Out of the "bail-in" pan and into the fire

The Governor of the Central Bank of Romania Mugur Isărescu has the following explanation on the consequences of the passing of the "bail-in" legislation in the European Union:

"According to me, in Europe we will have a banking system where the bulk of the depositors will be encouraged to stay within the limits of the guaranteed bank deposits. This is how the liquidity in itself will be formed.

This will also lead to the development of the Romanian stock market, where the investor is taking on risk. Because of that reason, we can say that unlike the US, the European stock market is underdeveloped, so ultimately this law will lead to the development of the Romanian stock market. In short, this is about the management of risk, which involves responsibility and diversification."

The explanation came in an interview which Mugur Isărescu gave Romanian press agency Mediafax; the reporter did not press the issue and moved on to a different topic.

The expression "the bulk of the depositors" used by the Governor can create confusion, namely that the "bail-in" would only apply to individuals (there is indeed a mass of individuals in "Europe").

In reality, the "bail-in" will lump together individuals and companies, and Europe is a continent that is sufficiently large and active to also have lots of companies.

Well, I for one would be really curious to see how Carrefour is going to split its 2012 revenues of 94 billion Euros, into bank deposits of 100,000 Euros, to make them fit within the minimum guaranteed deposit limit.

It would need 94,000 banks.

Someone should tell the Governor of the NBR that Europe has approximately 30,000 banks.

As I'm used to reading science fiction, I for one wouldn't find it impossible for Europe to multiply its number of banks three times, so it can convince Carrefour to keep its money on the continent, instead of migrating to other countries.

But what are we going to do about Royal Dutch Shell, which would need 376,000 banks?!

A bit of realism wouldn't hurt, people are going to think we're crazy ..."Golum, Golum"...

Obviously, the first companies that would leave the banking system would be the huge multinationals (I think that they have already left), followed in order by the very big ones, the big and those which are leaders in their countries; perhaps in the beginning of this year, it will be the turn of the medium sized companies.

I don't understand how a measure like the "bail-in", which drives away the major clients of the banking system, as well as the medium and small ones, is supposed to save the banking system.

I for one would think that a business gets stronger due to the increase in the number of customers, rather than their flight.

Well, who knows, maybe I am wrong.

Just like I can't understand how the "bail-in" is going to help the stock market develop; let's say we are not concerned with the fate of companies, and we only concern ourselves with the individuals; let's say all of them that have more than 100,000 Euros in their accounts are going to move everything above that amount to the stock market.

OK.

Aren't stock market payments done through the banking system?

Don't pension funds and investment funds have anything to do with the banking system?

They don't?

I had no idea they didn't.

Lucky them!