Here’s Why Mario Draghi Wants to Relax a Banking Regulation
Mario Draghi, the chief of the European Central Bank, has called into question rules that force banks to make junior bondholders take losses before applying for public aid, Bloomberg reports. With all eyes on the central bank before it announces a plan for a comprehensive review of European banks later this week, Draghi has voiced his opinion that a rule governing the region’s banks should be relaxed.
The rule says that if a bank wishes to apply for aid from any public group — including the ECB or the Firewall Fund that is being established to provide a public source of credit for struggling banks in the region — junior bondholders must first be made to lake losses on their effective loans to the bank. The rule is designed to dissuade banks from applying for public funding by imposing a sort of penalty for doing so. The penalty isn’t just that the bondholders lose money but that the reputation of the bank would also suffer greatly.
In the face of the ECB’s check on the status of the region’s banks — which will almost certainly include an asset quality review and several stress tests — Draghi has questioned whether the rule is too harsh on banks that are still solvent but would benefit from the use of the central bank’s resources. Under new guidelines, it is entirely possible that banks that are still far from going belly-up would need to raise additional capital in order to comply with the results of the central bank’s review, a prospect that would leave banks strapped for cash unless the funds were made available through some public means.