Like the villain in some horror-movie franchise, the European banking crisis resurfaces just when regulators imagine it was vanquished. The latest victim is Portugals second-largest lender, Banco Espirito Santo, BES.LB -40.30% which on Sunday was bailed out by the government. The rescue comes after the bank posted record losses of €3.5 billion in the second quarter, sending shares tumbling 73% last week before trading was suspended on Friday. The bailout will cost €4.9 billion. Since Portugals financial industry-funded resolution fund is nearly depleted, the lions share will be paid for using funds remaining in government coffers from the countrys €78 billion ($105 billion) European Union bailout. The Finance Ministry says that shareholders, subordinated debt holders, as well as board members or former board members directly involved in the more recent events, and not the taxpayers, will be called to shoulder the losses incurred by a banking business they failed to adequately oversee. Well, sort of. Under the bailout plan, Banco Espirito Santo deposit operations and assets will be transferred to a new entity, Novo Banco, whose eventual sale is supposed to refund the European taxpayer-funded bailout down the road. Senior bondholders and depositors as a result wont take haircuts. Shareholders and junior creditors, however, will be left with the old banks toxic assets and are likely to sustain substantial losses. Most of Banco Espirito Santos troubles are rooted in auditing irregularities at its parent company, Espirito Santo International. That firm filed for creditor protection last month after a series of revelations suggesting managers had allegedly created instruments, including some funded by the bank, designed to prop up failing entities within the conglomerates labyrinthine structure. Civil and criminal investigations have been launched in both Luxembourg and Portugal. Given this mismanagement, one question is why shareholders arent being wiped out and senior bondholders arent also taking some losses. The justification for a banking rescue, to the extent there is one, is to honor government guarantees to depositors and to prevent potential systemic damage from a depositor run. But one lesson of the 2008-09 crisis was supposed to be that going forward the owners of mismanaged banks would pay for their mistakes. Equity capital is risk capital that shouldnt be saved by governments. Bondholders also arent guaranteed, or shouldnt be, and forcing them to take losses would also be a welcome lesson in risk management. Its distressing that, five years after the financial panic, Europes regulators still show too much forbearance to the lenders and owners of a bank as badly managed as Espirito Santo and when theres little risk of broader contagion. The bailout is also a reminder that for all of their bragging about reforms, European leaders still havent done enough to clean up the Continents bank balance sheets. Regulators in Portugal and at the European Central Bank were caught by surprise at the magnitude of the banks problems. Europe needs to do more before the next recession arrives.
Posted on: Wed, 06 Aug 2014 00:26:38 +0000
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