SAFE Finance Blog
03 Feb 2017

Litmus Test Monte Paschi

SAFE scholars demand resoluteness in the case of the ailing Italian bank

In an opinion piece in the daily newspaper “Frankfurter Allgemeine Zeitung” on 3 February, Martin R. Götz, Jan Pieter Krahnen und Tobias H. Tröger, all professors at Goethe University and the Research Center SAFE, demand a stringent application of the Bank Recovery and Resolution Directive (BRRD) in the case of the Italian bank Monte dei Paschi di Siena (MPS). The authors state that the outcome of this test-case has a direct impact on the credibility of the new European bank recovery and resolution regime – introduced as a lesson from the recent financial crisis.

According to the relevant BRRD rules, the losses a failing bank incurred should generally be borne by its investors. Before a minimum bail-in of investors amounting to at least 8 percent of total liabilities has occurred, government money can only be injected in emergency cases to remedy a serious disturbance in the economy and to preserve financial stability. The authors do not see any signs that resolving MPS could cause such a systemic event. They argue that investors will not price bank capital adequately but impound implicit government guarantees if the authorities allow to bail out banks contrary to the existing rules. As a consequence, banks would continue to over-leverage and the necessary restructuring of the European banking industry would be retarded. If the Italian government wants to compensate retail investors in case of a bail-in, the researchers suggest to do so directly and not by giving financial assistance to MPS.

The authors remind that the case of MPS puts the EU institutions´ reputation at stake. The European Central Bank, the Single Resolution Board as well as the European Commission could prevent a bailout of MPS and avoid a dangerous bending of the rules.

More on this topic:

Martin Götz / Jan Pieter Krahnen / Tobias Tröger: Taking Bail-in Seriously - The Looming Risks for Banking Policy in the Rescue of Monte Paschi di Siena, SAFE White Paper No. 33