They had been expected for a long time - now they have arrived. The European Commission this week published a Communication containing regulations for so-called “Bad Banks”. These are institutes to be established by the state in order to buy toxic assets from the banks. Using taxpayers’ money.
During the past weeks, the pressure on the Commission has increased once again. Since in autumn of last year, after the collapse of the American Investment Bank Lehman Brothers, the crisis also became acute in Europe, the Civil servants of the European Commission have permanently worked overtime. About 50 bank rescue packages from the Member States had to be examined, often under enormous time pressure; in addition regulations had to be drawn up for the first bank rescue and recapitalisation plans. Many initiatives, however, came too late to provide the Member States with real action guidelines.
The current results of the historically unique rescue operation for the European financial system, where hundreds of billions of public tax money were spent, are more than sobering. So far, only a few banks have accepted the financing offer of the European countries. The tone was set by the Swiss Josef Ackermann, the chief executive of Deutsche Bank. He would be ashamed said Ackermann to accept money from the state. A remark, which got the self-assured banker into trouble with politicians.

Those banks, which so far accepted money from the state, did this for very different reasons. Either they were on the brink of collapse and had no other choice or they used the rescue packages to fill their war chests. The real target of the bank packages from a macroeconomic point of view, however, was clearly missed: banks are needed to finance the real economy. They have to meet their social responsibility and give loans to companies willing to invest and to private households; otherwise the economy collapses. And it is exactly that, which they don’t do. They are hording public funds and wait for more. Meanwhile, this has led to plain words by some high political representatives. Only recently for example the President of the European Central Bank ECB, Jean-Claude Trichet said that under those circumstances banks had really no right to exist. And the Irish Commissioner Charlie McCreevy - who came under fierce fire for his year-long tête-à-tête with the finance industry - got to the point: We are dealing with Zombie banks, which are not capable of playing a useful role in our national economies, said McCreevy.

Fact is that even the ECB is talking of a credit crunch and that at a time, where the crisis has a full impact on the labour markets. The fact that most of the initial bank rescue packages were only a half-hearted effort is now showing dire consequences. In most cases, the banks were not obliged to accept public funds and to pass them on in form of loans to industry and private households. Not to mention the lack of restrictions concerning manager salaries, bonuses and dividend distributions. The lesson is clear: the first wave of rescue packages has failed.

Curtain up for Act Two. For quite some time now, a new idea has been wandering through the political corridors. And once again the Americans were faster than the Europeans. The public authorities could - so the idea - rid the banks of their worthless “rubbish” assets. That way, they would once again have a clean slate, could start from scratch without worrying and would once more give loans. The idea of the so-called “Bad Bank”. Some European countries, among them Great Britain, have already implemented similar plans. The problem from a political point of view: again, such a solution costs billions, for which the taxpayers have to act as guarantors, which poses in times of massively rising unemployment a significant political risk. The problem from a European point of view: the possibility that each Member State introduces its own regulations could result in massive unequal treatments between banks in Europe. Setting a value for assets, which basically cannot be sold on the market at the moment, has to be coordinated at European level; otherwise the danger of dramatic subsidy races might arise.

At the last minute, however, the European Commission has now, in cooperation with the ECB, introduced these European regulations. The aim is to determine uniformly, which assets can be offloaded in state-owned rubbish dumps and which methods have to be applied for fixing their price. That way the banks should finally be forced into disclosing their balance sheets and to come out with the full truth about the real extent of the disaster so that at last a fresh start can be made. The political reaction of the population to this second attempt to rescue the banks remains to be seen.

For further information:

Press Release of the Commission

Communication from the Commission on Impaired Assets