Deposit insurance after Iceland and Cyprus
Anne Sibert 02 April 2013
Depositors in Eurozone banks are facing a steep learning curve on just exactly what deposit insurance means. This column points out that the precedents set in Cyprus and Iceland show that deposit insurance is only a legal commitment for small bank failures. In systemic crises, these are more political than legal commitments, so the solvency of the insuring government matters. A Eurozone-wide deposit-insurance scheme would change this.
This reposted column corrects an error, due to the editor, that was in the first posting.
The facts are now well known. The largest banks in Cyprus are insolvent, but too big for the government of Cyprus to save – at least if it wanted to avoid the ‘double drowning’ fate of Ireland. The government, trying to rescue banks, found itself needing a rescue.
EU institutions Financial markets Macroeconomic policy
Iceland, deposit insurance, bank bailouts, Cyprus, bail-ins
Bank bailout guarantees and public debt
Angelo Baglioni, Umberto Cherubini 01 December 2010
Bailing out banks has put severe pressure on government finances, particularly in the Eurozone. This column compares 10 EU governments’ explicit bailout commitments with their expected liabilities. It shows that the Irish government’s commitments are an outlier. Faced with a systemic crisis, financial assistance from international institutions is unavoidable.
The turmoil currently taking place in Ireland is the direct consequence of the troubles affecting its banking system and the bailout guarantee provided by the Irish government. Some had predicted the challenges this would pose (see Kelly 2010 and Honohan and Lane 2009). European governments have committed a lot of money to the rescue of their banks.
EU policies Europe's nations and regions
Ireland, bank bailouts, Fiscal crisis, Eurozone crisis
On forbearance lending, bank bailouts, and distinguishing the walking wounded from the living dead
Max Bruche, Gerard Llobet 09 August 2010
Bank bailouts have been controversial from the outset, with some commentators saying that they reward banks for making risky loans. This column investigates the idea of an asset buyback in which a special purpose vehicle buys bad loans from banks' balance sheets. It argues that these buybacks could be structured to avoid windfall gains.
As a consequence of the global crisis, there are worries that many countries will slide into a Japanese-style decade of lost growth. One of the main problems in Japan during the 1990s was that insolvent "zombie" banks decided it was a good idea to persist in lending to insolvent "zombie" firms (Peek and Rosengren 2005), a practice sometimes referred to as forbearance lending. But why would banks want to engage in such lending?
Europe's nations and regions Financial markets Global crisis Macroeconomic policy
financial crisis, financial regulation, bank bailouts, forbearance lending
The impact of public guarantees on bank risk taking: Evidence from a natural experiment
Reint Gropp, Christian Gründl, Andre Güttler 20 April 2010
Public guarantees in the wake of the global crisis have been wide-spread. This column presents recent research on the effects of a 2001 law to remove government guarantees for German banks. It finds that such guarantees were associated with significant moral hazards and removing them reduced the risk taking of banks, their average loan size and their overall lending volumes.
Do public guarantees influence bank risk taking? Public guarantees in the wake of the global financial crisis have been widespread. Many countries either nationalised banks (such as the US: Indy Mac, Fannie Mae, Freddy Mac; UK: RBS, HBOS, Lloyds; Germany: IKB, Hypo Real Estate; Belgium/Netherlands: Dexia, Fortis), or they provided blanked guarantees for the banking system (such as Germany and Italy) or both (Beck et al. 2010, Aït-Sahalia et al. 2009).
Despite this prevalence, there is scarce evidence on the likely effect of such interventions on bank risk taking.
Global crisis Microeconomic regulation
financial regulation, bank bailouts, public guarantees
“Too big to fail” is no redemption song
Avinash Persaud 10 February 2010
Policymakers and commentators have recently argued for downsizing banks that are “too big to fail.” This column argues that the logic is based on an illusion. A 2006 list of institutions considered “too big to fail” would not have included Northern Rock, Bear Sterns, or even Lehman Brothers. Instead, regulators should aim to make the financial system less sensitive to error in the markets’ estimate of risk.
A new global governance was forged in the white heat of the financial crisis. The G7 gave way to the G20 (Eichengreen 2009). Leaders representing 80% of the world’s population met and were resolute in calling for a global policy response to the crisis. Governments opened the fiscal sluice gates, interest rates were slashed, the IMF was given additional resources, and the OECD finally got tough with European tax havens.
financial regulation, bank bailouts, “too big to fail”
The financial crisis: Financial trilemma in Europe
Dirk Schoenmaker 19 December 2009
Current practice of national crisis resolution is threatening the EU’s single banking market. The financial trilemma suggests that policymakers can only choose two out of the following three objectives: financial stability, financial integration, and national financial policies. This column argues that EU burden-sharing rules among governments can save the single market.
The single banking market was built on the premise that banks conduct the majority of their business at home and only branch out to other EU countries on a modest scale. This premise is no longer true. Some of the major European banks such as Deutsche Bank, BNP Paribas and UniCredit currently conduct more business cross-border than at home. The single market is now weighed down by its own success (Persaud 2008).
EU institutions Global crisis
EU, global crisis, banking regulation, bank bailouts