Commission confirms bailouts are back – Matt Carthy MEP
Sinn Féin MEP Matt Carthy has accused the European Commission of “duplicity and hypocrisy” on using public funds for bailing out banks despite the implementation of the 2014 Bank Recovery and Resolution Directive, which was supposed to have ensured taxpayer-funded bailouts in the EU were a thing of the past.
Carthy was speaking in response to a letter he received from Competition Commissioner Margarethe Vestager in which she defended the Commission’s dubious interpretation of State aid rules in the bailout of two Italian banks in June.
Matt Carthy said;
“The response from Commissioner Vestager to my questions regarding the use of public funds in the recent Italian bank bailouts is not only disappointing – it reflects the duplicity and hypocrisy of the Commission on this issue.
“Let’s look at what happened here. First the ECB identified the two mid-size Italian banks, Veneto Banca and Banca Popolare, as ‘failing or likely to fail’, on June 23rd.
"But then instead of the Banking Recovery and Resolution Directive being applied, the ECB’s Single Resolution Board immediately declared that the Directive aimed at shielding taxpayers from the burden of bailouts didn’t need to apply in this case – because the size of the banks meant their failure would not threaten broader financial stability.
“But instead of normal Italian bankruptcy law applying, the Italian government applied for Commission approval that its €17 billion plan to bail out the bad loans of the two banks complied with EU State aid rules, and that the bailout was required because it posed a threat to regional economic stability.
“I questioned the Commission on this critical discrepancy – the difference between a threat to regional economic stability, i.e, the region around Venice, and a threat to European financial stability. It is the latter which is required to be threatened under the 2013 Banking Communication rules which the Commission used as political cover to approve the bailout.
“The response I received from Ms Vestager fails entirely to explain this wildly loose interpretation of the state aid rules, and praises the deal for ensuring ‘full burden-sharing by the banks' shareholders and subordinated debt holders’. But it didn’t ensure the senior bondholders were bailed in – that was the whole point of sidestepping the Directive.
“So we have the EU authorities on the one hand, through the SRB, claiming that the Directive doesn’t apply to the banks because their failure wouldn’t threaten economic stability – but the Commission then immediately agreeing with the Italian authorities to let them carry out a public bailout precisely because of the threat to economic stability. What a farce.
“This response follows a letter I received from the Commission over the summer claiming that the so-called precautionary recapitalisation loophole in the Directive used to green-light the bailout of Monte Dei Paschi Di Siena earlier this year may also be used by other governments in the EU to bail out the non-performing loans of their banks.
“The Banking Union legislation is not worth the paper it’s written on. The Commission has confirmed, without a doubt, bailouts are back.”
Note: See below for the written questions to the Commission from Matt Carthy and the Commissioners' responses.
Question for written answer E-004445/2017
to the Commission
Matt Carthy (GUE/NGL)Subject: State aid
DG COMP refers to the Commission’s ‘Communication on the application, from 1 August 2013, of state aid rules to support measures in favour of banks in the context of the financial crisis’ (Banking Communication) (2013/C 216/01) in its decision to authorise the public bailout of non-performing loans in the cases of banks that are failing or likely to fail, such as Veneto Banca and Banca Popolare.
This communication refers repeatedly to ‘risks to financial stability’ and was designed as a crisis-era regime to prevent contagion. However, in its statement DG COMP writes that the Italian Government feared only a ‘regional economic disturbance’ if the banks were allowed to fail without state intervention.
How does the Commission justify the discrepancy between the requirement of the Banking Communication and its authorisation of these bailouts?
ENE-004445/2017Answer given by Ms Vestager on behalf of the Commission(7.9.2017)
Since the beginning of the financial crisis in 2008, the Commission has authorised restructuring and liquidation aid also for small banks, under the applicable State aid rules, when the Member State considered that it was necessary to avoid serious disturbance of the economy.
The Banking Communication of 2013, while noting the improvements in market conditions, is nevertheless based on the assessment that the financial sector is still fragile, and continues to provide for the possibility of using aid to restructure or to organise the orderly market exit of large and small banks.
However, the Banking Communication of 2013 also tightened the conditions for authorising the aid, notably by requiring contribution by shareholders and subordinated debt holders (burden-sharing), which allows reducing the amount of State aid needed.
The Italian authorities wish to ensure the orderly market exit of Veneto Banca and Banca Popolare di Vicenza, to avoid significant effects on the economy of the Veneto Region, which by the way is larger than several Member States.
The decision to authorise liquidation aid to facilitate the smooth market exit of Veneto Banca and Banca Popolare di Vicenza and to ensure full burden-sharing by the banks' shareholders and subordinated debt holders is therefore in compliance with the Banking Communication of 2013.
Question for written answer E-004444/2017
to the Commission
Matt Carthy (GUE/NGL)
Subject: Precautionary recapitalisation clause
In recent months public representatives of the European Banking Authority (EBA) and European Central Bank (ECB) have advocated the establishment of a European-wide asset management company that could reduce the high level of non-performing loans in the EU, using some amount of public funds. These representatives have suggested that the precautionary recapitalisation clause in the Bank Recovery and Resolution Directive (BRRD) could be utilised in order to spend public funds for this purpose.
What is the Commission’s view of the proposal to use public funds to bail out banks with high levels of non-performing loans? Does the level of non-performing loans in the EU pose a risk to financial stability that justifies the use of the precautionary recapitalisation clause?
ENE-004444/2017Answer given by Vice-President Dombrovskison behalf of the Commission(23.8.2017)
The Commission is fully aware of the potential risks associated with high ratios of non-performing loan (NPL). Such rates can translate into concerns about the sustainability of individual financial institutions as NPLs weigh on the profitability and viability of the affected banks and constrain bank lending, thereby hampering economic growth. If provisioning dealing with NPLs is not adequate, this may put the solvency of a bank at risk. If the bank is of systemic relevance, or if provisioning is too low across a substantial part of the banking sector, this might ultimately put financial stability at risk.
Several workstreams are ongoing with regard to this important matter. The Commission has consistently mentioned this issue in the context of the country-specific recommendations to those Member States where high levels of NPLs persists in parts of the banking sector. The Commission launched a public consultation on 10 July 2017 on how to develop secondary markets for NPLs, and also on measures to facilitate out-of-court repossession of collateral, known as "accelerated loan security". The Commission is also working on a blueprint on national asset management companies (AMCs), as well as considering micro-prudential aspects related to NPLs. The Commission's work on NPLs is done in close cooperation with all other stakeholders. Moreover, on 11 July 2017, the Economic and Financial Affairs Council adopted an "Action Plan To Tackle Non-Performing Loans In Europe", which invites the Commission and other actors to take concrete actions on several fronts to address the existing stock of NPLs and to prevent the future emergence and accumulation of NPLs.
Under the current Bank Recovery and Resolution Directive (BRRD), a precautionary recapitalisation could, depending on the circumstances of the individual case, also address NPL-issues, provided that all the conditions for precautionary recapitalisation are met and State aid rules complied with.