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FIGBank Capital

Harmonised bank resolution is a fantasy

European Council president Donald Tusk this week told European Union leaders their “utopian” illusions were tearing Europe apart. They may end up doing the same to its banking sector.

This week ESMA said it was concerned investors were unaware of the risks of bail- inable bank debt, because of the maze created by the EU’s Bank Recovery and Resolution Directive (BRRD).

It suggested banks should give buyers a clear picture of their creditor hierarchy, a likely resolution scenario and even information on secondary market liquidity in such instruments.

But it is impossible for banks to do that with any accuracy. They wouldn’t like to admit it, but many banks have little idea how their national regulator would react if they ran into genuine trouble.

Italy’s Atlante fund, which is reportedly now seeking fresh capital, is a case in point. Italy has bent over backwards to get round EU state aid rules in order to protect its national interest.

Successes are European, but failures are very much local. An Italian bank failure would hit the Italian economy, not the European one.

Bank of Italy governor, Ignazio Visco, sees no reason why the country should suffer for the utopia of harmonised rules.

“There is no reason to stigmatise as improper state aid initiatives that help correct market failures without undermining competition,” he wrote in the central bank’s annual report this week, adding that the push for banking union had “virtually eliminated” the possibility of rescuing failing lenders.

The Italian and French finance ministries recently sent a joint paper to their fellow members protesting against looming plans to make some European banks maintain capital above that required by the global TLAC rules.

Europe has a history of setting idealistic rules and then bending them in the face of economic reality. National exceptions will be made time and again before banking union is complete.

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