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Is the Banking Union Stable and Resilient as It Looks? | The New Financial Architecture in the Eurozone


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Conference: The New Financial Architecture in the Eurozone - Pierre Werner Chair, Robert Schuman Centre for Advanced Studies, European University Institute

By: Natacha Valla, CEPII

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Is the Banking Union Stable and Resilient as It Looks? | The New Financial Architecture in the Eurozone

  1. 1. Is the Banking Union Stable and Resilient as It Looks? Natacha Valla CEPII Conference on “The New Financial Architecture in the Eurozone” Thursday 23 April 2015 – 10:30-12:00, Sala Europa, Villa Schifanoia European University Institute, Florence
  2. 2. Expected gains from Banking Union • Reduce likelihood of systemic banking crises • Common rules for “bailing in” private capital level-playing field? • End regulatory ring-fencing (national regulators prohibiting banks from moving liquidity / capital cross-border) • Stop regulatory arbitrage • Help harmonise / bring down financing costs (esp. in the euro periphery) • Protect taxpayers: directly (bail-out) and indirectly (output and tax losses) FinancialstabilityRegulatoryMacroeconomic andFiscal
  3. 3. A « real life » test of the Banking Union / BRRD: Hypo Alpe Adria • Small regional bank in Carinthia/Austria • 1990s/early 2000s close ties with regional politics – financing of political prestige projects • Aggressive balance sheet expansion with no/insufficient risk management • Heavy expansion into the Balkan region • Low cost re-financing covered by regional guarantees • Guarantees provided by Carinthia for Hypo peaked at €23bn in 2003 (more than 10x Carinthia‘s annual budget) • Purchased and re-sold by Bayerische Landesbank • Dependent on State Aid since end 2008 • Mix of political interference/lack of regulatory framework/insufficient supervisory awareness and action
  4. 4. Hypo Alpe Adria: Policy Action – where Banking Union worked • Capital injections by government 2009 – 2014: € 8bn (balance sheet end 2014: € 16bn) • Nationalisation by end 2009 (to avoid insolvency) + €20bn draw on regional guarantees • 2009-2014: policy inaction despite bank deterioration • October 2014: • Government establishes defeasance structure (Heta Asset Resolution) • Cancels by law €1.7bn of subordinated debt • January 2015: • National law (BaSaG) based on EU-Reg. 2014/59 (Banking Union) takes effect • Open issue: EU-Reg. also for defeasance structures?
  5. 5. Hypo Alpe Adria: The Debt Moratorium • March 2015: Financial Market Authority (FMA) orders a debt moratorium for Heta until 31 May 2016 • FMA rationale to wind down: • High likelihood of bank insolvency • No alternative measure (private or public) available to prevent insolvency • Wind down measure deemed in public interest • What happens until 2016? • No pay-outs (with few exceptions) until June 2016 • Micro analysis of asset values by regulator • Determination of a bail-in quota for private bond holders
  6. 6. Consequences of the Debt Moratorium • First bail-in show case based on Banking Union regulation • Burden relief of tax payers However: • Considerable unease among private financial investors • Numerous law suits challenging FMA‘s decision expected • ECB requires substantial write downs of Heta bonds in bondholders‘ balance sheets • Reassessment of reliability of regional/public guarantees will lead to risk differentiation and increasing re-financing costs
  7. 7. Lessons: The open issues of Banking Union • “Legacy assets” – still politically explosive ? Remaning under resp. of national authorities? • Defeasance structures? • Single Resolution Fund (SRF): sufficient in size if a major crisis occurs? • “Extraordinary public financial support” by national states  level playing field? (poor bail in, rich bailout) • Availability of direct ESM aid for banks? (Last resort for banks / Pooling of ESM/EFSF bond issuance) • The delusion of state guarantees (and similar kinds of contingent liabilities)
  8. 8. B.U. and government guarantees 0 5 10 15 20 25 30 35 40 Government Guarantees (2013) %GDP Source: Eurostat. Government guarantees: under the carpet?
  9. 9. B.U. and government guarantees: shifting instability in the future? %GDP Source: Eurostat. Guarantees: a non-negligible contingent liability 0 20 40 60 80 100 120 140 160 Government Guarantees (2013) Liabilities of State controlled enterprises (2013, 2012 for DE and GR) PPPs (2013)