BES Resolution Fund was best option says banking expert

 In Banks, Business, News

An international banking expert and author of a study into banking resolutions says that the windup option chosen for Banco Espírito Santo, which failed in 2014, was the best on the table at the time.

Thorsten Beck believes that all the other options discussed at the time would have implied greater costs for the Portuguese tax payer.
His affirmation flies in the face of comments by Portugal’s Minister of Finance, Mário Centeno, who said in May that the Resolution Fund set up for Banco Espírito Santo in 2014 was “the most disastrous bank resolution ever done in Europe.”
But a study by three economists including Isabel Schnabel, currently on the executive commission of the European Central Bank (ECB), flagged up the intervention in the Portuguese bank as a success story from among all the other resolutions applied.
In an interview with the online news source ECO, Thorsten Beck, professor of Banking and Finances at Cass Business School, London, and author of ‘Bank Resolution Regimes and Systemic Risk’ admits that: “There were negative effects from the failure and winding up of BES” six years ago.
Nevertheless, if another path had been taken, the costs for Portugal would have been even higher,” says Beck.
To date and since BES was wound up in 2014, Novo Banco which was created to hold the failed bank’s good assets, has received around €8Bn from the Resolution Fund which is financed by the Portuguese banking system and State loans.
In the report’s conclusions, it was found that during the period of shock to the entire banking system, banks in countries with more wide-reaching and ample resolution funds ironically increased their contribution to systemic risk. This does not apply to more idiosyncratic shocks (which adversely affect just one institution), such as in the case with the failure of BES.
However, when there are shocks throughout the entire system, certain aspects of bank resolutions exacerbate the impact of these shocks rather than mitigate them.
In the case of BES, it is defined as an idiosyncratic shock whereby the effects of its collapse did not contaminate the rest of the banking system.
“There were negative effects from the bankruptcy and resolution of BES, but other options would have probably involved even higher costs” he says.
The specialist points to that the Government lent money to the Resolution Fund (which owns Novo Banco), which is not the same as a capital injection.
The rest of the money was supplied by eight banks. If the bank had been liquidated, the negative effect on the real economy at the time would have been far worse and would have implied a loss for tax payers (less tax receipts, more unemployment costs). The burden would have been greater the banking expert concludes.