sábado, julho 28, 2012

Stress testing European financial regulators

As with everything else in life, this crisis  will separate the good financial regulators from ....the others.   Beyond being subjected to on-going stress tests of unforeseen proportions,  European and national prudential regulators may be judged harshly by history if they stand by while the Single Currency and the Euro banking system erode, threatenning the life savings of millions of European depositors and savers. 

This is why it is more than disappointing to learn of the opposition of some regulators to the creation of a robust European Deposit Insurance Scheme, as in the case of the recent interview of the head of  BaFin, a German national prudential regulator,  published in der Spiegel.  (see  

This opposition appears to be based on a rather belated  concern with cross-border contagion, a phenomenon which  really had its origin in the excessive cross-border lending to irresponsible borrowers by overleveraged, overextended and equally irresponsible creditors over the last decade. A lot of this irresponsible credit exposure was hidden from view, for example the Goldman Sachs swap loan to Greece,   but most was accumulated under  the (un)vigilant eye of the (im)prudent regulators.   As the unabated crisis moves into an ever  more critical phase,  this national indifference to the need for Europe-wide protective measures indicates a distressing lack of appreciation for the new “convertibility and redenomination risk” in the Eurozone and for the disastrous impact of capital flight on the European banking system  as a whole, in a context of the three NOs, NO devaluation, NO capital controls and NO independent monetary policy. 

The failure to stem capital flight by  protecting local savers also contributes to the continuing failure to stabilize the European banking system,  which  is threatenning to disagregate before our very eyes and no longer performs adequately its essential function of financial intermediation between net savers and net borrowers.  As  might be expected, this debacle has more severe consequeces for the more fragile member countries,  which have been steam-rolled by the flooding-in and flooding-out phases of the huge  tsunamis of “hot money” financial flows.
 Unlike the traditonal national regulators, whose views  may be more or less  one-sided and short-sided, we may look to the European Systemic Risk Board  to step foward now  since (1) it was established precisely as a response to the crash phase of this credit bubble-to-crash financial crisis, and (2) it it   has an Europe and Eurozone-wide, rather than merely national,  mandate. 

Thus,   it would be  important to know the position and recommendations of  the ESRB regarding   policy measures to be taken to stabilize the Euro banking and financial systems, specifically the  insurance for local retail deposits. However, this information so important to the European financial consumers as Stakeholders is not visible in the ESRB website.

Futher, it would also be important to know what  specific mechanisms the ESRB has in place to ensure that it takes account of needs of  ALL  the European  financial consumers, the local depositors and savers, especially those in distressed and fragile economies on the periphery of the Eurozone such as Portugal.

The mandate of the  Liikanen Group named in early 2012 by the European Commission to make recommendations on restructuring the EU banking sector should be equally broad.  

Mariana Abrantes de Sousa 
PPP Lusofonia 

See more periphery views on the crisis from a former money center banker in the blog PPP Lusofonia

11 comentários:

  1. "SPIEGEL: What do you think of proposals to establish common Europe-wide funds for just such cases, for liquidating banks or securing savings?

    König: That's a possibility in the long term. But we should also recognize that a common deposit-protection scheme carries with it additional risks of contagion.

    SPIEGEL: Proponents call it a guarantor of more security.

    König: Sure, but what happens when our regulatory systems become liable for southern Europe, as well? At the moment, German savers can remain calm when a Greek bank falters."

  2. The ONE thing that might really overcome this new "fear of convertibility", as an incontrovertible signal of the determination to re-integrate the Euro banking system, would be the creation of an European Deposit Guarantee Scheme to protect small LOCAL retail depositors, especially from the redenomination risk. This would also help to stabilize bank funding, though at first it might also imply letting some of the wholesale cross-border investors take some lumps.

    The CAC-treatment of local Greek investors seems to almost have been designed to promote capital flight. And with capital flight and no capital controls, no bailout money will ever be enough.

    Clearly, the shifting and back-door mutualization of credit risks in the ECB which has occurred over the last 3-year "no-default" period, has taken the pressure off the Bundesbank and the other national central banks, by helping their overextended irreponsible creditors to deleveraged faster, and with fewer losses.

    Respect for the letter of the Treaties is great, and would be sufficient if the Treaties were perfect, which unfortunately they are NOT, as we can tell by the present situation. Perhaps it would be useful to review the spirit of the Treaties now.

    If we don't stem capital flight, and we don't reverse the growing divergence among the EU and Eurozone trading partners, inflation might be the least of our problems.

  3. In order to "fix the big picture", you have TO START by "protecting the little people", hence the URGENT need for a robust guarantee for local retail savers depositors, if you intend to stem and NOT to promote capital flight as has happenned up to now.
    That's what Roosevelt's New Deal did in 1932, by creating the FDIC, in parallel with the Glass-Stegall Act, the equivalent of "protection with conditionality" in today's terms.

    So, better cut to the chase, and fast. So-called "prudential" regulators have to stop dragging their feet.

    It's more than a little late to start worrying about cross-border contagion, when irresponsible banks and other collective investors like pension funds were allowed to accumulate huge unsustainable exposures to equally irresponsible borrowers, in the decade-long European-style subprime bubble.

  4. The bailout of European investors was upside down, cockeyed: locals retail investors were CACed into taking losses on their own Govt bonds,while cross-border professional investors had nearly 3-years to shift exposure to official creditors such as the ECB, as sort of back-door mutualization of risk

  5. Pode haver uma razão "subtil" para este tipo de decisão; é que assim as pessoas movem as suas economias dos pequenos bancos para os grandes, para o Barclay's e Deutshe; e estes dois devem estar a precisar de dinheiro urgente porque devem ter um buraco gigantesco; quando isso se souber dificilmente se evitará o colapso do Euro. Trata-se pois de uma desesperada luta pela sobrevivência dos grandes e, naturalmente, não há qualquer hesitação em sacrificar os pequenos.

    Os planos da NATO em caso de ataque russo à Europa passavam por fazer da Dinamarca terra queimada; certamente uma boa estratégia global mas sem interesse nenhum para os Dinamarqueses; agora os planos para salvar o Euro passam por fazer dos países do Sul "terra queimada"; e nós ou embarcamos nisso ou pagamos o preço de assumirmos a defesa dos nossos interesses; e talvez a segunda seja a menos má.

  6. To begin to end the crisis, you have to separate credit risks (and losses) from convertibility risk (and capital flight)

  7. Here are some reality checks:
    - For every irresponsible borrower there is an equal and opposite irresponsible lender.
    - Creditors who cannot afford to take losses should not be in lending business. Some loans were doubtful from day 1, whatever their Basel/rating levels.
    - Credit risk is a commercial risk and must be distinguished from currency convertiblity and transfer risks which are macro/political.
    - ECB firepower IS limited and should be used carefully, and contrary to what has been done up to now.
    - To begin to end the Euro banking crisis, local retail depositors and savers HAVE to be protected from both credit and convertibility risk, with an Europeand deposit insurance, in order to stem capital flight.
    - Cross-border professional wholesale creditors may have to take credit losses on their excessive exposure, live with it. There are limits to the shifting of existing private sector cross-border exposure to collective official creditors like the ECB, a sort of back-door credit mutualization so attractive to the national regulators.

  8. If the European financial regulators can't  or won't  "protect the little people" at the retail level,  while allowing the massive shifting of wholesale  credit exposure to the ECB,  then that is the end of Europe as we've known it.
    This sacrificing of the local savers is the key error in the Eurozone credit crisis management  thus far, generating moral hazard among the large professional investors and  panic among the rest, and if you keep doing more of  the same, you will get the more of the same BAD results.

    The continuing divergence after 10 years of credit bubble in Europe (irresponsible creditors in the north and  irresponsible debtors in the south) has  become so unsustainable, as indicated by the TARGET2 balances,  that the problem will soon affect the net creditors as much as the net borrowers, as shown with the rating warnings this week.

    Given their function of intermediating between the net savers and the net borrowers, banks are always the front lines, suffering the first losses.  When the losses mount and wipe out capital, bank runs and capital flight usuallly follow, the key mechanisms of contagion in a credit crisis, in Europe as elsewhere.

  9. One reason that the "Eurozone monetary policy mechanism is broken" is the fact that EURIBOR has become less and less representative of true average borrowing costs, as banks have lost access to the inter-bank market.

    EURIBOR started out with 59 banks and is now down to 34 banks, last I looked. The percentage of the Eurozone banking market covered must have shrunk correspondingly.
    And that's not even considering the Libor-like manipulations and lobbying by central banks to keep EURIBOR down, or even penalties to banks for paying higher rates to secure retail funding.

    Who benefits and who suffers from a unjustifiably low EURIBOR? The usual suspects...
    Take an old syndicated loan priced at EURIBOR+1%, where strong bank A continues in the EURIBOR panel and strong bank B has been excluded and is paying EURIBOR +2%, going well underwater. The weak bank B will get weaker and weaker, and will be forced to sell the performing asset at a deep discount,a vicious cycle.

    This is why EBA and ECB should insure that EURIBOR reflects actual transaction prices of a large and representative portion of the Eurozone banks.

    PPP Lusofonia

  10. Segundo uma estimativa, nestes 30 meses de crise de divergência na Eurozone, a Alemanha poupou mais de € 60B com os custos de refinanciamento da sua dívida. Junto com receitas fiscais mais elevadas e com menor gasto social, a vantagem sobe para € 70-100B.
    E os bancos alemães têm beneficiado de grande entradas de depositos em fuga da periferia, recebendo inclusive reembolsos do crédito mal parado que tinham feito, reduzindo a sua exposição/imparidades com os países deficitários.
    Não é de admirar que o Bundesbank e a Merkal sejam populares por continuarem a fazer tudo para perpetuar tal maná caído do céu. Quando a esmola é grande, os ricos agradecem.

  11. The Eurozone as a giant vendor financing scheme for the net surplus countries.

    In t eh 1970's this was called "recycling petrodallars"