By Xander Snyder
The Italian government has bailed out its banks again, and in doing so it has unwittingly shown just how ineffective the European Central Bank may be. On June 26, Rome finalized a deal, agreed to in principle earlier in the month, to save Monte dei Paschi di Siena, one of the country’s largest and most important commercial banks. In another deal made June 25, Intesa Sanpaolo, a much more stable bank, will bail out Veneto Banca and Banca Popolare di Vicenza. Both agreements involve Italian government funds and prevent senior creditors from incurring losses, a politically contentious issue for a country in which many retail investors hold bank debt. Both deals also skirt the European Union’s strictest banking regulations, which allow Brussels to impose losses on senior bondholders.
But the ECB hasn’t actually had to enforce these measures yet. In fact, it didn’t even enforce them on Italy – there’s a chance the measures would have failed, and their failure would only have validated concerns of the ECB’s fecklessness.
Three Processes
There are three ways a bank can be bailed out under ECB guidelines. The first is a resolution process managed by the Single Resolution Board, an organization established by the European Union to prevent taxpayers from bearing the financial burden of bailouts as they did after the 2008-09 financial crisis. When the ECB determines that a bank has failed or is about to fail, it refers the case to the SRB, which, according to the EU banking framework, can but is not required to impose losses on shareholders, junior bondholders, senior bondholders and unsecured depositors – in that order. When 8 percent of the bank’s liabilities are accounted for in this “bail-in,” capital from the Single Resolution Mechanism fund can then be accessed, and the member state’s national government can also provide funding.