Deposit insurance after Iceland and Cyprus
Anne Sibert, 2 April 2013
Depositors in Eurozone banks are facing a steep learning curve on just exactly what deposit insurance means. This column points out that the precedents set in Cyprus and Iceland show that deposit insurance is only a legal commitment for small bank failures. In systemic crises, these are more political than legal commitments, so the solvency of the insuring government matters. A Eurozone-wide deposit-insurance scheme would change this.
This reposted column corrects an error, due to the editor, that was in the first posting.
The facts are now well known. The largest banks in Cyprus are insolvent, but too big for the government of Cyprus to save – at least if it wanted to avoid the ‘double drowning’ fate of Ireland. The government, trying to rescue banks, found itself needing a rescue.
Topics: EU institutions, Financial markets, Macroeconomic policy
Tags: bail-ins, bank bailouts, Cyprus, deposit insurance, Iceland
Bank bailout guarantees and public debt
Angelo Baglioni, Umberto Cherubini, 1 December 2010
Bailing out banks has put severe pressure on government finances, particularly in the Eurozone. This column compares 10 EU governments’ explicit bailout commitments with their expected liabilities. It shows that the Irish government’s commitments are an outlier. Faced with a systemic crisis, financial assistance from international institutions is unavoidable.
The turmoil currently taking place in Ireland is the direct consequence of the troubles affecting its banking system and the bailout guarantee provided by the Irish government.
Topics: EU policies, Europe's nations and regions
Tags: bank bailouts, Eurozone crisis, Fiscal crisis, Ireland
On forbearance lending, bank bailouts, and distinguishing the walking wounded from the living dead
Max Bruche, Gerard Llobet, 9 August 2010
Bank bailouts have been controversial from the outset, with some commentators saying that they reward banks for making risky loans. This column investigates the idea of an asset buyback in which a special purpose vehicle buys bad loans from banks' balance sheets. It argues that these buybacks could be structured to avoid windfall gains.
As a consequence of the global crisis, there are worries that many countries will slide into a Japanese-style decade of lost growth.
Topics: Europe's nations and regions, Financial markets, Global crisis, Macroeconomic policy
Tags: bank bailouts, financial crisis, financial regulation, forbearance lending
The impact of public guarantees on bank risk taking: Evidence from a natural experiment
Reint Gropp, Christian Gründl, Andre Güttler, 20 April 2010
Public guarantees in the wake of the global crisis have been wide-spread. This column presents recent research on the effects of a 2001 law to remove government guarantees for German banks. It finds that such guarantees were associated with significant moral hazards and removing them reduced the risk taking of banks, their average loan size and their overall lending volumes.
Do public guarantees influence bank risk taking? Public guarantees in the wake of the global financial crisis have been widespread.
Topics: Global crisis, Microeconomic regulation
Tags: bank bailouts, financial regulation, public guarantees
“Too big to fail” is no redemption song
Avinash Persaud, 10 February 2010
Policymakers and commentators have recently argued for downsizing banks that are “too big to fail.” This column argues that the logic is based on an illusion. A 2006 list of institutions considered “too big to fail” would not have included Northern Rock, Bear Sterns, or even Lehman Brothers. Instead, regulators should aim to make the financial system less sensitive to error in the markets’ estimate of risk.
A new global governance was forged in the white heat of the financial crisis. The G7 gave way to the G20 (Eichengreen 2009). Leaders representing 80% of the world’s population met and were resolute in calling for a global policy response to the crisis.
Topics: Global crisis
Tags: bank bailouts, financial regulation, “too big to fail”
The financial crisis: Financial trilemma in Europe
Dirk Schoenmaker, 19 December 2009
Current practice of national crisis resolution is threatening the EU’s single banking market. The financial trilemma suggests that policymakers can only choose two out of the following three objectives: financial stability, financial integration, and national financial policies. This column argues that EU burden-sharing rules among governments can save the single market.
The single banking market was built on the premise that banks conduct the majority of their business at home and only branch out to other EU countries on a modest scale. This premise is no longer true. Some of the major European banks such as Deutsche Bank, BNP Paribas and UniCredit currently conduct more business cross-border than at home.
Topics: EU institutions, Global crisis
Tags: bank bailouts, banking regulation, EU, global crisis