The discussion about the need for a ‘banking union’ in the Euro area needs to focus on the key issues, just as does the debate on the euro crisis as a whole.
What matters in deciding whether to assist a country to stay in the euro is its political will to reform. The test is whether Greece and the other peripheral countries show sufficient political maturity to reform. It can work.
On the banking side, similarly, the issue is NOT whether there are sufficient funds to recapitalise eurozone banks, or what the ECB can do to help, but whether they can be restructured so they are commercially viable entities.
A bank is an institution that depends entirely on its credit to perform its crucial economic functions. Once its credit is gone, so is its ability to perform those functions.
In Europe, it is questionable whether any bank has sufficient credit to perform those functions today, five years after the outbreak of the crisis.
We cannot know that for sure, as the interbank market is not functioning properly and the big banks are seen to be too big to fail anyway.
Yet public policy in Europe has shied away from bank resolution and restructuring.
Thus ghostly apparitions masquerading as banks continue to haunt us. Everybody is pretending. Regulators are pretending to regulate while the banking ghosts are pretending to be alive. But they are not doing what they should do if they were alive – standing on their own two feet and supporting real economic activity!
Instead, according to the IMF European banks could shrink their balance sheets by almost $2.6 trillion in coming months.
True, other forms of innovation include peer-to-peer lending and internet-based lending are emerging. Andy Haldane has suggested that peer-to-peer lenders could replace banks. “There is no reason why end-savers and end-investors cannot connect directly. The banking middle men may in time become the surplus links in the chain.”
Is that the future? Central bankers and governments must face up to these key long-term structural issues now. How many large financial institutions does Europe need?
Should ‘banks’ focus on providing a basic payments system? Certainly many more commentators view them as utilities, to be structured and regulated accordingly.
Should Sifis transform into non-bank investment firms that create and sell marketable securities to businesses? Firms wishing to borrow would issue securities, banks would bundle them into groups with specific risk characteristics, with full disclosure, and bank ‘depositors’ would be invited to subscribe at their own risk.
Some such system may be needed to protect taxpayers from future raids by bankers. Yet at present G-Sifis seem to regard their status as giving them the right to an unlimited blood transfusion service from the public sector.
Public policy is hindering rather than encouraging change. For example, the ‘tsunami’ of new regulations – on capital, liquidity, funding and so on – are making financial institutions invest in government debt securities. A nice captive market for government debt.
As the governor of one G8 central bank said to me recently, financial repression is ‘ongoing’.
The artificial lowering of interest rates, especially at the long end, amounts to blatant monetary manipulation. It facilitates government borrowing, tempts commentators to encourage further public spending, under the illusion that state credit is good.
Governments must restructure banking in the euro area – and then market capital will be available to capitalize viable entities. But that would entail a drastic pruning of the banking structure and an end to financial repression.
People say: “But that’s politically impossible!” Really? If so, it’s goodbye to the euro.
Banish Europe’s banking ghosts
RP’s Diary
The discussion about the need for a ‘banking union’ in the Euro area needs to focus on the key issues, just as does the debate on the euro crisis as a whole.
What matters in deciding whether to assist a country to stay in the euro is its political will to reform. The test is whether Greece and the other peripheral countries show sufficient political maturity to reform. It can work.
On the banking side, similarly, the issue is NOT whether there are sufficient funds to recapitalise eurozone banks, or what the ECB can do to help, but whether they can be restructured so they are commercially viable entities.
A bank is an institution that depends entirely on its credit to perform its crucial economic functions. Once its credit is gone, so is its ability to perform those functions.
In Europe, it is questionable whether any bank has sufficient credit to perform those functions today, five years after the outbreak of the crisis.
We cannot know that for sure, as the interbank market is not functioning properly and the big banks are seen to be too big to fail anyway.
Yet public policy in Europe has shied away from bank resolution and restructuring.
Thus ghostly apparitions masquerading as banks continue to haunt us. Everybody is pretending. Regulators are pretending to regulate while the banking ghosts are pretending to be alive. But they are not doing what they should do if they were alive – standing on their own two feet and supporting real economic activity!
Instead, according to the IMF European banks could shrink their balance sheets by almost $2.6 trillion in coming months.
True, other forms of innovation include peer-to-peer lending and internet-based lending are emerging. Andy Haldane has suggested that peer-to-peer lenders could replace banks. “There is no reason why end-savers and end-investors cannot connect directly. The banking middle men may in time become the surplus links in the chain.”
Is that the future? Central bankers and governments must face up to these key long-term structural issues now. How many large financial institutions does Europe need?
Should ‘banks’ focus on providing a basic payments system? Certainly many more commentators view them as utilities, to be structured and regulated accordingly.
Should Sifis transform into non-bank investment firms that create and sell marketable securities to businesses? Firms wishing to borrow would issue securities, banks would bundle them into groups with specific risk characteristics, with full disclosure, and bank ‘depositors’ would be invited to subscribe at their own risk.
Some such system may be needed to protect taxpayers from future raids by bankers. Yet at present G-Sifis seem to regard their status as giving them the right to an unlimited blood transfusion service from the public sector.
Public policy is hindering rather than encouraging change. For example, the ‘tsunami’ of new regulations – on capital, liquidity, funding and so on – are making financial institutions invest in government debt securities. A nice captive market for government debt.
As the governor of one G8 central bank said to me recently, financial repression is ‘ongoing’.
The artificial lowering of interest rates, especially at the long end, amounts to blatant monetary manipulation. It facilitates government borrowing, tempts commentators to encourage further public spending, under the illusion that state credit is good.
Governments must restructure banking in the euro area – and then market capital will be available to capitalize viable entities. But that would entail a drastic pruning of the banking structure and an end to financial repression.
People say: “But that’s politically impossible!” Really? If so, it’s goodbye to the euro.
Written on June 22, 2012 at 2:54 pm, by robert
Categories: Banking, Homepage, News and Comment, Part III: Four Key Issues, RP's Diary | Tags: Andy Haldane, banking, ECB, euro area, Europe, G8, Greece, IMF, Sifis