Banking crisis yet again and how to fix it. CEPS Commentary, 15 February 2016

Almost out of the blue, a combination of diverse factors has elicited a run on bank stocks and junior and senior debt, raising the spectre of a renewed systemic bank crisis within the European Union. The policy response cannot come from the European Central Bank but, instead, must consist of regulatory responses capable of dispelling the uncertainty over future prudential capital requirements while also temporarily suspending the rules on state aid cum bail-in that had ignited the crisis.

In Search of a Feasible EU-Mercosul Free Trade Agreement. CEPS Working Document No. 378, 25 February 2013

This paper aims at identifying ways to pursue the EU–Mercosul negotiations leading to a free trade agreement (FTA). After reviewing their already long history, it outlines a basic framework, in goods, services and other themes, judged possible. The main point is that, given the prevailing conditions on both sides, an agreement to be signed within a reasonable time must be modest, i.e. along the described lines. It then clearly sets up the decisions confronting the negotiators: either to pursue the modest, feasible option or to terminate negotiations under the FTA heading. The latter, however, does not imply an end to the dialogue. Many actions and measures may be taken – which are easier to discuss and fix – that could pave the way for, in due time, a closer-to-ideal FTA to be considered again. These are the subjects of a last section.

Eurozone Debt Crisis: Reckless debtors or misguided rescuers? EuropEos Commentary No. 10, 26 May 2011

Based on the latest round of difficulties to emerge from the Greek financial assistance programme, this commentary concludes that there are serious flaws in the design of the eurozone’s crisis management system that periodically push the members to the brink of financial meltdown. He warns that the same is bound to happen again with Ireland and Portugal, and each time with higher risks that the fabric of cooperation within the eurozone will tear irreparably. In order to fix them, he proposes three basic changes to the crisis management arrangements and the design of the European Stabilty Mechanism (ESM) decided in March by the European Council.

Addressing the immediate needs of the Greek banks. CEPS Commentary, 31 July 2015

Based on a detailed calculation of the recapitalisation requirements of the Greek banks, we find that the sector needs an infusion of capital, but that the level largely depends on the stringency of the capital requirements applied. An expedient quick fix to comply with the minimum capital requirements could be achieved by a bail-in of existing creditors under the EU Bank Recovery and Resolution Directive of around €5 billion, leaving only €6 billion needed for re-capitalisation. If the ‘Cypriot’ standard is applied, however, the required re-capitalisation would be €15 billion. A ‘generous’ approach, which takes into account the phasing in of the new more-stringent capital requirements until 2018, would imply a re-capitalisation of €29 billion (or more bailing-in of creditors). The re-capitalisation should be undertaken preferably by the EIB, the EBRD or the new Greek investment fund, rather than via loans from the ESM to the Greek government.

Fine-tuning the use of bail-in to promote a stronger EU financial system. CEPS Special Report No. 136/April 2016

This paper discusses the application of the new European rules for burden-sharing and bail-in in the banking sector, in view of their ability to accommodate broader policy goals of aggregate financial stability. It finds that the Treaty principles and the new discipline of state aid and the restructuring of banks provide a solid framework for combating moral hazard and removing incentives that encourage excessive risk-taking by bankers. However, the application of the new rules may have become excessively attentive to the case-by-case evaluation of individual institutions, while perhaps losing sight of the aggregate policy needs of the banking system. Indeed, in this first phase of the banking union, while large segments of the EU banking sector still require a substantial restructuring and recapitalisation, the market may not be able to provide all the needed resources in the current environment of depressed profitability and low growth. Thus, a systemic market failure may be making the problem impossible to fix without resorting to temporary public support. But the risk of large write-offs of capital instruments due to burden-sharing and bail-in may represent an insurmountable obstacle to such public support as it may set in motion an investors’ flight. The paper concludes by showing that existing rules do contain the flexibility required to accommodate aggregate policy requirements in the general interest, and outlines a public support scheme for the precautionary recapitalisation of solvent banks that would be compliant with EU law.