Cash Management In The New Europe

It is the explicit intention of the Eurogroup* to implement a new bank resolution regime for the EU that is intended to eliminate bank bailouts (TBTF). It provides that banks will be resolved at the expense of shareholders, bondholders and, if necessary, uninsured depositors. Consequently, wealthy individuals, businesses and fiduciaries will be expected to discriminate between good and bad depositories. This is an ill-advised public policy choice.

Under the new dispensation, eurozone depositors can handle this challenge in one of two ways: (1) the identification of banks likely to fail; or (2) the identification of banks which are likely to still be TBTF despite the new policy.

Is it possible to identify banks likely to fail? Yes, one can easily make up a list of troubled banks, that is, banks which have already reported problems in their financials, e.g., Banca MPS, Commerzbank, Credit Foncier, Deutsche Pfandbrief, Bankia, etc. But what about banks that may be at risk of failure but which have not yet reported problems in their financial disclosure? Identifying these banks is more difficult, but not impossible which is why rating agencies and other bank credit analysts exist: to spot and flag the weak and the aged.

But if one could identify the banks that would never be allowed to default on their deposits, wouldn't that be a lot easier than looking for creditworthy banks? It doesn’t take a an astrophysicist to answer the question: what are the names of the biggest banks in the strongest countries in Europe? These banks, no matter how awful, will always be TBTF, because they are important and their governments can afford to bail them out. Frankly, I’d prefer to be exposed to a small bank in the North than a big bank in the South. Uninsured depositors at Deutsche Bank and its Northern peers will always be protected no matter what happens in terms of solvency.