Claudia Buch: Banks need to back sovereign bonds by capital / Bail-in of creditors should be implemented forcefully / Conflict of interest for resolution authorities
The Vice President of the Deutsche Bundesbank Claudia Buch calls for further steps to stabilize banks in Europe and to untangle the risks of financial institutions and European governments. “The banking union alone cannot resolve the challenges the euro area faces,” Buch writes in a guest commentary for the current issue of the SAFE Newsletter, released by the Research Center SAFE at Goethe University Frankfurt. Further regulatory action is required, Buch states, which includes, in particular, that banks will be obliged to back sovereign bonds by capital: “We need to put an end to the preferential treatment afforded to government debt instruments.” What is more, the existing limits on other large bank exposures should be gradually extended to cover sovereign debt as well.
Furthermore, Buch calls for rigorously applying the new rules to hold bank creditors liable. Within the framework of the recently implemented Single Resolution Mechanism (SRM), resolution authorities can exercise a degree of discretion which exposes them to a conflict of interest: On the one hand, they aim to discipline investors and protect taxpayers from a bank bailout, while, on the other hand, they want to safeguard financial stability which could be threatened if single private investors have to assume high losses. Against this background, Buch points to the U.S. where a deviation from the principle of bail-in is permitted only in systemic crises and upon approval of a majority of the relevant decision-making bodies. “This may be a sensible approach to strengthening the credibility of resolution regimes and to being capable of acting during systemic crises at the same time.”
As a third necessary step, Buch names the nurturing and integration of capital markets in Europe. A comparison with the United States shows that equity holdings there are dispersed much more widely throughout the entire country than they are in Europe, so that negative shocks are also spread more widely. In contrast, the ownership structures of many European enterprises are strongly national. “Improved market integration is hindered by differences in national taxation and legal systems, by varying market practices and, not least, by political factors,” Buch writes. With regard to all three aspects, further progress and action is crucially important because the banking union alone will not be able to achieve the aim of greater stability.
