EU Bank Packages: Objectives and Potential Conflicts of Objectives

Abstract

Any attempt to resolve a systemic financial crisis inherently involves conflicts of objectives. In the following article, we identify and elaborate on the conflicts of objectives embodied in the EU bank packages. Building on this, we then analyze how the EU Member States and the EU institutions are dealing with these conflicts of objectives. The empirical basis of our analysis comprises the explicit objectives of the EU bank packages and the details of the bank packages of the individual Member States. Our main findings are: (1) Although much effort has been extended to ensure a harmonized EU approach, the Member States in fact enjoy great leeway in designing national bank packages, which leads to competitive distortion. (2) In the conflict between fiscal objectives and micro- and macroeconomic objectives, the latter have been afforded priority. The bank packages entail passing on the costs of overcoming the crisis to the taxpayers, while the banks’ creditors are not required to make a contribution. (3) As a result, short-term financial stability is favored over long-term stability in the conflict between these two objectives. (4) Some attempts have been made to resolve these conflicts of objectives by attaching conditions to state aid. Our analysis indicates first of all, that under certain circumstances conditions such as dividend restrictions, state influence on company management and salary caps may be consistent with all of the objectives specified, and second, that requirements to maintain lending and solve borrowers’ debt problems are themselves subject to unavoidable conflicts of objectives.

Keywords: Financial crisis, bank packages

JEL Classification: D53, E44, F36, G18, G28