Last week, Debating Europe attended the 10th Annual European Financial Services Conference in Brussels, an event organised by Forum Europe to bring together more than 400 senior bankers and policy-makers from around the world. We came to the event prepared with a couple of questions from our readers on the topic of banks being “too big to fail” and on the controversial issue of bankers’ bonuses.

First up, we had a comment submitted by Van Patten that was highly critical of the bail-outs:

If the government deems the banks ‘too big to fail’, surely it is little wonder that those banks engage in speculative behaviour knowing that if they find themselves short of funds, the government, or ultimately the taxpayer will bail them out?

In other words, by “privatising profits and socialising losses” for large financial institutions are we encouraging risky behaviour? We approached Olivier Guersent, the Head of Cabinet for Michel Barnier (the EU Commissioner responsible for financial services regulation) and asked him if “too big to fail” was just a reality we had to live with, or if there was something we could do about it.

Mr Guersent told us that this question was one of the reasons Commissioner Barnier asked Erkki Liikanen, Governer of the Bank of Finland and former member of the European Commission, to compile a report (due later this year) on possible ways to reform Europe’s banking sector. The second point Mr Guersent made was that he doesn’t think “too big to fail” is inevitable, and policies such as bail-ins (i.e. forcing banks to “recapitalise from within” using private money instead of public money) might help.

Also speaking at the event was Sharon Bowles, a UK Liberal Democrat Member of the European Parliament (MEP). She made the point that the financial crisis had actually made the situation worse, not better:

We do have some very big banks, and the crisis has only made them bigger, that’s the irony of it; the forced mergers have meant we now have more too-big-to-fail than we did before.

Finally, we had the chance to ask a couple of questions to each speaker on the controversial topic of bankers’ bonuses. We had a comment sent in by Panagiotis arguing that, if executives in bailed-out banks are “also [getting] big bonuses like the ones that have not been aided, [this] is totally unfair [and] people have to complain to banks’ new owners: their political leaders.

We asked Mr Guersent whether there was a problem with excessive bonuses being paid in financial institutions receiving support from the public purse, and whether Commissioner Barnier had any plans on this front.

We also put the same question to Sharon Bowles. Is the issue of bankers’ pay something that Europeans should be angry about, or is this just a populist line? After all, financial services in Europe need to attract the best and brightest, and if we interfere with their pay they may take their skills elsewhere.

What do YOU think? Maybe we have to just accept that some banks will always be “too big to fail”? Or could the creation of “too big to fail” banks be avoided through “bail-ins” and strict separation of retail banks and “casino” investment banks? Do we need new regulations to control bankers’ bonuses in publicly-supported banks? Or should we let free markets decide how much an individual is paid? Let us know your thoughts in the form below, and we’ll take your comments to policy-makers and experts to hear their reactions.

IMAGE CREDITS: CC / Flickr – eyewash

28 comments Post a commentcomment

  1. avatar
    Nikolai Holmov

    Now the cynic in me sees the ECB giving unlimited low interest loans to banks on the premise of recapitalisation but given that bonds have been successfully sold by Italy, Portugal, Spain and all the other apparently wobbly economies at ever reducing rates (to the point they are deemed serviceable by economists), you have to suspect that the banks are actually buying government bonds with ECB money to keep those market dictated rates down through an apparent “faith” from within the said market.

    Cynically I suspect that “faith” comes by a deal between the ECB and the banks that in order to stabilise the bond market. So the ECB lends them unlimited cash at 1% for the next few years (to recapitalise allegedly) but in fact it is lent on the understanding a large proportion of this unlimited cash is used to buy bonds to keep them within a serviceable interest level.

    In other words, the banks borrow unlimited cash at 1% from the ECB and buy otherwise unwanted bonds with a return of about 6%.

    A nice net 5% for the bank, apparent faith in the wobbly EU economies from “the market”, little if any direct ECB involvement and thus all the banks in this scheme cannot be allowed to fail or they will blow the whistle on this nefarious little scam or call in the bonds they hold early forcing rates way back up to unsustainable levels when trying to sell EU government debt.

    But like I say, I am cynical.

  2. avatar
    Michael Tsikalakis

    It is clear to everybody today that banks took advantage of their powerful position in the market all these years. The results are there. In order not to have the same story again, banks need Government’s intervention and guidance. The most important is to separate retail banks and “casino” investment banks.

  3. avatar

    Private insurance.

    Banks need to have adequate private insurance (as opposed to implicit or explicit government insurances) so that should they fail, private insurance policies they have in place cover their liabilities.

  4. avatar
    Karel Van Isacker

    I believe the banking world should be more regulated to avoid any Greek scenarios to happen again. Hedge funds and investment banks bring basically the European balance and solidarity in danger, while they were at the same time saved by the forced solidarity shown by the taxpayers. And they succeed in paying themselves royal bonuses. Is this what Europe 2020 stands for? A Europe dictated by banking rules, lack of solidarity and ever increasing hunger for profit, bonuses and top profit margins? Is this why people have worked so hard to unify Europe?
    I dare say no. And I hope EU politicians will soon discover that creating leaders and followers among the EU members will result in ever increasing problems. Greece is the pariah today, tomorrow Portugal will be the pariah, etc. This is not what Europe 2020 stands for.
    I am a EU citizen, Belgian and living in Greece, working with people with disabilities. The enforced austerity measured imposed by a “solidair” Europe are destroying the very social network that lives in a society.
    The question therefore should not be “how do we stop banks from failing”, but rather, “how do we stop the EU from failing because of the greediness of Banks”.
    I sincerely hope the EU thinks a bit more in this direction when it decides to save another bank so it can continue doing what made it a bad bank: betting on the misery of others.

  5. avatar
    Christos Mouzeviris

    For me it is back to the basics with banking, to the times where the banks were regulated and people made profit out of their savings, not the other way around…When we were paid to have an account with a bank, not be charged..When banks did not have as much powers…end of…

  6. avatar
    Leonardo Baggiani

    “I believe the banking world should be more regulated to avoid any Greek scenarios to happen again”
    The Greek scenario was created by ill-managed public finance.

  7. avatar
    Christos Mouzeviris

    Not only that Leonardo….There are many reasons why Greece failed and the blame is both on the Greek governments of the past decades, and the European elites, of course..Both internal and external driving forces…

    • avatar
      Leonardo Baggiani

      I do not share this view: when a State goes bankrupt because of too high debt and spending (please note I am Italian, you know what Italy is) there is no way to blame others. You cannot say you are failing because others have not saved you, being saved is an option (you can considered a must only if you evaluate the things in political terms, not economic), but proper financial management is Government’s duty.

      As to the amost world-wide crisis as an exogenous cause of toruble, it is shared by every nation, so it is not a discriminating cause to call for particular help.

      As to banks… I do think that the necessity to protect the sector for the economy not to implode are exaggerated: the whole banking system will never collapse, as the more banks fail, the more monetary wealth and demand for financial services (tho’ deleveraging must occur) flow into the remaining – seemingly sound – banks. There is a lower bound to failings which is not zero-banks. So we can let banks fail when the balance sheet goes stinky.

    • avatar
      Christos Mouzeviris

      Leonardo I agree with your second argument..As for the first I think you did not understand exactly what I meant…

      I, in no way blame others for not “coming to save Greece”…But because a) when they were designing the euro, EU or the common market they left too many grey areas and loopholes that everybody took advantage and one would wonder if the loopholes were put there for the exact reason to allow states not to play by the rules..Germany was the first to break the rules of the eurozone remember..?? Let us not forget that..But they blamed the Greeks only…

      b) I do blame others because to me, I am pro-European or support my country’s EU membership because I want an external body to keep my Government’s actions in place..As sad as this sounds, I have more trust in my representatives in the EP than my national Parliament..That did not happen..European powers knew the state of Greece for more than a decade now, (as Mr Juncker admitted) yet they did nothing all those years to force our politicians to conform..Now they are demanding all the reforms to be done in a small period of time, reforms that should have started at least 10-20 years ago..and all that with result to the Greek people suffering! I agree that they have a share of blame and responsibility..But if you look back to the turbulent and often violent recent history of Greece, is there any wonder that they became politically idle..?? Juntas, civil wars, foreign intervention…you name it..

      c) I disagree with the current model of how the common market works..some states have all the industrial activity on the continent, while others battle it out for what is left and rely on agriculture and tourism to survive, two industries that rely on the money of others or a lot of subsidizing to make it profitable..while since we are in the euro, we should be allowed or encouraged to develop industries..Germany is too strong and advanced to share the same currency with…we need to become a bit more like them, thus start producing heavy industries..and my idea..?? start producing solar panels, windmills and all the components to produce solar and wind energy..then start producing green energy and export those components to other countries too..but will Germany and other industrialized countries allow Greece to start producing them, or what they want is them to produce them, Greece to import them then German or other European companies while the European companies set them on Greek soil and exploit them, so Greece actually gains again very little from its natural assets such as sun and wind that are plenty in the Aegean? you understand now what i mean?

    • avatar
      Leonardo Baggiani

      Thanks for replying, Sir

      a) Germany (and France) temporarily broke the Maastricht deficit limit, I do remember. As to France, I cannot say whether it was justified; as to Germany, it was a way to finance their international production organisation, whose effects are now evident. You cannot take that singular case to justify a perennial deficit spending of the Greek and Italian kind, which was no investment but mere electoral shopping.

      b) You have to pay heed to “realpolitik”: if Germans (or Finns or whoever else) had imposed their rules to Greece (or Italy, I like to stress not to look like one-sided critic), they would have accused of imperialism (an Italian joke “Hitler theorised the superiority of the Arian race, Kohl realised it”). the EU, like any other organisation, cannot move pre-emptively in these case, but has to way for the situation to be stressed enough for their intervention to be inevitable and uncriticable. It is sad, but it is how our system goes (a domestic example: in the last 20 years was well known that the Italian pension system had to be reformed, but its new working has been repeatedly postponed… until it was not possible to keep on and a “third” goverment HAD to impose it). Anyway, you cannot blame a “third” entity for you have spent more than you could.

      c) I do not understand your (not only your) stress on heavy industries. Tourism and Art can be great sources of income and jobs; dunno Greece, but Italy’s tourism is less than 8% of GDP… we have a structure simile like Germany but far less competitive, and this depends not on the euro but on total factor productivity. Germany can insulate exchange rate problems by importing parts and assembling in Germany then export them, they rely on external money too.
      No European law impedes solar panels (if you believe in them) to be produced in Greece or Italy, or make them the fotovoltaic energy provider of Europe (nice stuff, isn’t?); it’s a matter of lobbysm at both domestic and far wider level.
      You must not expect 27 States to have the same industrial structure (tot agriculture, tot manifacture, tot heavy industries, tot energy, tot tourism…tot banking… the same for everyone – neither communism could do it): comparative advantages exist which make States specialise, so we have to find (by market forces, or illuminated rulers, you choose) where our advantages lie.
      One observation: when more than half of your economy is State bureaucracy you cannot surprise at your State to be a net importer of goods: if someone sells you something, you must pay heed to the fact that you prefer buying it than building it.

    • avatar
      Christos Mouzeviris

      Thank you Leonardo…That makes sense…Then it all coes down to our incompetent politicians that made deals with other European and non European leaders not to produce anything..Just sit back and leave the country rot..It is this intergovernmentalism that I hate and oppose…Because we are not being told anything…Even until the last minute, Mr Papandreou, was promising us that the country has money and we won’t be needing a bail out…What happened next is history…So why is that..?

      I would still like to see Greece diversifying its economy though….We must become stronger…

      So what we all should have done all those years..?? With lying politicians and the indifference of our “partners”..??

      Oh and some other countries or organizations are making profit out of Greece’s bail outs and interest on their loans.. This is unacceptable..!! The suffering of a nation gives more wealth to some others…!! Shame!

    • avatar
      Christos Mouzeviris

      Oh and the public sector in Greece got so big because politicians were using as a lure to gain votes….They were promising a position in the public sector in exchange for voting loyalties…instead of creating jobs….So with no other choice or stable career prospects the Greeks went for that option…the other options they had was to work in the tourism industry, customer services or become a farmer….
      our politicians need to hung by their balls….end of….

  8. avatar
    Otto de Voogd

    How can we avoid that the tax-payer ends up paying in the event of the failure of a bank (or other company) regardless of how big they are?

    It’s really about the bank deposit guarantee, maybe that’s what needs some rethinking. Maybe those financial institutions that take deposits from the public and operate a payment system need to be limited in how they can invest that money so as to limit the risks. While other financial institutions can do whatever they want (except hold deposits or run a payment system) but they won’t be saved when they fail no matter how big or small they are.

  9. avatar
    Galina Deneva

    If you regulate the banks to stay smaller, who will give the money for the next keptboy? Better think of a way to stop creating “countries too loved to fail”.

  10. avatar
    Christos Mouzeviris

    It is not countries too loved to fail Galina. It is banks too big to lose any money because someone will be upset and will lose his/her investments..Europeans are paying to save foreign banks in their banking system, because European banks got too much exposure in American toxic debt..Now some European nations are asked to pay the bills, while others are not…!! Simply as crude as that…..

  11. avatar
    Paul Smyth

    Surely, whether something should be allowed to become too big to fail depends on whether it does you good or not. If it brings security and important benefits you’d want it to be preserved forever, if it brings risk and penalties/liabilities you’d want to prevent it from becoming too important and seek to control its power/influence. Therefore, is it not what banks do and how they conduct themselves that is more important than how large they become?

  12. avatar
    Hamza Serry-Senhaji

    Banks should be allowed to go bust. The central banks role is to provide liquidity but not to solve banks insolvency problems. Be carefull about the unintended consequences of capping bonuses , they might just increase their base salary which makes them even more vulnerable in dowturns (because otherwise they would just cut bonuses) and by the way might move elsewhere to Wall Street or Hong Kong. Markets sometimes fail but government politically motivated solutions to those failures almost always fail.

  13. avatar
    Des Whelan

    Still to much,not low enough,making out they are doing something.The answer is Prison for though’s who brought their Banks and Country to it’s knees .

  14. avatar
    Pham Quoc Dung

    There is no reason to save banks it is not only the problem of “too big to fail” but also “too big to save”. Moreover, this will creat a problem of moral hazard. dependency of bannking sector on the “bail out culture”. Money does not come from the sky but from tax payers. tax serves to pay for each level of government in order to produce the public goods at local and national level or european level. Explain me why I have to pay for the private debt accumulated by private banks ???? Lets banks save banks for there error in overestimating the markets. Savving banks violates completely the principle of market economics.

  15. avatar
    Paul Galbally

    Let them fail, they are undermining the Economic Union by draining it of liquidity while simultaneously financing the anti-EU media.

  16. avatar
    Vicente Silva Tavares

    Shareholders are deceived by these guys, since the Salaries commission is actually indicated by the board directors, so, no wonder they give the board directors all what they want. If they win, they get huge premiuns, if they take the companies to debts, the shareholders pay or the tax payers as we have seen recently with many banks.

  17. avatar
    eusebio manuel vestias pecurto

    Os administradoresdos bancos têm que ser responsáveis pelos seus actos se um Banco privado faliu esse banco é responsável pela sua falência e não os contribuintes eles não podem ter o poder da decisão a UE deve travar esse poder de decisão dos sir. administradores é necessário que os lideres e so seus partidos olhem para a realidade das classes medias europeias porque estão a ser desvalorizadas novos ventos novas politicas de crescimento económico

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