We Need European Solutions to Overcome the Crisis

BAD BANKS AND DEPOSIT INSURANCE ON A CONTINENTAL SCALE ARE AMONG THE MEASURES SUGGESTED BY ANDREA RESTI WHEN TEMPORARY STATE SUPPORT TO COMPANIES WILL BE LIFTED

The idea that the COVID crisis could be tackled as an exogeneous, temporary crisis, has proved to be an illusion, according to Andrea Resti, Associate Professor at Bocconi’s Department of Finance and one of the banking experts called by the European Parliament’s Economic and Monetary Committee (ECON) to address the question of when and how to unwind COVID-support measures to the banking system. In his paper, Prof. Resti warns us to brace for an impact that could include company bankruptcies and banking sector consolidation.
 
While supervisory measures that directly affect the banking system have been homogeneous across Europe, indirect measures seem to have followed different patterns across Member States. Where constraints posed by public-sector deficits and sovereign debt were tighter, the governments’ response to COVID-19 was more focused on contingent measures (such as state-sponsored loans, tax deferrals and public guarantees) and fiscally-neutral interventions (such as moratoria, which do not entail costs for governments). “However,” Prof. Resti warns, “such measures are intrinsically fragile, since they might lead to greater fiscal unbalances (as deferred taxes may not be paid, and public guarantees must be honored if called in) and to a significant rise in bank loan defaults once moratoria are lifted.”
 
“Emergency instruments aimed at freezing payments, easing capital constraints and providing additional credit,” Prof. Resti writes, “cannot simply be dismantled, but rather have to be replaced by measures aimed at smoothing the transition”.
 
On the one hand, he therefore suggests measures aimed at alleviating the burden of bankruptcies: additional flexibility in default recognition should be allowed for companies that are on a path to recovery but that require additional support. Also, significant investment in judicial procedures to deal with a rise in liquidations should be undertaken, including digitalization of the workflow. Where such innovations are implemented, less strict prudential regulation should be allowed.
 
On the other hand, Prof. Resti suggests policies aimed at protecting the banking system and at disentangling banks’ and governments’ liabilities: State aid rules should be reexamined, in order to streamline the establishment of bad banks, preferably on a continental rather than national scale; in the same way a truly pan-European deposit insurance would be advisable.

by Fabio Todesco