee fund — hence the need to mobilize taxpayer funds. Under rules passed in 2014, EU member states need to have funds in deposit guarantee schemes equivalent to at least 0.8% of the covered deposits, but given that most countries don’t even come close to that, they’ve been given until 2024 to reach the target.

The last time the European Banking Authority checked, at the end of 2016, Italy, like Ireland and the Netherlands, had guarantee funds equivalent to just 0.1% of covered deposits. In Spain the figure was around 0.2%, while in France and Germany it was 0.3%

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