Europe’s finance ministers are currently deciding on the legislation intended to implement the Basel III international agreement on bank capital, leverage, liquidity, and risk management. This column argues that many officials, within Europe and beyond, severely underestimate the importance of this debate for reaching a global standard for financial regulation. Read more
Bruegel blog
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The European debate on bank capital is not just about Europe
18th May 2012
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Is Europe ready for banking union?
18th May 2012
Systemic fragility in the European banking sector predates the Greek fiscal crisis. It was revealed by the subprime/Lehman shock of 2007-08, and has never been properly addressed since then in spite of successive “stress tests.” In recent weeks, several senior policymakers have become more explicit on the need for a “banking union” – in other words, a federal framework for banking policy. Among them is Christine Lagarde, managing director of the International Monetary Fund (IMF), who on April 17 said, “To break the feedback loop between sovereigns and banks, we need more risk-sharing across borders in the banking system. In the near term, a pan-euro area facility that has the capacity to take direct stakes in banks would help. Looking… Read more
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The state of foreign bank branches in Korea
16th May 2012
Foreign bank branches in Korea have gradually gained importance, increasing their share of the total assets of the Korean banking industry from 6.3 percent in 2000 to 14.2 percent in 2009. But recently, both their growth and profitability have been stagnant. The likelihood of either closures or asset sales is increasing, especially with the rapidly deteriorating performance of US and European bank branches. Thus, monitoring the repatriation of funds from Korea to the foreign banks’ headquarters should be strengthened, while the Bank of Korea and Financial Supervisory Committee should put in place a plan to handle potential large-scale capital outflows. Read more
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The Weekender
14th May 2012
Dear All, In Germany, the elections in North Rhine-Westphalia (German’s most populous state and not Schleswig-Holstein as I mistakenly wrote last week, apologies for this…) brought a victory for the SPD and the Greens. The CDU collapsed to its post war low while the FDP surprisingly held up (around 8%) which, at the Federal level, should help keep the coalition together until the 2013 election. The pirates did a fairly strong showing at 7.5% and will enter the parliament in NRW but are lower than their recent national polls. These domestic political considerations will be important in future European negotiations and are likely to tilt Merkel towards a softer stance. In addition, with respect to domestic German developments, it is… Read more
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Move the financial stability board’s secretariat to Asia
8th May 2012
On the face of it, the financial crisis of 2007-08 has helped rebalance global financial governance, partially correcting the prior under-representation of emerging economies and particularly of Asia. From November 2008 to April 2009, the G7/G8 was superseded by the G20, the Financial Stability Board (FSB) was empowered and enlarged to include major non-Western economies, and discussions began on reconfiguring the governance of the International Monetary Fund and World Bank. The Basel Committee on Bank Supervision was also adjusted to broaden its membership. Much remains to be done to enable Asians to feel a genuine sense of ownership, however. Membership may have been broadened, but these institutions, which were generally created by Westerners for Westerners, remain predominantly run by Westerners… Read more
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Europe needs a financial policy
25th April 2012
In the last few weeks, the predominant narrative about the origins of the European crisis has come under strain. The fable that the current predicament was fundamentally the result of a failure to meet the rules of the Maastricht Treaty is slowly but rightly vanishing. Now, not only are the countries that were forced into aggressive and self-defeating fiscal adjustments objecting but so too are the fiscally conservative countries like the Netherlands. More broadly twelve other heads of state and governments in Europe signed a letter to the European Council at the end of March arguing that Europe was wrong headed and lacked a growth strategy. This should resonate well in France where the presidential frontrunner, François Hollande, has argued… Read more
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The Weekender
23rd April 2012
Dear All, It has been an eventful last few days for the Spring Meetings of the IMF and the occasion of a series of speeches, conferences and corridor discussions which I have only followed from the distance and via proxies. Despite, the disappointment on the European firewall (or the lack thereof), the IMF unleashed some 430bn dollars of additional resources but the focus has turned on the necessity to tackle convincingly the banking sector (and therefore Spain). I will only focus on: European banking resolution: What we have and what we need? After fiscal consolidation, the consensus seems to be that financial stability is the biggest downside risk to the economy and that the credit multiplier is key to the… Read more
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Europe needs to drop its resistance to non-bank credit
16th April 2012
The financial systems in the United States and Europe have long differed on an important aspect. In Europe, most of the credit flows through the banks. In the US the bank channel is less dominant, and borrowers gain access to capital directly by issuing bonds or through “non-bank” intermediaries that do not take deposits and are not regulated as banks. An oft-quoted measure is that in Europe banks represent more than two-thirds of total credit, whereas in the US the proportion is less than one-third. In the past few years of crisis, this difference has mattered decisively. To begin with, the securitization of residential mortgages in the US went wild in the mid-2000s and was the initial trigger of… Read more
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Parliament Debates Capital Requirements
11th April 2012
On April 2, the European Systemic Risk Board (ESRB) published a letter by Mario Draghi, as Chair of the ESRB, to EU legislators. The letter focused on developing further the legal basis of the current proposals for the Capital Requirements Directive and Regulation. Martin Wolff takes up the topic of capital requirements in a recent post on England’s Financial Policy Committee. On the US side, Ben Bernake stated on Monday that increased capital requirements for banks could make loans more expensive for financial institutions. The Economic and Monetary Affairs Committee of the European Parliament is also debating the topic this Thursday (17 April). One of the key issues on the agenda will be the capital buffers put forward in a proposal for a directive.According to the… Read more
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Banking union or financial repression? Europe has not chosen yet
6th April 2012
European policymakers, particularly on the continent, have long appeared to be in denial of the centrality of systemic banking fragility in the place’s problems. They have first denied a homegrown banking problem existed, by shifting all the blame to Anglo-Saxons in 2007-09; then by engaging in timid, less-than-credible stress tests while redirecting the blame at the Greek government and other lousy fiscal managers in the European South. The October 2011 “recapitalization plan” was in effect another episode of denial, for various reasons: it was based on an unreliable capital assessment; it went full fair value on sovereign debt, in violation of any prudential principles; and it relied on overly volatile debt prices, a dubious basis for capital assessments even at… Read more