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Germán López Espinosa, , Director of the Master's Degree in Banking and Financial Regulation of the University of Navarra.

No more public money to bail out banks

Fri, 20 Feb 2015 14:27:00 +0000 Posted in Expansion

Directive 2014/59/EU establishes a framework for the restructuring and resolution of credit institutions and investment firms. This Directive aims to minimize reliance on public support to rescue unviable institutions, thus protecting taxpayers, deposits -covered by the deposit guarantee fund-, investors and customers.

The Restructuring Plans of the entities of credit will be crucial for the stability of the global financial system and it is intended that public aid will never be used in carrying them out. The governance process, the scaling of decisions, the robustness of the restructuring indicators and the credibility of the measures to be taken by the bank will be crucial for the prevention of negative effects on the financial system and on the Economics real. If the Restructuring Plan is perfectly updated and designed, the contribution to the systemic nature of a given bank will be less than it was in the past. Furthermore, and not less important, this entity will be less exposed to market volatility, because the restructuring measures are designed for both systemic and idiosyncratic scenarios, or both.

Therefore, these Plans are intended to contribute to maintaining financial stability and minimizing the economic and social effects that we have suffered during the financial crisis in the countries where the entity operates from credit . From an empirical point of view, this can be verified in the future, when at least one bank is under severe stress status and we can assess whether the Restructuring Plan contributed decisively to reduce its contribution to contagion to the rest of the institutions and/or reduced its exhibition in the face of a systemic status .

It is also important to highlight that not only the credibility of the entities will be at stake, but also the credibility of the Single Supervisor, since the latter has the capacity to require modifications to the Plan from the supervised entities to the extent that they are not considered adequate or realistic.

Therefore, if everything goes according to plan, in the future, taxpayers will not have to bear the losses of banks, nor will healthy banks have to bear a good part of the losses of banks that had an excessive appetite for risk; we have moved to a more preventive scenario, since prevention is always better than rescue.