BRUSSELS — In 2008, a major financial crisis rocked the world. In the European Union, this event sparked a
political discussion on a series of measures designed to prevent the dire consequences of such crises in the future,
including big bank bailouts.
Meanwhile, five years have passed and the EU has adopted new financial rules under the framework of a banking union.
Kenneth Haar is a Danish researcher who specializes in financial issues and he works with Corporate Europe Observatory (CEO), which defines itself as a “research and campaign group working to expose and challenge the privileged access and influence enjoyed by corporations and their lobby groups in EU policy making.”
According to Haar, the EU has failed to adopt necessary measures for stopping the past from repeating itself.
Mint Press News (MPN): What, exactly, was the origin of the 2008 crisis?
Kenneth Haar (KH): The crisis started in the U.S. with the collapse of the markets in real estate. The clearest sign of this was the collapse of Lehman Brothers, a big American investment bank. And this created a domino effect because a lot of others banks were involved in the same kind of investments as Lehman Brothers.
It is also the event that made many investors realize that they were in trouble. This led to a freeze of credit in the banking market — banks were afraid to lend money to each other. So the banks that were already weak became even weaker because they could no longer borrow money to survive.
MPN: And the EU crisis was linked to the U.S. crisis?
KH: Yes, the EU crisis was a direct consequence of the U.S. one. But in the EU, we had actually two crises: a financial one in 2008 and the euro-crisis in 2010. The two are very closely linked. The financial crisis hit every country in the world in 2008, but was particularly damaging in the EU because the economy of several member states was already weak, and the problems linked to the euro had led to a speculative bubble in a number of European countries so that when the crisis came, this situation was exacerbated.
As a result, the U.S. and the EU concluded that too little had been done in the past to regulate banks and the financial markets, that the rules were too lax, too easy for big investors to circumvent. And at the end of 2008, they launched pretty comprehensive political work to reform all kinds of laws.
MPN: Do you have an idea of the amount that was paid in bailouts to the European banks?
KH: Yes, because these figures were released by the European Commission. There are actually two important figures. The final bill for governments in Europe for the bailouts is 1.6 trillion euros, or 1,600 billion euros, which is a huge amount. And if you count all the money that the governments felt obliged to risk, it is 4.5 trillion euros in guarantees, loans and bailouts packages. But luckily, they did not have to spend it all. Still, it is a very big amount. And the current public debts in some European countries are very much a result of these bailouts. If you look at the statistics, the public debt in the eurozone until 2008 was relatively stable. When the crisis struck, the curve suddenly went up steeply, and this is because the governments bailed out the banks.
MPN: The EU recently adopted a series of measures. There is the Deposit Guarantee Scheme, which is aimed at safeguarding all bank deposits up to 100,000 euros.
KH: Yes, this was debated in the framework of the crisis in Cyprus. This is in place now and I don’t see it as the most controversial issue in Europe. That is broadly accepted.
MPN: Is this really useful for the small savers?
KH: Yes, definitely. It is a guarantee for the small savers. Otherwise, people would be very scared and would not know where to place their money. That scare has now been taken care of.
MPN: Another issue is that of bank capital requirements.
KH: Yes, and this is one thing where we feel that the EU has failed. This is about the bank having enough capital at hand in case the markets turn sour like in 2008. The idea is that if you have a certain percentage of capital assets, you can mobilize quickly, the risk of ending up in the same mess as 2008 is considerably reduced. It is a very complicated piece of legislation, but to make it simple, Lehman Brothers had capitalized to the amount of 11 percent of its assets. Now, after the EU has changed its rules and made them supposedly stronger, the amount of capital required is 7 or 8 percent. What is the conclusion? Lehman Brothers was obviously not a safe bank with 11 percent of capital, and now the maximum amount required in Europe is even smaller. This is a clear sign of failure.
MPN: You consider the amount should be much higher?
KH: Yes, definitely. Additionally, during the crisis, a lot of experts agreed that one of the problems is that it was left to the banks themselves to calculate the amount of capital they needed. They assess how risky their investments are, and on that basis, they decide on the amount of capital. In other words, the banks calculate their own capital requirements. And this has barely changed. We still have a system where even the biggest banks can use different kinds of complicated models to decide on their levels of capitalization. This means that we don’t know whether it is true or not.
There is a second problem. The rules on capital requirements originate in an international agreement, the Basel Convention. The same rules are hence supposed to apply in the EU, in the U.S. and elsewhere. But the Basel rules were always meant to be minimum requirements, so when they speak about 7 or 8 percent of capital requirements, this is a minimum. But the EU has turned this on its head and has put these figures in their legislation as a maximum. The result is that a European government cannot ask a bank for more – if it wants to do that, it would have to ask permission from the EU Commission first. Basically, what this boils down to is that the EU rules are weaker than the international rules.
MPN: How can the EU decide not to respect an international agreement?
KH: These international rules are not binding. They are mere guidelines. It is just a loose political agreement.
MPN: Another controversial measure is the so-called “resolution mechanism” to wind-up failed banks.
KH: I think that in many parts of the public, there was a hope that the banking union would help us avoid large bailouts in the future —
MPN: Well, that was the idea, wasn’t it?
KH: Yes, but I don’t think this will be case, unfortunately. It is important to remember that the reason why some banks were bailed out is that they were considered “too big to fail.” But in the future, it has not become easier for governments to say, “We let this bank go bankrupt because after all, it was a result of speculation.” The larger public would prefer banks to go bankrupt through the normal insolvency procedure, you know, just like any other company. Governments do not jump in to help companies when they risk going bankrupt.
But many European banks are so big that if they start failing, public money is needed to help them. If Deutsche Bank (DB) is in trouble, for example, the German government would spend billions to save it, otherwise the German economy would suffer too much.
The main problem is not the rules on resolution of banks, actually. The main issue here is that the EU considers it needs a mechanism whereby we spend money to save banks in the first place. The more logical approach would be to break up banks in smaller pieces so it would be possible to let them go bankrupt and follow normal insolvency procedures. Instead, the EU has created a system to allow the spending of money to help banks if things go wrong in the future. In other words, with the resolution mechanism, not only is it now accepted that we spend money to save banks, we even created an obligation to do so.
MPN: Who will pay the bill?
KH: Well, there was a debate in the European Union Council in December. And the idea of the European Union is to say: we put a tax or a levy on the banks so that they would pay for their own mistakes. At least this is the proposal and this is what they told the public. And indeed, the model agreed upon in December by the ministers is that a special resolution fund would be created with the levies on the banks over a period of 10 years. In a decade, the amount in the fund would be 55 billion euros. Now, this may sound like a lot of money to some, but in the frame of European banks, this is a very small amount. Experts have calculated that the sum of European banks’ bad debts today is somewhere between one and two-and-a-half trillion euros. In other words, the banks still have many bad assets on their balance sheets and 55 billion euros is far from being sufficient for an effective resolution mechanism. But the EU is trying to ignore the problem because it is politically very difficult to find the money and to figure out who should pay, and so they left the issue unsolved. Yet, it is quite possible that in the next few years, we see major problems in the banking sector again.
The EU is trying to persuade the public that in the future the sector would pay for its own mistakes — this is a big lie. And what this adds up to is very simple: they promised us that they would figure out how to avoid public bailouts in the future and they failed.
MPN: Why are governments so keen to save the banks?
KH: In Denmark, for example, we have one big bank. If it went bankrupt, the government would be forced to save it. But this is not about the small savers; this is about the country’s economy. A lot of companies rely on the bank and they would go bankrupt, thereby considerably damaging the Danish economy. And we have these big banks all over Europe. They play a vital role in the national economies. So a deposit guarantee scheme is not enough. You have to ensure that one single bank does not play a key role in the economy.
MPN: How can you do that?
KH: Well, there are two measures that would be effective. The first one is to split them into smaller units and separate investment banks from retailer banks. The second is to impose strong rules on risky investments. But in the political reality of the EU, these issues have been hardly debated at all because they are considered radical, detrimental to the economy. The majority of European governments and the European Commission still think that big banks are very favorable to the economy. In fact, in 2008, we had a clear sign that this is not necessarily the case — they actually give us bigger problems than advantages. But the European Union is convinced that we need big banks and that we have to make sure they are competitive in a global market. And by saying this, they indirectly say that we need a strong support mechanism to make sure that they do not go bankrupt.
MPN: Yet, there are competition rules in Europe that prevent one company from taking a dominant position on a market.
KH: Well, as far as banks are concerned, the European Commission says it adopts a European approach: it may well be that there are a few banks that are dominant at the national level, in Germany or in France, for example. But this does not matter as long as there is enough competition at a European level.
MPN: Is this really a fair way of looking at things?
KH: No, it is not. It is terrible, actually, because in some countries, there is almost a monopolistic structure in the banking sector. In Denmark, there are two big banks and all the others are no competitors at all. In Germany, you have DB, in France, there are BNP Paribas, Crédit Agricole… these are clearly dominating inside their national borders.
MPN: If I understand you well, it looks like this is not the end of financial crises and this is not the end of big bank bailouts by the governments. Has the financial lobby won?
KH: Yes, this is how we could put it. I have been following all major legislative debates on this dossier since the end of 2008, and I think that the financial lobby has been extremely successful in watering down any kind of proposal tabled and very often even before it was submitted to a public, democratic debate. I would not say that nothing has happened, but big banks, investment funds have not been obligated to change their behavior on the financial markets in any significant way. Basically, it is business as usual.