Euro up sharply on the news, stocks rising
BASEL / GENEVA, SWITZERLAND – Reactions are flowing in from the surprise nighttime decision 29 June by European Union leaders to focus on growth,in part by giving money directly to troubled banks in Spain, without increasing government debt, and in part by allowing Italy to use emergency funds to buy its sovereign debt. Spain and Italy put heavy pressure on Germany to accept the deal that has resulted in the deployment of the new European Stabilisation Mechanism (ESM) to help banks directly. France’s Le Monde says it was a deal in the wee hours of Friday, “torn out with forceps”, while the Guardian describes the marathon debate as: “Italy and Spain stunned Germany by blocking progress until they obtained softer bailout rules in 14 hours of bad-tempered talks.”
A key feature is the creation of a eurozone banking supervisory system that will, by the end of the year, allow the European Stability Mechanism to recapitalize failing banks “directly, without the loans going via governments as at present and adding to national debt burdens”, the Guardian writes.
The news was followed Friday morning by a paper issued for consultation by the Bank for International Settlements in Basel, which will now take on added significance in the eurozone.
“A framework for dealing with domestic systemically important banks” (D-SIBs) focuses, says the BIS, “on the impact that the distress or failure of banks will have on the domestic economy. While not all D-SIBs are significant from a global perspective, the failure of such a bank could have an important impact on its domestic financial system and economy compared to non-systemic institutions.” Basel III is a set of prescriptions that banks identified as globally sytemically important are obliged to follow. The parallel group of key domestic banks will not have prescriptions, but a set of principles to follow. “In order to accommodate the structural characteristics of individual jurisdictions, the assessment and application of policy tools should allow for an appropriate degree of national discretion. That is why the D-SIB framework is proposed to be a principles-based approach, which contrasts with the prescriptive approach in the G-SIB framework,” BIS notes.
But the paper was written before this morning’s agreement to create a eurozone supervisory system and the consultation process could be complicated by the new European banking landscape.