Avoiding more bailouts crucial, says Honohan

Wed, Nov 14, 2012, 00:00

Countries won’t have to bailout banks if the cost of future failures are shared with bondholders and the single euro area banking supervisor acts promptly, Central Bank governor Patrick Honohan said.

But this was “not how the recent wave of failures has been dealt with”, he said, warning of the danger of “divergent expectations” about the aim of a common resolution scheme for failing banks in the euro area.

“Can we be sure that enough will have changed in this respect for the future, or will the public purse be called upon again?” Mr Honohan asked in a speech in Edinburgh last night.

He said he doubts that the single euro area banking supervisor will intrude on the work of national supervisors but the challenge will be to move to a single supervisor without losing “the nose for local detail, rumour and feel of the market”.

“Achieving the balance, which will require a subtle balance between national and central supervisors, will not be easy but can be developed over time,” he said in his speech to a Scottish economics institute.

The European authorities plan to set up a single euro area banking supervisor within the European Central Bank before the year-end as the first step towards a banking union, paving the way for injections from the euro bailout funds into banks.

This will be followed by a common deposit guarantee and resolution scheme for failing banks in what Honohan called elements of “euro 2.0”.

He described the “makeover” of the euro zone as a “large and ambitious venture” that was essential to re-establishing “smooth and effective operation of finance and banking in the euro area”.

Deposit guarantees on the first €100,000 of savings offer “peace of mind” to customers and a common insurance scheme could strengthen this by pooling responsibility and resources for payouts.