'Too big to fail' isn't explicit policy for European banks ... yet

Trichet Kills Plan for Public Rescue of Banks

By George Parker
Financial Times, London
Sunday, April 22, 2007

http://www.ft.com/cms/s/84dc0ef0-f10d-11db-838b-000b5df10621.html

BRUSSELS -- Jean-Claude Trichet, European Central Bank president, has succeeded in killing a proposal for European Union member states to agree detailed plans for a public bailout of a failing bank, designed to stop financial chaos spreading across the continent.

Mr Trichet was backed by Mervyn King, governor of the Bank of England, in arguing at a meeting in ­Berlin that plans for a publicly funded rescue operation would send the wrong signals to markets. Both feared that the proposal, pushed during last year's Finnish presidency, would lead to significant moral hazard if the markets believed that finance ministers and central bankers would intervene to save a big bank.

The proposal now looks dead. Finance ministers of Britain and Germany -- Europe's two biggest financial services centres -- also oppose an ex-ante agreement on who would foot the bill if a systemic crisis hit more than one country. The debate was sparked by fears the EU is unprepared for a cross-border crisis in an era of banking consolidation. Forty-six groups have activities in more than one EU state, representing 58 percent of banking assets.

Ministers and central bankers at the Ecofin meeting on Saturday agreed to carry out more work on improving co-operation and planning for a crash but there was little support for a detailed "burden sharing" plan for funding a public bailout.

Their approach reflects the tone of an internal paper, drawn up by senior bank and finance ministry officials, that said: "Moral hazard should be minimised by a firm commitment to the primacy of private-sector solutions in crisis management."

"Constructive ambiguity" should be maintained regarding the circumstances and timing under which public intervention could take place, the economic and financial committee paper said.

Mr Trichet, who led opposition to the idea at the meeting, said it was right to discuss the principles for dealing with a systemic crisis but it was "not appropriate" to have detailed plans for cross-border burden sharing.

Although the Ecofin meeting basked in good economic news -- all eurozone members vowed to balance their budgets by 2010 -- ministers and bankers are scanning the horizon for trouble.

Hedge funds are seen as a particular cause for concern, with Germany pushing for an international code of conduct to govern the industry.

Ed Balls, the British Treasury minister responsible for the City of London, proposed at the meeting greater international information sharing to assess investment banks' exposure to hedge funds.

Mr Balls, who will give more details of the plan in a speech on Monday, will argue that hedge funds play a positive role in financial markets and reject suggestions they disclose portfolio positions in some sort of register.

He believes investors should not be lulled into thinking that a regulator is protecting them with respect to individual funds but that more international understanding is needed of overall exposure to hedge funds.

Britain's Financial Services Authority already conducts a regular six-month survey of prime brokers and Mr Balls believes the main financial centres should co-operate in such work.

"We believe the quality of prudential supervision of hedge fund activity would be enhanced if there were greater co-operation between regulators in surveying investment banks' exposure to hedge funds, pooling that information," he said.

He will be discussing the proposal with other international colleagues in the run-up to next month's Group of Eight finance ministers' meeting in Potsdam.

Charlie McCreevy, the EU internal market commissioner, backed an industry-led approach to the regulation of hedge funds, arguing that they were "big boys who know what they’re doing."

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