- Senior bank debt must be bail-in-able
- G-SIFIs must be restructured for resolution to work
Speaking at a conference in Brussels organised by Finance Watch, the independent public interest association dedicated to making finance serve society, chairman Bair said:
“In the US, once a bank is in resolution, all debt instruments are available for absorption. It would be a very bad decision to exempt certain types of assets from bail-in because it creates an unwarranted government guarantee for what should be bail-in-able debt. Why give a free implicit protection for big bondholders?”
The EU is currently negotiating a Single Resolution Mechanism as part of its Banking Union initiative. Chairman Bair was head of the FDIC, which is responsible for bank resolution in the US, during the 2008 financial crisis.
Chairman Bair also said that resolution would be easier if banks are ringfenced and recommended “hard-wiring” into law that banks cannot be bailed out, other than emergency liquidity provision.
Also at the event was Adrian Blundell-Wignall, Special Advisor to the Secretary-General on Financial Markets at the Organisation for Economic Cooperation and Development.
Mr Blundell-Wignall said:
“If you are going to have resolution regimes and if you are going to attack ‘too-big-to-fail’, the preventive way to do it is through structural separation of G-SiFi banks. If you don’t do preventive things to stop ‘too-big-to-fail’, it will continue to exist.”
Thierry Philipponnat, Secretary General of Finance Watch, said:
“Banking Union requires that Europe’s large banks be resolvable. Firstly, banks should not be too large, too complex or too inter-connected to fail; they must be restructured before problems occur. Secondly, in the event of a problem, senior debt must be bail-in-able with a clear trigger and there should be limited inter-connection with systematically important institutions. The success of Banking Union depends on these things.”
The conference, “Five Years After – What Next for the Financial Reform Agenda?”, took place on 7 November 2013 at the Square, Brussels. Conference materials will be posted online at www.finance-watch.org in a few days.
For further information please contact:
Greg Ford, Head of Communications at Finance Watch, on +322.401.8740 or +44 7703 219 222 or email@example.com
Charlotte Geiger, Communications Officer at Finance Watch, on +322.401.8741 or firstname.lastname@example.org
The implicit government guarantee refers to the expectation that certain large or systemically important banks will be rescued by the government if they get into trouble. This expectation lowers the risk for a bank’s investors, who can then offer funding at lower rates than they would otherwise. An explanation of why this is harmful and how structural bank reform can address the problem of implicit guarantees and make Banking Union safer, can be found in Finance Watch’s position paper “Europe’s Banking Trilemma”.
The EC’s webpage on Banking Union can be found at http://ec.europa.eu/internal_market/finances/banking-union/
The EC’s webpage on the High-level Expert Group on possible reforms to the structure of the EU banking can be found at http://ec.europa.eu/internal_market/bank/group_of_experts/
Join Finance Watch’s “Change Finance!” campaign: http://www.finance-watch.org/hot-topics/campaign-change-finance