EU drafting plan to keep banks afloat after crisis

BRUSSELS — EU officials are drawing up a blueprint to keep a lender alive after a banking crisis, three years after Swiss authorities scrambled to prevent the collapse of Credit Suisse.

It’s a problem the EU has yet to figure out almost two decades after the financial crisis in 2008, despite triggering a regulatory response that is supposed to ensure shareholders and creditors absorb the losses from a failing bank.

But gaps remain, leaving the public purse at risk of propping up giant banks when the next crisis hits — a nightmare scenario for cash-strapped governments trying to recover from back-to-back crises. The bloc already faces an annual bill of €1 trillion to modernize its economies and strengthen its defense, while contending with skyrocketing fuel prices and stagnant growth.

The last thing the EU needs now is the collapse of a bank the size of Deutsche Bank, UniCredit or BNP Paribas.

Rather than wait until the next financial meltdown, the European Commission has begun working on a plan, according to a confidential document seen by POLITICO. The goal is to solve the Monday morning problem, when a rescued lender can emerge from a weekend solvent on paper but still run out of money if depositors flee and investors refuse to lend.

“The lack of an adequate European mechanism results in persistent gaps in the crisis management framework that undermine credibility and trust,” said the 16-page document, dated June 1. “This uncertainty also creates risks for national budgets, the EU economy and the financing of the EU priorities.”

Credit Suisse serves as a timely reminder of the gargantuan sum needed to keep a major rescued bank alive once confidence evaporates. The crisis in 2023 came hot on the heels of Silicon Valley Bank’s failure, which revealed how quickly savers can empty their deposits at the click of a button.

Swiss authorities assembled a rescue package worth around 260 billion francs, roughly a third of Swiss economic output at the time, over a frantic 48-hour weekend to keep Credit Suisse operating until its rival UBS could swallow up the troubled bank. Bern was even prepared to put public funds on the line to prevent a collapse that would have sent tremors throughout the global financial system.

The EU can’t copy the Swiss playbook because it doesn’t have a single treasury that can step in. Brussels has also written up hundreds of pages of rules to prevent taxpayers from having to pick up the bill.

Those rules require banks to draw up living wills and build up loss-absorbing buffers that authorities can use to stabilize a failing lender over a weekend, a process known as “resolution.” The Single Resolution Board, which handles failing banks, even oversees an €81 billion industry-funded safety net that can support a resolved bank if its bail-in buffer isn’t enough. None of that matters if the rescued bank can’t find the cash needed to run the business on Monday morning.

The European Central Bank, meanwhile, can’t simply print money to absorb losses that belong to a government or failing bank.

To attempt to solve the various problems, the Commission sought “staff level input” for its paper from the EU’s institutional heavyweights: The ECB, the SRB, and the eurozone’s bailout fund, known as the European Stability Mechanism (ESM).

Talks are still at a technical stage, according to three EU officials briefed on the paper, meaning the topic is unlikely to reach finance ministers this year.

But deputy finance ministers have already discussed the topic, also known as “liquidity in resolution” among specialists, and it is one of the priorities of the U.S.' ongoing presidency of the G20. They’re expected to return to the subject in the fall once the Commission unveils its policy position on how to make European banks more competitive on the world stage, the three officials said.

Chasing waterfalls

The Commission envisages a blueprint akin to a waterfall of responsibilities, whereby, as a starter, the ECB provides a lifeline to the troubled lender. As collateral, the bank issues a special bond that the SRB guarantees.

Should the troubled bank fail, leaving the bonds worthless, the SRB would tap its €81 billion safety net to repay the ECB. If more money is needed, the SRB can borrow from the industry or, failing that, turn to the ESM — assuming Italy eventually ratifies the bailout fund’s new treaty, which would allow it to serve as a backstop for the SRB’s safety net.

If that’s still not enough, the onus would fall on the government standing behind the bank rescue. The government can seek a credit line from the ESM if it lacks the cash. Once the ECB is repaid, the banking sector picks up the tab, shielding taxpayers in the long run.

The Commission, ECB, SRB and ESM all declined to comment on the leaked document.

A spokesperson for the EU executive did, however, add: “It is no secret that the Commission’s services are looking at liquidity in resolution in the context of our work on the Banking Competitiveness Report that is expected to be published in July. It’s a long standing and important discussion – as part of our efforts to ensure a fully-functioning Banking Union.”