European leaders say they have an agreement on a framework for future bank stabilization actions. There are a host of problems with the plan, but it is still an important step forward.
Here are seven reasons why the new plan may not be enough to address the next banking crisis:
- The amount of money available under the plan, though large by any ordinary standard enough, may not be enough to rescue even one giant bank.
- The new system does not go into effect until 2014, and a lot could happen between now and then.
- Bank executives may become more willing to take risks if they imagine the rescue fund as a backstop for their bank.
- The plan requires all large depositors to participate in any bank recapitalization, a provision that may accelerate the deposit flight that is already taking place.
- There are more details to be worked out, and fundamental disagreements on matters of policy remain between countries that want a clear stated policy and those that want more flexibility in dealing with a crisis.
- The plan for bank liquidation is even less clear than the plan for recapitalization, and that discrepancy is likely to make bank executives believe that bank liquidation is not seriously being considered for banks that fail.
- Some economists believe the European economy (along with that of China) is fundamentally not large enough to rescue the giant banks that are already in trouble.
The plan is still an important step forward, because it sets in place a mechanism for the EU to stabilize banks without destabilizing the countries where the banks are located.
EU policy on bank liquidations may come soon enough, if the recent change in tone in London is any indication. New legislative proposals would create criminal penalties for bank executives whose high-risk behavior runs afoul of their fiduciary duties, and would keep bank bonuses in escrow for 10 years, to be forfeited if the bank becomes insolvent during that time. Needless to say, these are proposals that wouldn’t have been taken seriously two years ago.
Germany’s Commerzbank, losing money at the rate of €1 million per day, will lay off 5,200 workers as it looks for a way to become profitable again.
Deloitte erased key information from its report on Standard Chartered’s international transactions in order to hide the bank’s money-laundering activities from regulators, and now has agreed to pay a $10 million fine to settle that case.
The NCUA placed PEF Federal Credit Union, of Highland Heights, Ohio, into conservatorship today. The credit union, which has 3,000 members, will stay open while new managers try to turn it around financially.