The failure of Banco Espirito Santo is not a harbinger of disaster for Europe’s nascent banking union. On the contrary, the main lesson from the Portuguese bank's collapse and rescue is that European bank regulation is getting stronger.
Of course, the situation is lamentable. BES should never have been allowed to develop incestuous relations with its financially challenged owners. It would have been better to make senior creditors, rather than the Portuguese state, provide the 4.4 billion euros judged necessary to help cover possible losses. And it’s disturbing that the Troika – which includes the European Central Bank that will soon regulate all big euro zone lenders – managed to miss BES’s issues given it has overseen Portugal’s economy since its national bailout in 2011.
Still, the BES plan is far superior to last year's disorderly Cypriot bank rescue, when uninsured depositors suffered losses. It is also better than most of the bailouts during the financial crisis five years ago, in which governments limited even shareholders' losses. At BES, both shareholders and junior creditors will be on the hook. Besides, taxpayers should not end up losing out directly. Levies on the nation's banking system should make up for any shortfalls.
As far as regulation goes, the failures belong to an old regime. Once the European Central Bank starts regulating the big euro zone lenders in November, it will hopefully do a better job. And it will not be allowed to be kind to senior creditors. As of January 2016, they will be eligible to be "bailed in" during bank rescues.
There is another reason that BES shouldn’t set an unhappy precedent. It is unlikely that many European banks are controlled by families that also run networks of opaque and leveraged entities, let alone entities which manage to borrow from the family bank without disclosing the loans to either regulators or the bank's own board of directors, as BES alleged last week.
Investors seem to understand that the collapse of BES is not the beginning of a doom loop of financial woes and strain on government finances. At the height of the credit crunch in 2012, any bank failure tended to make yields on government debt jump. Portugal’s actually rallied on Aug. 4.
Although BES's structure is extraordinary, more conventional euro zone banks may yet fail. But if they do, the Portuguese lender provides a template of how to proceed – and one which can and will be further fine-tuned.
Source: Reuters
Of course, the situation is lamentable. BES should never have been allowed to develop incestuous relations with its financially challenged owners. It would have been better to make senior creditors, rather than the Portuguese state, provide the 4.4 billion euros judged necessary to help cover possible losses. And it’s disturbing that the Troika – which includes the European Central Bank that will soon regulate all big euro zone lenders – managed to miss BES’s issues given it has overseen Portugal’s economy since its national bailout in 2011.
Still, the BES plan is far superior to last year's disorderly Cypriot bank rescue, when uninsured depositors suffered losses. It is also better than most of the bailouts during the financial crisis five years ago, in which governments limited even shareholders' losses. At BES, both shareholders and junior creditors will be on the hook. Besides, taxpayers should not end up losing out directly. Levies on the nation's banking system should make up for any shortfalls.
As far as regulation goes, the failures belong to an old regime. Once the European Central Bank starts regulating the big euro zone lenders in November, it will hopefully do a better job. And it will not be allowed to be kind to senior creditors. As of January 2016, they will be eligible to be "bailed in" during bank rescues.
There is another reason that BES shouldn’t set an unhappy precedent. It is unlikely that many European banks are controlled by families that also run networks of opaque and leveraged entities, let alone entities which manage to borrow from the family bank without disclosing the loans to either regulators or the bank's own board of directors, as BES alleged last week.
Investors seem to understand that the collapse of BES is not the beginning of a doom loop of financial woes and strain on government finances. At the height of the credit crunch in 2012, any bank failure tended to make yields on government debt jump. Portugal’s actually rallied on Aug. 4.
Although BES's structure is extraordinary, more conventional euro zone banks may yet fail. But if they do, the Portuguese lender provides a template of how to proceed – and one which can and will be further fine-tuned.
