Guillaume Prache enjoyed the rare privilege of being invited by the European Commission and the European Central Bank to address a conference on financial stability and the Banking Union on 27 April. For the occasion, he reiterated BETTER FINANCE’s conditional support for the Single Supervisory (SSM) and Single Resolution (SSM) Mechanisms.
Without forgetting that financial stability has in the past served as justification for bailing out banks at a high cost to individual savers and investors, it is crucial to realize that, if handled correctly, it is also a notion that could go a long way towards restoring the trust of citizens and financial services users in the financial system.
Banking resolutions that don’t respect the rights of individual investors and depositors carry enormous social costs. Individual savers and investors have borne the brunt of these costs. Not only are they paying for bailouts in their capacity as taxpayers, they are also suffering losses due to financial repression and negative returns on bank savings.
Adding insult to injury, depositors have repeatedly been put on the front-line and "bailed-in” by having part of the debt they are owed written off in order to rescue the borrowing institution. This is unacceptable and needs to be addressed as a matter of priority in the further development of the Banking Union. At the very least, assurance should be given that the bail-in of depositors is a measure of last resort.
Above all the Banking Union should continue to tackle what can only be described as the “privatization of profits and socialization of losses” that has dominated the bank resolutions of the past years, such as in Spain where BETTER FINANCE’s Spanish member organisations AEMEC and ADICAE have been seeking redress through class actions for BANKIA’s hundreds of thousands of individual shareholders.
It’s a perverse system that would see savers and depositors pay instead of the parties responsible for bank failures, such as bank executives and supervisors.
Besides strong and effective resolution and supervisory mechanisms, the banking union needs to reduce the European Union’s over-reliance on intermediated finance and the related complexity of banking activities, in order to improve the ability of shareholders to exert control over the banks in which they invest.
In view of potential bail-ins of non-insider investors and depositors, it is indispensable for real and thorough reform of banking structures that will improve the corporate governance of financial institutions and allow, at the very least, for investors to have a say on risks, liabilities and reserves.
A point in case would be Germany’s largest association for private investors and BETTER FINANCE member organization, DSW, who is calling for an external special audit into the adequacy of the reserves established by Deutsche Bank in view of the risks deriving from all the ongoing legal and supervisory proceedings against the bank.
Financial Stability is important, but it cannot be implemented at the cost of individual investors and depositors without holding the responsible parties to account. If individual investors are to pay for bailouts, at the very least, they should be able to influence corporate governance.