Forbearance, resolution and deposit insurance Post author By Philip Lane Post date August 1, 2012 The advisory scientific committee to the ESRB has released a report on the European Banking sector here. (Link fixed.) Categories In Uncategorized 7 Comments on Forbearance, resolution and deposit insurance ← The Euro Crisis is Tough on (Some) Hedge Funds → ECB Statement 7 replies on “Forbearance, resolution and deposit insurance” Link is broken This should work: http://www.esrb.europa.eu/pub/pdf/asc/Reports_ASC_1207.pdf working link: http://www.esrb.europa.eu/pub/pdf/asc/Reports_ASC_1207.pdf?3c92fc7deeb71d34ae75d11e17de37e4 This link seems to work: http://www.esrb.europa.eu/pub/pdf/asc/Reports_ASC_1207.pdf?9602826021c52903d8b895acbad11f00 The report gives a good summary of what should have been done during, roughly, early to mid 2008. It warns against everything that was done in Ireland without mentioning the words Anglo or Irish. No mention either of the inhibition of bank resolution by the ECB. Colm McCarthy and yet the anglo debacle remains unfixed. Where now are those brave defenders of it? Still for the most part sitting in well padded comfy chairs. Scientific committee? There isn’t a single scientist on it. Good link via Karl Whelan – Forbes. It is surprising that government equity/ownership arising from banking problems isn’t included as part of the context and background underlying the different aspects of resolution discussed. Do this, this and this but no mention of the potential for profit accruing to the governments/resolution mechanisms in the medium to longish-term time frame. It could well be that for every ten banks in difficulty, eight or so will recover and two will liquidate. Or some such ratio. Those that recover (following substantial government capitalisation) will yield profits (and dividends) and capital gain on disposal. The issue pertaining to this potential is how to mix and match public and private banking in the ‘medium to longish-term time frame’. By omitting any discussion of this in the report on the European Banking sector by the advisory scientific committee to the ESRB, the authors are tut-tutting national ownership. Private or nothing. I contend that the asset of government ownership resulting from bank failure should be set within resolution proposals. The Irish government’s ‘forced’ equity investment in the operating banks – Aib/Ebs, IL&P, BoI – of around €15 billion, is well capable of yielding a substantial net profit to the state. Not overnight: that’s why a ‘thinking through’ is required on an effective operational outcome for a mix of public and private banking in the ‘medium to longish-term time frame’. Note. Of Ireland’s €29.4 billion bailout of the operational banks, €8.4 is in the form of capital loans (at 8-10% per annum), €15 billion in equity and €6 billion is in the form of a write-off. The €6 billion write-off (special capital contribution to Aib) could be offset (or mostly offset) against the sundry income arising from the bank guarantee scheme (€4 billion plus by 2014) & Central Bank Interest gains (not including Anglo) for the period 2009-2014. The capital loans could be off-loaded to private funding in due course or paid out of profits. Any broad projections that I have made suggests that the operating banks (of which the state owns around 62.5%) will yield an after-tax profit of €4 billion per annum in due course – setting up a net yield to the state of substantial billions. There is no hurry to sell the bank equity. But watch out for the disastrous deal that our government will conclude this October as the tut-tutters emerge victorious. Comments are closed.