Can the Mes really save Deutsche Bank?
Past, present and future of the Mes and potential banking crises such as that of Deutsche Bank. Giuseppe Liturri's analysis
In the hours in which Deutsche Bank makes the markets falter, the role of the Mes as the "savior" of banks in difficulty returns to the fore.
An even more topical issue in the light of the statements by President Giorgia Meloni after the Euro Summit on Friday, with which the line that Parliament had already dictated to the government itself since November was reaffirmed: the Mes is an instrument of last resort in a framework of rules that are changing and therefore first a new governance framework of European economic policy is defined (Stability Pact, capital market union and banking union) and then , as a consequence of these choices, it is decided what to do with this instrument designed for another geological era.
Quite surprisingly – at least for those who do not work for the interests of our country – the final statement of the Euro Summit does not speak of the Mes, but speaks exactly of everything that must precede it .
But can the Mes (in its current or reformed version, a non-trivial difference, as we will see) really play a role in a crisis of a systemically important bank, such as Deutsche Bank, and therefore would it be necessary to ratify the reform immediately?
The answer is no. For several reasons that we will explain below. Including the twist that you will find at the end.
One topic would be enough to end this article immediately: the ESM support loan (reforming) to the single resolution fund (SRF) would be equal to a maximum of 68 billion and would arrive only when this fund had exhausted its availability and had no other sources available (other extraordinary contributions from banks, for example). In short, truly an instrument of last resort when, after having asked for an adequate sacrifice from shareholders, unsecured bondholders and depositors over 100 thousand (the notorious bail-in), the resolution authority would also have exhausted its own resources (today around 70 billion) and would need additional funds to lend to the bank under resolution.
Ultimately, limited resources – to which Italy should also generously contribute – which would be foam on the shoreline compared to the tsunami deriving from the collapse of a bank such as the German one. We recall that the Credit Suisse affair saw the Swiss central bank make available 200 billion francs and other substantially unlimited resources.
But, in the event that the Mes were enough, what would happen?
The current Mes Treaty provides that, in the event of a banking crisis, the Mes can intervene by disbursing loans to the States to recapitalize their respective banks, as happened to Spain, beneficiary of 41 billion between 2012 and 2014. This intervention follows the rules of conditionality of the other ESM loans to the States (precautionary and under strengthened conditions), therefore it requires the signing of a more or less rigid memorandum of understanding.
Then there is the Mes direct bank recapitalization tool (DRI). Introduced at the end of 2014 and never used, it provides for the direct entry of the Mes into the capital of banks in crisis with an available fund of 60 billion.
The much-invoked ESM support loan to the SRF originates from here. By the same admission of the Mes, the direct recapitalization is very dangerous for the Luxembourg institution as it would constitute a direct exposure to the risk of default of the recapitalized bank and therefore worsen the rating of the Mes. Much better (again for them) to have the SRF intervene directly by following the resolution rules developed with the bail-in directive (BRRD) and, in the event of inadequacy of the latter, to intervene with a loan of last resort.
In short, when in Europe they realized that it is impossible to create a Banking Union without having a resolution fund with "credible" resources, then, to make it "credible", they invented the "parachute" loan from the Mes to the SRF, with a duration triennial, extendable by another two years. Suffice it to consider that the SRF (launched in 2016) is still in a transitional period until 31 December 2023, when it should reach an amount equal to 1% of eurozone bank deposits.
The Mes loan must be "fiscally neutral". That is, in the medium term, that loan must be repaid by leveraging contributions and withdrawals from the banking sector which already feeds the SRF with annual contributions.
This is why it is safer, from the ESM point of view, to lend to the SRF than to recapitalize a single bank. You risk less. The Mes support loan is convenient for the… Mes.
But now comes the twist. If you think about what happened in the last two weekends in the USA and in Switzerland, these are decisions to be taken in a very short time and instead the decisions of the Mes sometimes require – in addition to the resolutions of the board of governors and of directors – also the involvement of national parliaments (see under B as Bundestag). So the reforming treaty provides for an emergency procedure which however requires a qualified majority of 85%. And do you know what Italy's share is (third place after Germany and France)? 17.7%. So without the consent of Italy (or Germany or France), the Mes (reforming) cannot rush to anyone's rescue.
It is worth emphasizing that the ESM loan to the SRF is quite different from the one disbursed to the States in the double form of a precautionary loan (PCCL) or with enhanced conditions (ECCL). The conditions governing access to the latter are well defined in Annex 3, which calls for compliance with public finance parameters that are subject to revision, another good reason why it makes no sense to ratify something that will already be outdated tomorrow .
On the other hand, the conditions of the Mes support loan are defined in Annex 4 and do not at all concern the state of health of the public finance of the State in which a bank is the subject of the intervention of the SRF and, ultimately, of the Mes loan. . They are really two different worlds not to be confused.
So it could well happen that the SRF (backed by the Mes) intervenes on an Italian bank, regardless of whether our public accounts respect certain parameters.
It is no coincidence that the reforming Treaty provides in article 12 for paragraph 1 (interventions for the financial stability of the States) and paragraph 1 bis (support loan from the ESM to the SRF). The first intervention is governed by articles 14 to 18 (memorandum of understanding above). The second from article 18-bis. There must also be a reason for keeping them separate, or not?
In conclusion, the Mes (current and reforming) is the last (spare) wheel of a wagon so precarious that it can't even keep the road, but you want to use it as a steering wheel.
We do not know (nor do we delude ourselves) the results that the Meloni government will be able to obtain on the issues under discussion. But we cannot fail to note that, after years of subjection, we are entering Europe with a negotiating position worthy of the name.
Work on the stability of the wagon, if there is the will and the ability to do so. Because if you insist on the Mes, the suspicion that it is needed for something else increases, not for the banks.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/il-mes-puo-davvero-salvare-deutsche-bank/ on Sat, 25 Mar 2023 20:01:12 +0000.