Backstop to the SRF Fund for banks, here’s what Italy really rejected with the No to the ESM

26 December 20234 months ago babelfish

The Chamber's vote against the ratification of the reform of the European Stability Mechanism and Liturri's in-depth analysis of the ESM's "parachute" loan (backstop) to the Single Resolution Fund (SRF) for the management of banking crises.

The Chamber put an end to the tormented path of the ESM and the backstop for the SRF fund. After months of debates and surprise postponements, the proposal for ratification of the reform of the European Stability Mechanism presented by the opposition comes to the vote in the Chamber and is rejected by part of the majority which is divided, with Fdi and Lega voting against and Forza Italia voting he abstains. But the opposition is also divided, with Pd, IV, Action and +Europa voting in favour, Avs abstaining and the 5 Stars, as widely announced by Giuseppe Conte, voting against. In the aftermath of the agreement of the European Finance Ministers on the new Stability Pact, Europe remains to watch the vote with which the Italian Parliament puts an end to the reform of the bailout fund. Now the completion of the Banking Union is at risk – is the harsh common warning of the director general of the ESM, Pierre Gramegna, and the president of the Eurogroup, Paschal Donohoe -, with the parachute for banking crises foreseen in the new version of the ESM which, without Italy's yes, will no longer be able to be activated on January 1st as agreed by all the leaders at the height of the Covid crisis. And if for the government it is an opportunity to start a reflection on the instrument, for the community leaders it is yet another missed opportunity to make use of an extra weapon to defend themselves from economic shocks. Moreover, the outgoing president of the ECB Supervisory Board Andrea Enria had also warned in recent days, although European banks have shown "resilience" this year, uncertainty remains and our guard must be "kept high". The only certainty, the ESM admits, is that the reform will remain at a standstill. And that the bailout fund will continue to "fulfil the important mandate for which it was created: to guarantee financial stability in the Eurozone". However, limiting itself to "the current context" . ( Extract from an Ansa point dated 21 December 2023 )

EXTRACT OF TWO INSIGHTS BY LITURRI ON THE ESM REFORM AND THE BACKSTOP IN FAVOR OF THE SINGLE RESOLUTION FUND (SRF)

In recent days in Italy emphasis has been placed on one aspect of the reform of this Treaty. This is the "parachute" loan (backstop) that the ESM should be ready to provide to the Single Resolution Fund (SRF) for the management of banking crises.

WHAT IS THE BACKSTOP FOR THE SRF FUND

It seems like a very technical matter reserved for professionals, but this is not the case at all. One of the pillars of the Banking Union (the second pillar) is at stake, without which the monetary union risks dissolution, which it came close to during the 2010-2012 debt crisis and from whose traumatic experience the supervision and resolution project was born unique. The third pillar (common guarantee on bank deposits) is still to come.

THE PRESSURES

What the concerned interested parties from Brussels and Luxembourg (headquarters of the ESM) refuse to explain, however, is what the reasons for their pressure are and, in particular, why it is necessary and even urgent to provide the SRF with an additional parachute loan compared to the resources available.

THE ENDOWMENT OF THE SRF FUND

The answer is that the SRF does not have the legs to walk on its own or at least it is too fragile to do so. In fact, from next January 1st it will no longer be able to count on the emergency parachute loans granted by the 20 member states. (…)

THE NUMBERS ON THE SRF FUND

In fact, it is necessary to know that at the end of 2022 the Srf counted on approximately 63 billion in liquidity and securities ready to be used in various ways in the event of a bank crisis. The goal is to reach around 80 billion by the end of the year. Just under 1% of bank deposits in the entire eurozone, equal to around 9,000 billion. To get an idea of the fragility of the SRF, just think of the hundreds of billions it took to manage the recent crises of Credit Suisse and some US banks.

WHAT IS THE RESOLUTION FUND FOR?

The role of the SRF is to manage the event in an "orderly" manner in the event of a bank's failure. Avoiding a hasty and ruinous liquidation of assets and allowing, to the extent possible, continuity in company management by taking over the banking company or one of its branches. The recapitalization by the SRF, however, has conditions: the bail-in of the bank's creditors for at least 8% of the value of the liabilities and in any case it can undertake to disburse no more than 5% of the latter value.

HOW THE RESOLUTION FUND WORKS

This fund had a transitional period of 8 years (from 2016 to 2023) to see funds flow from contributing banks (2,896 in 2022, of which 375 Italian which in 2022 contributed 1.4 billion, approximately 10% of total). These funds were initially separated into national compartments, that is, in the event of failure, each state paid for its own banks. Then the mutualisation gradually increased, reaching 100% from next January. From that moment, the entire mass of approximately 80 billion is available to any bank in the eurozone, regardless of the country it belongs to. And this exposes the Fund even more to the risk of insufficiency in the event of a crisis of significant dimensions and is one more reason to urgently have the ESM "parachute", which should have been operational as early as the beginning of 2022. (…)

THE SCENARIO FOR GERMAN BANKS WITH THE SIGNA CASE

If Signa's difficulties were to spread like wildfire to the entire sector, it would affect a fifth of the German GDP and a tenth of the jobs. And the prospect of a rapid involvement of the SRF would become concrete. With the consequence that it will be the contributions of our banks to that fund that will save the German and Austrian banks and the contributions of the Italian Republic to the ESM (14 billion) that will allow the ESM to provide that parachute loan to the SRF so as not to let it run dry. All this always subject to bloodletting (i.e. bail-in) borne by shareholders, bondholders and, possibly, depositors.

This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/mes-fondo-srf-banche/ on Tue, 26 Dec 2023 07:16:05 +0000.