The European ‘Plan’ to bail out Europe’s banks one more time, has now descended in to utter farce.
We began with estimates that the EFSF would need to be tripled or quadrupled in size. One to two trillion euros were being mentioned as what the new and improved super EFSF would need in order to comprehensively solve the debt problems of Greek, Italian and Spanish Banks that were bringing down their respective governments. This was to be Europe’s Big Bazooka to match America’s TARP bail out fund. The Americans were keen so was Mr Cameron the UK Prime Minister who said Europe must have one. Maybe he hoped they’d let him hold it.
Anyway, Germany and the rest of the world merely noted there wasn’t this much money around. And when they did the figures of what money there really might be, the bazooka was ridiculed as being likely to more of a pea-shooter than a bazooka. Analysts sensing there might be a teeny problem reconsidered and came up with a new figure and a new more modest plan.
The new more modest plan merely talks of ‘recapitalizing’ the banks. This is a real breakthrough for the banks, not because it has the slightest chance of really working but because they have found a way, finally, of advocating another bail out without having to use the dirty term. The new figure was magically much smaller – a mere €275 billion. A trillion only weeks ago considered essential, till it was pointed out it was also impossible, is now, by happy coincidence no longer needed.
However all is still not well in banker land. The banks aren’t keen on ‘recapitalization’ because although they would get billions in public money to bail them out it would be ‘given’ to them in the form of ‘investing’ in new shares. This would wipe out those who already had shares and dilute their share price. At the same time it would saddle the public with more shares in more insolvent banks which we would be assured would eventually bring a profit when we sold them but would then promptly loose value as exactly as happened to the shares we were forced to buy the last time they pulled this stupidity on us.
So what to do? The IMF went away and had a think. Their answer was to recommend a lower figure. According to the IMF Europe’s banks would not need either a trillion nor indeed €275 billion, but only €200 billion. Another €75 billion was magically saved.
The plan was now coming in to focus. The financial authorities and banks were going to run a sort of inverse auction where experts and regulators could bid for which plan should be adopted and the winner would be the one who bid the lowest.
Today the European Banking Authority (EBA) entered its bid. And it looks like the new front runner – coming in at only 80-100 billion. How do they do that I hear you ask. Easy, they’re the new European regulator for all things financial. The EBA was created in January of this year (2011). It is supposed to make sure Europe’s banks are properly regulated to the highest standard. Consequently it has the power to and its purpose as summarized in Wikipedia, is to make sure
… overrule national regulators if they fail to properly regulate their banks…. to prevent regulatory arbitrage and …prevent a race to the bottom because banks established in jurisdictions with less regulation will no longer be at a competitive advantage compared to ones based in jurisdictions with more regulations because all banks will have to comply with the higher pan European standard.
Their first act has therefore been to find that the banks don’t need any where near as much money as the banks, the analysts and even the IMF had thought.
It’s worth mentioning that the EBA isn;t alone in this. After the debacle of national regulators not regulating – see Greece – it was decided an complete overhaul was needed and power centralized. No one mentioned the fact that those national regulators – Greece in particular but others also – had actually been under close Central European ECB supervision during all the time it is now understood they were lying. So the central authorities were either complicit or incompetent.
So Europe did what it does so wellit decided to solve teh problem by giving everything a new name. So the Committee of European Banking Supervisors became the EBA. The European Insurance and Occupational Pensions Authority (EIOPA) replaced the Committee of European Insurance and Occupational Pensions Supervisors and the European Securities and Markets Authority (ESMA) replaced the Committee of European Securities Regulators. And as if this thorough house-cleaning weren’t sparkling enough they also created a brand new European Systemic Risk Board (ESRB) which reports to and is largely made up of people connected to the European Central Bank.
I hope that is all clear to you and is giving you the warm feeling of being in safe, expert hands.
The new drastically lower EBA bid for saving the banks comes courtesy of making sure that in their new ‘stress test’ – upon which their bid is based – they test for writing down sovereign debt but carefully exclude any calculation of a severe economic downturn. Ahhh – so clever! No one will suspect!
But that is not going to be th elast word bby any means. Already the FT reports today, in its article “EU bank recap could be only €80 billion”, ( I would link but there is a firewall) that,
Officials caution that most of the key assumptions in the EBA model – including the number of banks involved, the capital threshold and market to market model – are still the subject of debate between member states and Brussels.
Debate between member states? Means exactly the kind of regulatory arbitrage and race to the bottom the EBA was supposed to over-rule but apparently can’t or doesn’t want to. Which as the article concludes, means that,
While Germany has pushed for a lower capital threshold, other countries are suggesting amendments that would further reduce the overall capital shortfall, either by exempting certain banks, changing the form of capital that will count or introducing a more lenient means of valuing sovereign debt.
Expect the bidding to continue and the money the banks need to magically go down and down until it equals what Angela Merkel happens to have behind the cushions of her sofa.
Euro Farce in full effect!