In Europe, the issue seemed relatively limited, at least until we saw how Deutsche’s situation developed. The Credit Suisse sales operation, designed against time over the course of a weekend, probably prevented the Swiss presence from being viewed as unsustainable and thus prevented the authorities from entering the settlement plan, which is their last option and this figure in addition. Because it is complex, it has not yet been homogenized in Europe. In the case of a hypothetical solution, What vehicles and what firepower does Europe have?
Margarita Delgado, vice-president of the Bank of Spain, recently in the presentation of the PwC Report ‘The Banking Union, a challenge among overlapping crises’ said, “In the case of a hypothetical solution in Europe, it will be this year with the Single Solution Fund (FUR). 80,000 million euros” and “to complement the support capacity” with additional support from MEDE (European Stability Mechanism).
Piecemeal. As announced by the Bank of Spain, FUR is equipped with contributions from all credit institutions and certain investment companies from 19 member countries of the Banking Union. Its target amount is equivalent to 1% of the deposits covered in the Banks Association, which was gradually established in the first eight years (in 2016) from its establishment; this is exactly on December 31st of this year, end of contributionunless you have to use it.
According to Jonás Fernández, PSOE Member of the European Parliament and member of the European Parliament’s Committee on Economic and Monetary Affairs, the additional support (‘backstop’) of MEDE measures up to twice what FUR provides. In this case, assuming the full use of the fund, MEDE’s contribution would be 160,000 million. If there is a solution, the European bazooka will increase to 240,000 million..
At the Bank of Spain, they insist that these tools are only used in the case of settlements to provide liquidity by the FUR and ESM, so they are not other liquidity tools that the European Central Bank (ECB) can offer. Lagarde points out. These tools are mainly focused on the famous LTRO, an emergency procedure. ECB lends to banks at low interest type of interest temporarily replace lending between banks (interbank market) and prevent the collapse of the European system.
One of the problems with this 240,000-million bazooka is this: activation has not yet been homogenized at the European level. In fact, the implementation of the FUR is conditional upon the shareholders and bondholders covering at least 8% of the organization’s debts in the event of a decision; The first two to bear the loss in the event of bankruptcy: “They are now trying to harmonize the hierarchy criteria for returns,” confirms Fernández. In fact, Italy has not yet approved this harmonization because its proposal is to expand the scope of the ESM.
Another important issue is that the solution formula will mainly be implemented if at least medium-sized and not necessarily non-systemic organizations cannot survive, because if they are small, it remains in the hands of local authorities. In the case of Spain, Frob would be responsible for liquidating the asset. And, of course, another key concept is that the remedy is only used in situations where there is no obvious way out, because the authorities pre-analyze the consequences of implementing a resolution plan and its social impact. In most cases, such situations are resolved by selling the business of the business., As in Spain with Banco Popular (acquired by Santander) and Credit Suisse’s sale to competitor UBS. Three other options being considered by supervisors are: transfer of assets or liabilities to a bridge organization (actually a way to save time as a pre-sale step); the transfer of assets or liabilities to an asset management company, thereby transferring certain assets and liabilities to a firm that manages them so that they can be sold at the best time, i.e. when transferred to Sareb in Spain, what was done was the crisis’s most unsellable real estate debts; and internal recapitalization, where certain debt instruments cover losses first, others are then converted into equity, and finally restructuring measures are taken.