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In 2012, European leaders bravely decided to cut the umbilical cord between banks and their governments, by adopting rules to limit future taxpayer bailouts of lossmaking banks and force bondholders to take their share in losses. This started the long march towards banking union and gave Mario Draghi, then European Central Bank president, political cover to say he would do “whatever it takes” to keep the euro together. But old vices die hard. The rules put in place for winding up failing institutions have proved inadequate, whether for lenders that are too big to fail or for smaller regional banks. There are simply too many loopholes in the regulations for national authorities to exploit. Some countries can get away with it. Others cannot.
Brussels’ recent approval of a new injection of taxpayer money into the German regional bank NordLB is a case in point. NordLB has eroded its equity by losing billions of euros on toxic shipping loans and needs funds for recapitalisation. Private equity groups had offered to buy a stake, conditional on public support, but the regional governments owning the bulk of the bank opted for a public solution involving only existing owners including municipally owned banks. The consequence, however, is a greater overall contribution from the public sector. This is not how things were meant to be done in the brave new world of European banking union. And it is not how German politicians normally demand that things be done when it comes to handling basket-case banks in southern Europe. Experts have roundly criticised EU commissioner Margrethe Vestager’s ruling that the bailout is on terms “a private owner would have accepted” and that it is therefore in line with European law on state aid.
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