Financial Times, April 26th 2016
Sir, John Pattison is right, living wills are necessary and should be simple enough to be workable (Letters, April 22). But indeed, many banks seem to be dragging their feet, and hope to gain time and keep “business as usual”, at least until the next crisis.
An alternative, which could also be easily imposed as a default position until banks come up with a satisfactory proposal for a living will, would be to require banks that enjoy a public guarantee on deposits to better protect those deposits, making a carve-out easier in case of failure.
Retail deposits, at least those enjoying a public guarantee, could easily be better protected from the problems originating from other activities, if adequate assets (loans, bonds, bills, deposits with other banks) were simply pledged in their favour; in fact, a kind of “covered deposit”. The deposit insurers and supervisors should monitor the quality of these assets, making sure that there would always be enough quality assets to carve the deposits and the assets that cover them out of a failing bank. Combined with efficient central counterparties to mitigate the contagion or systemic risk, this would indeed make the bankruptcy of banks much easier to manage without taxpayers’ money. The cover would be very easy to manage, just as it is for covered bonds.
Banks may object that this would jeopardise their market activities, covered bonds issuance and so on, but this would only illustrate that many banks have been financing speculative activities with guaranteed depositor’s money, or weakening the status of depositors by pledging the banks’ best assets as collateral, in effect turning depositors into subordinated creditors, and abusing deposit insurers and the taxpayers behind them.
Once again, this may or may not be a better solution altogether to simplify and improve banks’ regulation, but it concentrates on an essential objective, is easy to implement and could act as a catalyser for banks to come up with acceptable plans for living wills; unless they are happy with a well defined “covered deposit” mechanism, which many banks may very well be.
Prof Eric De Keuleneer
Solvay Brussels School of Economics,