by Fred Kingery
In January, European Union (EU) bureaucrats based in Brussels passed an EU banking reform referred to as the BRRD. The BRRD stands for Banking Recovery and Resolution Directive. The reform rules were aimed at shielding EU taxpayers from bailing out troubled EU banks with taxpayer-sourced funding. The rules were modeled after the Cyprus banking crisis solution referred to as a “bail-in.” A bail-in is where bank bond holders and large bank depositors are all placed at the front of the line and used as funding sources to offset a write down of bad bank loans. Taxpayer-based funding (a bailout) becomes a last resort.
What was significant about this is that for the first time bank depositors have been officially added to the list of funding sources for offsetting bad bank loans. Bank depositors all over the world took special note of this “bail-in.” The BRRD is a one-size-fits-all approach to dealing with EU problem banks if and when the time comes. Unfortunately, the time has come for Italy’s banking system, but there is a major problem. For perspective on the problem consider the following facts on the EU banking system: