Allow me to recall, first of all, that the bank 'resolution' system - introduced into the European legal system with the BRRD directive (transposed by Italy at the beginning of November to be able to make the intervention then made on the famous four banks), the SRM Regulation and the intergovernmental treaty that allows the transfer of funds to the Single Resolution Fund – essentially reproduces the American FDIC system in force in that country since the early nineties, developed on the basis of the analyzes and proposals of various important economists, among which the main one is GG Kaufmam (you can easily find his contributions on the subject on Google). Who refers to principles of economics, should know those contributions.?
That system starts from two assumptions:??
- A banking system will not be stable without state aid – which are never a good idea – unless the principle prevails that losses from mismanagement must be borne by shareholders and creditors (again excluding deposits backed by insurance); otherwise it is certain that some bankers will take advantage of the system by taking excessive risks, knowing that the state will then come to save it. After the bankruptcy of Lehman Brothers, the theory has been enriched by the "too big to fail" variant (if a bank is too big to fail, its shareholders and its management will take advantage of it to the detriment of taxpayers), but the substance does not change : a stable banking system without state aid is a system in which banks can fail without generating adverse effects of systemic instability. This requires major changes in bank management practices, on which global regulators are working hard.
- The decision to extend the American system already in force for medium-small commercial banks to all banks, even very large ones, and to bank holding companies was taken by the Financial Stability Board (at the time chaired by Mario Draghi) and then by the G-20 in 2009: it obviously arose in reaction to the bankers' misdeeds that emerged with the financial crisis, but also from a simple factual consideration: bank losses are smaller in a banking system where resolution is applied. Indeed, the American TARP fund used to recapitalize the banks has not lost a dollar, and indeed has gained a great many (about 40 billion), while the European states that have intervened with public funds have lost something like 500 billion euros to date. Anyone who shouts wildly against the FDIC resolution system, which is also valid in Europe today, does not know what he is saying, he is talking nonsense.
From general to specific, we come to the story of the four bankruptcies resolved by the Bank of Italy, which are causing so much scandal. It is clear from what I have said that:?
1. Couldn't ordinary bankruptcy proceedings be used without producing a panic among depositors?
2. Bail-in is an integral part of the new system, not a baroque tinsel: without bail-in, the necessary change in incentives for shareholders and management would not occur, and the free-riding behavior of bankers would continue;?
3. Technically, saving the subordinated bonds would have been in contrast with the European rules on state aid to banks, introduced after bailouts had been allowed for five years (Commission Communication of 31 July 2013); in the transitional phase until the entry into force of the new resolution system (on 1 January 2016) the bail-in must extend at least to shareholders and subordinated bondholders.
4. But, someone argues that saving those banks with the Interbank Fund would have been lawful and possible. I start by saying that Italy has not yet transposed the new European directive on deposit insurance, and with its Fund maintains a system that is contrary to European law – which will soon become the subject of an infringement procedure if we do not transpose the directive. The fundamental principle that we do not respect is that the Interbank Insurance Fund must be based on funds collected ex-ante (that is, paid by all the banks before the crisis occurs) and with a participation quota determined on the basis of the riskiness of the model business (riskier bank pays more). In our system, on the other hand, the Fund calls the funds ex-post, after a bank goes into crisis, and therefore the good banks pay the cost of the badly managed ones: with what effects on system incentives, everyone can clearly see. That system was an opaque system with which depositors were saved for five decades, but they also covered up the misdeeds of unfaithful administrators, often politically well 'connected'. The new European system, on the other hand, explicitly provides that the Deposit Insurance Fund serves to protect depositors, but not unfaithful administrators, let alone the banks themselves (there is a clause in the directive which provides for an exception in the case of such bailout is 'more efficient' – but then the rules on state aid are triggered anyway, with all that follows). This clarifies that recourse to the Interbank Fund would in any case have taken place in contrast with European regulations already in force, but not yet transposed by Italy.
5. The objection according to which recourse to the Fund would not have violated the European rules on state aid, since it concerns private funds, is incorrect: in fact, the definition of state aid is much broader, extending to any intervention ordered or induced by the state. This triggers the objection according to which, since the 'call' of the funds is arranged with the intervention of a public body and the payment being obligatory, this constitutes state aid. There are previous Commission decisions on this and also Court case law which leaves little room for doubt.?
Now, some more general comments.?
6. The Bank of Italy has clarified that in no case have there been placements of subordinated bonds after the receivership; the directors of the "saved" banks answer for what happened before. The Bank of Italy is publishing the inspection documents, which clearly show the directors' responsibilities in refusing or delaying corrective actions. From what we see and know, the Bank of Italy has used the tools it had. Consob itself had drawn investors' attention to the risks of subordinated bonds. I would be wary of unprovoked attacks against our market surveillance authorities, which also undermine confidence in our financial system.???
7. What actually emerges is a not entirely transparent system for placing bank bonds, which deserves some further study that will have to be done in the appropriate forums.???
8. In any case, there is great confusion when improbable appeals are invoked "against the European authorities": the resolution decisions were taken by the Italian authority in charge, in application of the European rules transposed into our legal system, therefore if an appeal must be do, it must be done against the Bank of Italy. The fact that the European authorities were consulted before starting the procedure does not change the substance: the decisions were taken by the national authorities.
