domingo, junho 15, 2014

European deposit insurance for local retail depositors key to Euro crisis prevention

European banks clearly went to far afield into markets they knew very little about, and are now continuing to retrack not only in cross-border lending but also in the cross-border deposit taking.  This is evidence of the limits of "home country rule", BASEL and other mis-guided banking regulations. 
Just recently a number of banks have anounced disposal of branch networks in other countries, As we move towards banking union and centralized banking supervision, we even hear talk of placing 100% reserve requirements on bank deposits! 
Surely, we can find an acceptable alternative between ZERO bank leverage and peak leverage of over 49 times, as recorded by banks which believed in the BASEL illusion of "risk-free OECD sovereign debt".
Have financial regulators never heard of the simple virtues of moderation?
How can capital of 2% of the balance sheet ever meet any reasonable test of "capital adequacy", even ignoring the risks hidden in the other 90% of the off B/S iceberg?
What were the (im)prudent regulators thinking?
More importantly, not all deposits or depositors need or deserve protection. Smaller, local, retail deposits, families and SMEs should be highly protected. Do you want your dentist to be worried about his bank when when he powers up the drill?
And the Eurozone credit crisis highlighted the importance of differentiating the protection between (stable) local deposits (speculative)cross-border funding which zips around the globe faster and faster, at the speed of a click or of acomputerized arbitrage program. A Pigouvian tax to incorporate the negative externalities of these risk-intensive free capital flows would be too good for these "hot-money" tsu-moneys.
Thus,large retail deposits, most corporate deposits and ALL cross-border non-bank and inter-bank funding should be exposed to increasing levels of risk, probably inverse to tenor. The tragic consequences of capital in-flows and sudden stops and reversals should not be underestimated.
That's why we need EUROPEAN deposit insurance for smaller LOCAL retail deposits, to break  the link between banking and sovereign risk.