Europe Warned Against Free Virus Bailouts for Zombie Banks
Europe Warned Against Free Virus Bailouts for Zombie Banks
(Bloomberg) -- The top European official in charge of handling failing banks warned against using taxpayer money to rescue lenders that were barely surviving before the coronavirus pandemic.
With the economic fallout from the virus pushing the limits on state aid in Europe, Elke Koenig said handing out targeted aid to banks “shouldn’t mean now we’re back to bailouts.”
The question that needs to be asked is “what is a corona-related issue and what is perhaps an underlying problem which was only getting the last kick via corona,” Koenig, who heads the Single Resolution Board in Brussels, said in an interview.
Koenig’s position will be crucial to the debate on the subject, which will likely heat up as business failures reverberate through the economy and blow a hole in banks’ balance sheets. The European Central Bank and other authorities have so far extended unprecedented relief to the industry, allowing banks to dip into capital buffers and tweaking rules in a hurry to ensure they can continue to lend.
Governments used trillions of euros to prop up banks during the financial crisis, becoming direct shareholders in some institutions. More than a decade later, the German government still owns some 15% of Commerzbank AG.
Koenig’s SRB was set up in 2015 along with a new European framework to make sure failing banks are treated equally across the region, while sparing taxpayers to the largest extent possible. Politicians still found various ways to avoid imposing losses on investors, using public money to prop up struggling lenders in recent years.
The European Commission, the EU’s executive arm, said in March that aid given to banks to compensate for “direct damage” suffered as a result of the virus wouldn’t be subject to the usual constraints. Rules were also loosened for many other parts of the economy, and governments have used this leeway to prop up airlines and hand out hundreds of billions of euros in loan guarantees.
Koenig also said that proposals from some European officials to set up an EU-wide bad bank to buy soured loans are premature and probably unworkable because they’d hand a manager a “hodgepodge” of assets. “I’m not very much convinced that a broad bank that is then collecting from everywhere is a manageable solution,” she said.
Andrea Enria, the head of the ECB’s supervisory arm, pushed the idea in 2017 and said recently that he still thinks it could be a useful tool in case of a “significant, system-wide deterioration of asset quality.”
While lenders entered the latest recession with much higher capital cushions than before the financial crisis, they’ve been grappling with low profitability and -- especially in some southern countries -- high levels of bad loans.
Koenig said it’s “broadly realistic” to expect some banks to struggle late this year and in 2021. “Will this be institutions that you will have to declare failing or likely to fail? I don’t know. We are now just monitoring it,” she said.
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