Direct bank recapitalisation by the ESM: Well done - but further changes bring about advantages

If the Bundestag approves, the ESM will be able to recapitalise ailing banks in the euro zone directly from autumn 2014. Significant criticism can be heard, ranging from "too little, too late" to fears that enormous cost may loom for (German) taxpayers. Others even have been filing a complaint at the German Constitutional Court.

Looking into the hitherto neglected ESM guidelines, cep clears the conditions for the use of the new ESM instrument. "I think it is very unlikely that direct ESM-recapitalisation will be used to solve the problems in southern European banks balance sheet following the publication of the ECB stress tests,” claims cep expert Dr. Bert Van Roosebeke, author of the paper.

For the period starting from 2016, that is, from the full coming into force of the banking union, the design of the direct recapitalisation is convincing. "The guidelines entail a comprehensive participation of both the bank creditors and in particular the relevant Member State (so called national backstop) as prerequisites for any ESM-recapitalisation aid. Such national backstop is necessary,” says Van Roosebeke.

Risks to German taxpayers are not insignificant. However, there is no question of an unlimited liability or lack of legitimacy. In the worst of all cases, costs to Germany are at most € 16 billion. Every single ESM recapitalisation needs the approval of the Bundestag. The same applies for an extension of the usable volume (currently € 60 billion).

Van Roosebeke pleads for cautiously further developing of the banking union’s backstops. “The ESM should be able - in narrowly defined cases – to provide financial support to the EU resolution fund." This should be possible only for large recapitalisations and only if the Member State concerned has been financially involved (national backstop).

“The ESM serving as a backstop for the banking resolution fund is not a panacea. But it offers the possibility of better balancing of risks, incentives and costs between taxpayers, Member States and banks”, the author concludes.