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Who should pay for falling banks?

C ross-border crisis management in banking sector Stanisław Kluza, Ph.D. Chairman Komisja Nadzoru Finansowego – Polish Financial Supervision Authority www.knf.gov.pl/en Plac Powsta ńcó w Warszawy 1 , 00-950 Warsaw knf@knf.gov.pl. Who should pay for falling banks?. Taxpayers ? Subsidiaries ?

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Who should pay for falling banks?

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  1. Cross-border crisis management in banking sectorStanisław Kluza, Ph.D.ChairmanKomisja Nadzoru Finansowego – Polish Financial Supervision Authoritywww.knf.gov.pl/enPlac Powstańców Warszawy 1, 00-950 Warsawknf@knf.gov.pl

  2. Who should pay for falling banks? • Taxpayers? • Subsidiaries? • Reformed EU Safety net? • - Regulation of SIFIs • - Proper management of liquidity • - Well funded network of DGSs with resolution functions financed by theindustry

  3. Clear Regulation of SIFIs Too big to fail – too expensive to rescue • The size of the financial institution should not eliminate the risk of bankruptcy • The risk generated by SIFIs surpasses the abilities of guarantee systems and state budgets to absorb it. • Failure of major institutions should be allowed to preserve the competition within the market. • Clear need to limit the size of financial institutions. Systemic risk related to the size of SIFIs should not prevent them from going bankrupt in case of insolvency. • The taxpayers should never again bear the costs of saving financial institutions. 2008 Bailout vs. other large government projects $4.616.000.000.000 Source: www.voltagecreative.com/blog

  4. Liquidity challenge mln mln mln mln mln Total: £108 245 mln Liquidity determines the ability to cover liability • Lack of the possibility to cover liabilities triggers bankruptcy procedure. • Solvency margin describes the safe ratio between capital and financing means, liquidity is needed to cover current liabilities. • CRD provisions do not specify liquidity standards for banks butsome Member States introduced such standards within their markets (PL in 2008). • Proper supervision over liquidity of credit institutions is an essential element needed to enable for cross-border crisis management.

  5. A network of DGSs financed by banks is an alternative for engaging taxpayers in rescuing banks EU guarantee schemes net should limit moral hazard • Why the parent institution should be excluded from the responsibility borne by local institutions that finance the DGS of its cross-border subsidiary? • Designing appropriate ties between national DGS can establish the EU network of DGS. • The ties should reflect the structure of banking groups to allow cross-border support. • If one EU wide DGS existed before crisis, it would have to cover claims amounting to 3309 bn Euros. Could we afford it? • Deposits within the EU should be better protected by the EU safety net.

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