By Business Editor David Murphy
The Irish taxpayer has already paid vast sums to fix the banks – so it can be easy to be cynical about Europe’s plans to deal with the next banking crisis, whenever that might occur.
But adopting a common mechanism to deal with troubled lenders is a big deal.
However, a big question is whether the policy behind the so-called banking union is sound and what exactly it all means.
The plan creates a pecking order for who loses out when a bank gets into trouble.
First to take pain would be shareholders, who would be followed by junior bondholders, then senior bondholders – who could lose up to 8% – and finally unguaranteed depositors.
The idea behind banking union is to also create a fund generated by banks, which will pay the equivalent of 1% of certain deposits every year until the fund reaches €55 billion in size.
That process would take ten years.
After the creditors are hit the fund would then be tapped. Only after that pot of money is exhausted would taxpayers be on the line.
There are two big problems with the fund.
It will take far too long to establish and €55 billion is far too small for European, considering the Irish bank bailout cost €60 billion net.
Another big issue is the treatment of large deposits.
At present many countries give senior bonds the same legal ranking as depositors.
During the acute phase of the Irish banking crisis in 2008 and 2009 the then Finance Minister Brian Lenihan stated senior bondholders could not be burned if depositors were being repaid in full because both had the same status.
At a briefing this week European Commission officials said the medium-term policy would be to get countries like Ireland to change legislation. That would see senior bondholders being hit first before unguaranteed depositors (typically over €100,000).
A lot of basic details have yet to be worked out.
But the proposals establish an important marker: it is okay to burn large depositors.
This is a big problem for big corporations, which can have tens of millions of euro on deposit at any time.
If the eurozone policy says is that it is acceptable to burn these creditors, why would a large firm would leave money in a bank in Europe over a weekend?
It is then when regulators would be likely to pounce to sort out a bank in difficulty (remember Cyprus).
I pointed out in this blog last year that cement giant CRH moves all its deposits out of the EU on a Friday evening for that reason.
If large depositors leave their money elsewhere it means banks will have less money to lend.
And that has detrimental economic consequences.
So while banking union means there are more creditors to take pain before the taxpayer is stung – it is far from flawless.