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Early Christmas for European banks: Public bailouts to become the norm again

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Finance Watch comments on the European Commission’s NPL Action Plan

Brussels, 16 December 2020 – Finance Watch, the public interest association dedicated to make finance serve society, calls upon the European Commission to reconsider its stance of supporting the bailout of private banks with public money through so-called ‘precautionary recapitalisations’.

This new measure which is part of a package to address the upcoming flows of non-performing loans in the COVID-19 pandemic comes on top of the massive public support brought already to the European banking system in 2020. It shows without ambiguity that efforts made over the past twelve years to prevent public money from being used, time and again, to bail out private banking interests have not been sufficient.

  • If precautionary recapitalisations of banks will now be allowed in the form of “temporary capital buffer to deal with severe adverse conditions”, this effectively means that the Capital Requirement Regulation, adopted at great pain, is still not sufficient to make European banks stand on their own capable of withstanding crises on their own, which has many implications for European citizens.
  • It also shows that the Bank Resolution and Recovery Directive (BRRD), and the related Minimum Requirement for own funds and Eligible Liabilities (MREL), are obviously not trusted, even by the policymakers and regulators who created them, to ensure that failing banks can be restructured or wound up without destabilising the financial system. The provision added by the European Commission that precautionary recapitalisation measures would only be available to lenders that were viable or solid before the pandemic is effectively an empty statement: Absent any political determination to apply the BRRD framework, failing institutions have been kept afloat with public money long before the COVID-19 pandemic struck. The proposed mainstream adoption of “precautionary recapitalisation” would legitimise that practice, pave the way to a new wave of bailouts and, incidentally, put the final nail in the coffin of the BRRD.
  • The publication of the Communication is particularly ill-timed, coming one day after the announcement by the European Central Bank that it will allow again the payment of dividends by banks under its supervision, if under conditions.

Finance Watch therefore calls upon the European Commission, and the EU co-legislators, to concentrate their efforts on completing the Banking Union, with its ultimate goal of creating a resilient, properly capitalised and self-sustaining banking sector.

Benoît Lallemand, Secretary General of Finance Watch said:

“When banking profits benefiting private interests are derived from public support, we have a clear case of diversion of public money towards private pockets. In this context, there should not be any room for discussing the possibility for banks to resume paying dividends or not finalising the Basel 3 framework.”

Thierry Philipponnat, Head of Research and Advocacy of Finance Watch, said:

“We are seeing the resurgence and the institutionalisation of the bailout of banks with public money. When it comes to bailing out banks, we have moved in twelve years from “never again” after the shock of the financial crisis of 2007-2009 to “it is our duty” in the wake of the COVID-19 crisis.  This has far reaching consequences for the banking system and for society”. 

In a context where the looming climate crisis will also have most significant financial stability consequences, it is time to rethink the relationship between society and financial institutions.”

ENDS

 

For further information or interview requests, please contact Charlotte Geiger, Head of Communications at Finance Watch: charlotte.geiger@finance-watch.org or on + 32 474 33 10 31.

 

NOTES TO EDITORS

On 16 December 2020, the European Commission proposed a range of new measures to address the upcoming flows of non-performing loans in the aftermath of the COVID-19 pandemic – the Commission calls on the European Parliament, Council and Member States to help implement the measures swiftly and in a coordinated manner.

The announcement from the European Commission comes after the European Central Bank announcement of a targeted longer-term refinancing operation (TLTRO) scheme extended to € 3.2 trillion at a negative rate of 1%, effectively paying banks to borrow money and handing the European banking sector a windfall profit of up to € 32 billion per annum.  Moreover, TLTRO comes as an addition to the worldwide unprecedented injection of central banks liquidity in financial markets in 2020, an injection that has maintained financial markets at artificially high levels despite the deep ongoing economic recession.

On 15 December, the European Central Bank also lifted their de facto ban on banks paying dividends, clearing the way for the strongest lenders to make limited payouts (and pay bonuses) under certain conditions.

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