EU proposes 'banking union'

Victor

I think part of the problem of the overheating, especially in Ireland, Spain and Greece would have been tempered by having a banking union, with joint oversight and a joint banking guarantee system. If any country or group of banks started behaving irresponsibly, their guarantee premiums could be increased or they could be evicted from the guarantee system, which would rein them in.

I wonder if it could also be used to deal with loan dumping (the cash rich dumping cheap loans on bubbles) or should that be done via fiscal policy.

Amberman

Victor wrote: »

I think part of the problem of the overheating, especially in Ireland, Spain and Greece would have been tempered by having a banking union, with joint oversight and a joint banking guarantee system. If any country or group of banks started behaving irresponsibly, their guarantee premiums could be increased or they could be evicted from the guarantee system, which would rein them in.

I wonder if it could also be used to deal with loan dumping (the cash rich dumping cheap loans on bubbles) or should that be done via fiscal policy.

Not sure what loan dumping is...banks dont need cash to give loans so it won't stop them.

I think the way to deal with the banks is to break them up into smaller peices that don't threaten the system...and if they mess up, its off to bankrupcy court. More competent banks get to pick up the pieces at a decent price.

Nice and old fashioned...and highly effective at stopping the sort of massively stupid speculation we've just seen.

antoobrien

Amberman wrote: »

Not sure what loan dumping is...banks dont need cash to give loans so it won't stop them.

Loan dumping is essentially what happened when HBOS came to Ireland. Through its two brands (Bank of Scotland & Halifax) it dumped cheap cash onto the Irish loan market that the Irish banks initially couldn't deal with (the HBOS depots book was much larger than the Irish banks meaning they had to leverage more to get down to the same cost base).

Amberman

Also Scofflaw...what you are missing is that the rule of widely understood law and order has brorken down inside the EU.

The Maastrict treaty is only paid lip service now...and its the EU's own rule!

So is the pari passu nature of EU member bond contracts.

No one trusts the EU any more...because they're making this up as they go along.

Hardly enticing for foreign investors....which is whay they are fleeing.

Economics trumps politics...always in the end.

hatrickpatrick

Scofflaw wrote: »

What's "structurally unsound" about the euro, though? And please don't just say "several countries involved" or "different economic cycles", because frankly those aren't explanations in themselves.

I've asked in a number of threads what the supposedly obvious problems with the euro are, and so far the responses haven't impressed me. There's a crisis - OK, but you can't simply say "there's a crisis, some of the euro countries are in crisis, therefore there's a problem with the euro". That's not logic. And, yes, the euro undeniably had no crisis plan, lacking even the often self-defeating options open to national currencies and requiring public, ongoing and fraught multinational horsetrading, but that's an issue of response to the crisis.

The only really relevant points I've seen so far are: (a) a common interest rate created bubbles in some countries where the rate was inappropriately low; and (b) the market's appreciation of risk allowed sovereigns to borrow at inappropriately rates.

The second explanation, as far as I can see, really only applies to Greece (although one could perhaps argue it for Italy?),and isn't a feature of the euro itself, but an inappropriate market response to it.

The first explanation is highly popular and explains issues in more countries, but ignores the question of how countries could have responded to common interest rates, something which was hardly a surprise feature of the euro.

What am I missing?

cordially,
Scofflaw

Sorry forgot all about this thread, was in so many.
I wasn't referring to the Euro itself as structurally unsound, I was referring to the banking system itself and the monetary system in general. Greater oversight of banks isn't enough, we need to completely redefine what the word "bank" actually means if we're to prevent this whole incident repeating itself somewhere down the line.

It just saddens me that this crisis was a golden opportunity to build a new, better ship to sail in, and instead they insist on trying to shore up the existing one to limp on for another couple of decades. Kicking the can down the road has never solved anything and it won't solve anything now.

Scofflaw

Amberman wrote: »

Then you need to understand how money is created in a fractional reserve system...loan demand "pulls" the money into being from vapour...it isnt backed by "deposits" as you would likely understand them.

Yes, I know that - and I don't have an ideological stance on it, either.

Amberman wrote: »

Then banks go back and raise that money to fill their "reserves" (which are really just capital adequacy buffer ratios sent down from above) from the markets...some banks who are intermediaries for the central bank, use the central bank directly, others use the interbank market. The lag between demand pulled and supply pushed from the markets is was 20 days...but I think its longer now.

If borrowers weren't able to pull loans demanded through the banks from the markets, the banks wouldn't have been able to meet all those calls for mortgage loans at the rates they did.

That doesn't address the question at all, though. You've provided a link between inter-bank rates and retail rates, not between sovereign rates and retail rates.

Amberman wrote: »

I suppose it depends on how you define "public". Are banks public? As you know, they mostly are now. This was the funding mechanism of the splurge of choice in most places...but speaking traditionally, you are right...though France jumped quite a bit after 2000...from 55% to about 70%.

It's entirely irrelevant to their behaviour then that the banks are nationalised now.

Amberman wrote: »

Italy actually paid debt DOWN...by quite a bit from 2000 till 2007...but their anemic GDP growth, productivity growth, half hearted tax collection and corruption caught up with them.

It was a mixture of both public and private that got everyone who is in trouble in trouble.

That's true enough, but too vague to be useful.

Amberman wrote: »

Other countries may have higher debt ratios NOW...but not soon...in Spain, the banking system has large and growing holes...100bn is nothing. The market is looking at this number, looking forward...pulling out a calculator and driving these yields higher.

taly can sustain its debt at 4...even 5%...but at 6% its in trouble, at 7%, on a 2.4tr debt pile, (120% of a 2tr economy) thats almost 170bn a year in interest...in an economy that has shrinking tax revenue which is currently taking in around the 400bn a year mark. They are also highly uncompetitive in terms of social programs and productivity and GDP growth.

If Italy collected taxes as well as Germany, there wouldn't be a problem...but it doesn't...so the debt servicing costs, even if they move up just a bit, blow it wide open just as its population is aging and drawing down on all the promises they were made.

Well, yes, but that's what I said.

Amberman wrote: »

I'm actually not sure if it is a structural problem specific to the Euro...and I hesitated to put that in there. I know what the reality on the ground is...most banks, life co and pension funds are basically, through a variety of means, strong armed into buying the sovereigns debt. It happens everywhere...US, Japan, UK, Europe. The "risk free rate of return" falicy.

BTW, this horror is coming to those countries in one way or another at some point for the same reason. However, it will be less pronounced in these countries because they have more tools at their disposal to address the crisis once it erupts.

Again, though, you'd have to show that the strong-arming of banks into buying sovereign debt either (a) wasn't effective pre-euro, or (b) didn't happen pre-euro for it to be anything to do with the euro - and even the other examples you've cited make the point that it's not the case.

Amberman wrote: »

I don't believe I said that this was limited to only sovereign debt spending binges. I included the banks in the last post. Whats your point here?

Incase I didnt make it clear, the banks also used the low sovereign debt to go on a lending binge and on the sovereigns back is where the bank debt ended up. In Greece, and to a lesser extend France, it was the sovereign debt...with some banking debt thrown in in France for good measure.

You've made it clear, I think, that that's what you're claiming - what you haven't done is actually demonstrate the claimed link.

Amberman wrote: »

Agreed. This was a terrible flaw. Keeping the Euro alive will likely mean living in a German dominated Europe...but honestly, I don't see whats so bad about that? Do you?

They're obviously the smartest and most responsible.

I wouldn't quite see it that way - we already live in a German-dominated Europe from an economic perspective, and have done since the 1970s at least. They therefore dominate the negotiations on a crisis mechanism because they are the linchpin of any attempt to underwrite the crisis. Had Europe negotiated crisis response mechanisms into the euro before the crisis, their voice would have been less dominant.

Is it a bad thing that they're dominating the crisis response? No, like you, I'd see them as mostly favouring proper long-term solutions over quick fixes - to me, that's what an awful lot of the griping is actually about, people complaining that the Germans won't let us have our usual popular quick fixes (which they'd have to pay for), but instead insist on unpopular structural reforms and real competitiveness.

Amberman wrote: »

You need to understand what was driving the market for bonds. Whether this was ever really a true free market. Whether there was more than just economics at play here...because it sure seems like it to me.

If that was true, why weren't all bonds trading within 11 points of bunds? What made the Euro special?

This all boils down to politics versus economics. I honestly don't know how (I am guessing that the strong arm tactics made national players in bond markets take national debt...but I dont have a shred of evidence to prove it...its just circumstantial.

The question I ask myself is why would the An Post pension fund buy Irish bonds that were trading at only a fraction above German bonds. Same for Greece, Spain, etc.

If these fiduciaries were allowed to have a free hand in their asset choices, I find it incredible that they would have made this choice. No sane money manager, insurance company, or pension fund would make that choice.

Maybe you are right...maybe it was a herd mentality.

Honestly, I doubt it. There was something else here IMO. Whether it was misguided nationalism, forced nationalism from CB's, regulators, Ministers, an unspoken but widely understood policy from Brussels to the heads of maybe a few hundreds orgs in Europe...who knows. I have little doubt that the stewards of capital were working with a forced hand in the bond markets.

I admit to being largely uninterested in enormous conspiracies that lack evidence entirely...

Amberman wrote: »

I believe that they knew implicitly they would get bailed out...and that was down to politics...

Let me put it like this - they're clearly not getting bailed out to the extent they believed they would be, and are concerned that their upcoming likelihood is even lower yet - otherwise the sovereign bond rates would still be where they were. And they're not.

So, no, they didn't "know implicitly they would get out", they believed it would be the case, and have been unpleasantly surprised to find out it isn't.

Amberman wrote: »

The markets can't fix the Euro...but they can apply pressure for a resolution to the crisis.

They're pushing very hard right now...and they aren't going to let up until the politicians manage to make their electorates go all in...or fold.

In the end, it will be up to countries like Italy and Spain I think. Either they roll over to German demands, or Germany picks up its ball and goes home.

I really beleive its as simple as that.

What I want Scofflaw is for the suffering to end as fast as possible.

Real people are dying, seeing their dreams go up in smoke and losing everything they own. The human cost of this is incredible.

If we have to live in a German Europe, so be it.

Personally, I think living in a German dominated Europe would completely invigorate it.

I don't see the Germans as interested in dominating Europe any more than they have for the last generation. It seems to have suited them well enough.

However, I would tend to agree that if the Germans get their way, and force the rest of the eurozone countries to engage in real structural reform of their economies on a German pattern rather than getting the Germans to fund the quick fixes the general public would like, I think the result would indeed be a reinvigorated Europe. It would also quite likely result in less German dominance.

cordially,
Scofflaw

Amberman

Scofflaw wrote: »

Yes, I know that - and I don't have an ideological stance on it, either.



That doesn't address the question at all, though. You've provided a link between inter-bank rates and retail rates, not between sovereign rates and retail rates.

Um, I think I have...read it again. Some banks go to the interbank market, (and pay a slight margin over what "direct to central bank" actors pay). The central bank is the anchor of sovereign rates so "direct to central bank" actors are in effect borrowing at rates pegged to sovereign rates. Thats the link between sovereign rates and retail rates. Ofcourse, in times of stress, even thought the relationship still exists, the spreads can blow out. If you need any more help completing that circle, feel free to let me know.

It's entirely irrelevant to their behaviour then that the banks are nationalised now.

I honestly couldnt disagree with this more strongly. When traders are keeping profits and socialising losses...there is limited downside to taking big risks while their bonuses reflect the payouts when the risks pay off. There is no bonus clawback when they are nationalised, therefore these traders are completely rational in taking huge and dangerous risks from a personal perspective...as are those further up the chain.

That this leads to nationalisation means nothing to the collective risk takers as we have seen. 2010 was a bumper bonus year in Fin services.

Well, yes, but that's what I said.

I can't see where you said that.

Again, though, you'd have to show that the strong-arming of banks into buying sovereign debt either (a) wasn't effective pre-euro, or (b) didn't happen pre-euro for it to be anything to do with the euro - and even the other examples you've cited make the point that it's not the case.

Agreed, it does happen everywhere and still does. Just look at where the LTRO money went. BUT...the difference between the UK, US and Japan and the EZ is crucial...they have homogenous bond markets...the EZ doesn't. This is why the (previously) low spreads between different govt bonds inside the EZ was insane and led to the issues we are seeing.

You've made it clear, I think, that that's what you're claiming - what you haven't done is actually demonstrate the claimed link.

I think this link is self evident to anyone who has been following this closely. Banks levered low sovereign rates and borrowed and lent recklessly, funding bubbles, and were nationalised or bailed out in a lot of cases.

Self evident...no?

I wouldn't quite see it that way - we already live in a German-dominated Europe from an economic perspective,

I would also say politically.

and have done since the 1970s at least. They therefore dominate the negotiations on a crisis mechanism because they are the linchpin of any attempt to underwrite the crisis. Had Europe negotiated crisis response mechanisms into the euro before the crisis, their voice would have been less dominant.

Is it a bad thing that they're dominating the crisis response? No, like you, I'd see them as mostly favouring proper long-term solutions over quick fixes - to me, that's what an awful lot of the griping is actually about, people complaining that the Germans won't let us have our usual popular quick fixes (which they'd have to pay for), but instead insist on unpopular structural reforms and real competitiveness.

Not sure I agree with this. All we are seeing is quick fixes and sticking plasters. Thats all Germany is willing to give...

I admit to being largely uninterested in enormous conspiracies that lack evidence entirely...

A lack of evidence? Most national actors (banks, pension funds, insurance co, etc) hold HUGE amounts of their own sovereigns debt, relative to say, German debt...even when the two were trading within a dozen basis points of each other.

Thats a fact, not a conspiracy.

Let me put it like this - they're clearly not getting bailed out to the extent they believed they would be, and are concerned that their upcoming likelihood is even lower yet - otherwise the sovereign bond rates would still be where they were. And they're not.

They are right to be concerned. The $125bn Spanish banking bailout will but time..thats all. It doesnt plug the hole...becuase the property crash has a long way to go. The number is laughably small...but to plug the entire gap now is financially and politically impossible...but I beleive its as much as they can expect at this stage...just more can kicking...which is all that has been done to date.

So, no, they didn't "know implicitly they would get out", they believed it would be the case, and have been unpleasantly surprised to find out it isn't.

I think they did know it...when is the last time a major bank in Europe was allowed to fail?

Why would they be unpleasantly surprised? The are getting bailed out...a bit at a time, through a variety of measures.

Can you name a single big bank that has been allowed to fail by the Europeans in the last 10 years?

I don't see the Germans as interested in dominating Europe any more than they have for the last generation. It seems to have suited them well enough.

However, I would tend to agree that if the Germans get their way, and force the rest of the eurozone countries to engage in real structural reform of their economies on a German pattern rather than getting the Germans to fund the quick fixes the general public would like, I think the result would indeed be a reinvigorated Europe. It would also quite likely result in less German dominance.

In fairness, they have been interested in dominating Europe for more than the last generation...but I think the current iteration of their policy is a good thing.

Amberman

I admit to being largely uninterested in enormous conspiracies that lack evidence entirely...

Well, admittedly, the evidence wasnt spoon-fed to you...it was just a hunch on my part... A quick google search would have turned this up...

The tinfoil hats economists at infowars Citibank have actually looked at this recently.

Here you go! Turns out, sovereign debt isnt counted towards Basel requirements!

Regulators are allowing banks to escape counting their country's debt against capital requirements and loosening other rules to create a steady market for government bonds, the study says.

Consipracy Political theory fact.

http://www.cnbc.com/id/47633576

Scofflaw

Do we have to have this discussion on the basis of you claiming things are "self-evident", giving oblique references to "evidence" that I should understand if only I weren't incapable of understanding things not "spoon-fed" to me?

Thus far, you've demonstrated none of your central claims to my satisfaction - yours is pretty much taken for granted, but mine doesn't automatically follow. Waving at some piece of "evidence" you regard as consonant with your claims and saying "see, obvious!" doesn't in any sense prove them, because aside from anything else you apparently don't even look at contrary evidence.

Claiming that sovereign rates effectively dictate bank retail rates is a very large claim, which requires a good deal more than the off-hand "this is so obvious I don't need to explain it" hand-waving you've managed so far.

regards,
Scofflaw

antoobrien

Scofflaw wrote: »

Claiming that sovereign rates effectively dictate bank retail rates is a very large claim

Anybody who had looked at the bond rates and compared them against the retail rates paid by Irish banks would know that this isn't true.

Scofflaw

antoobrien wrote: »

Anybody who had looked at the bond rates and compared them against the retail rates paid by Irish banks would know that this isn't true.

And that's before we even get onto the question of correlation versus causality...

cordially,
Scofflaw

Amberman

Im pretty sure at this stage that fail to I'd prove to your satisfaction that the earth is round.

Banks live off sovereign rates...sovereigns and banks are (rightly) viewed by the market to be tied at the hip...and their (individually fluctuating) margins over sovereign rates provide retail rates...but its not my job to school you.

Then again, you seem to think that banks being "encouraged" to buy sovereign debt is a "consipracy theory"...yet their sovereigns debt is the very basis of any banks book.

It isn't rocket science.

Amberman

antoobrien wrote: »

Anybody who had looked at the bond rates and compared them against the retail rates paid by Irish banks would know that this isn't true.

You neglect the effective rate of borrowing...which is what bond rates are in a typical market...hence...BAILOUTS!

Bailed out countries arent typical.

Amberman

Rises in sovereign risk [my note: which is reflected in sovereign yields] adversely affect banks funding costs through several channels due to the pervasive nature of sovereign debt in financial system.

First, losses on holdings of government debt weaken banks balance sheets, increasing their riskiness and making funding more costly and difficult to obtain. Banks exposures are mostly to the home sovereign. [my note: the BIS is in on the big conspiracy!]

Second, higher sovereign risk reduces the value of the collateral banks can use to raise wholesale funding and central bank liquidity. The repercussions of this channel have so far been contained by the intervention of central banks.

Third, sovereign downgrades generally flow through to lower ratings for domestic banks increasing their wholesale funding costs [my note: and decreasing funding costs in good times], and potentially impairing market access.

Fourth, a weakening of the sovereign reduces the funding benefits that banks derive from implicit and explicit government guarantees.

Bank Of International Settlements.

There are multiple transmission mechanisms between sovereigns and bank funding costs...according to those tin foil hat wearers at the BIS...some of which are causal.

ShanePouch

My sense is that there is a growing resentment to the idea of a USE across Europe. The structural issues in the Euro were well flagged before the launch of the Euro, yet the EU simply ignored them and decided to launch knowing the structural issues were there, and knowing what was likely to happen. While I understand politics is politics, and the EU is a political organisation, the manipulation and cynicism that suggests is not a happy thought.

In a time of world crises, the response of the EU has been almost criminally slow, perhaps not deliberately, but certainly the more sceptical have been able to make that claim thus paving the way for the argument that the EU needs more powers to enable it to react more quickly next time.

At the time when the new economies of the world react to events with speed and often skill, the EU seems oblivious to its affect on the scale of the disaster which currently paralyses much of Europe.

antoobrien

Amberman wrote: »

You neglect the effective rate of borrowing...which is what bond rates are in a typical market...hence...BAILOUTS!

Bailed out countries arent typical.

The banks have been getting lower rates than bond rates for years - because the banks are not tied to our CB any more - they are now ted to the ECB (for funding rates). The other CBs (therefore sources of funding for the people loaning our banks money) have lower rates than our the Irish bond rates - hence the lower rates being charged to our banks.

Amberman

antoobrien wrote: »

The banks have been getting lower rates than bond rates for years - because the banks are not tied to our CB any more - they are now ted to the ECB (for funding rates). The other CBs (therefore sources of funding for the people loaning our banks money) have lower rates than our the Irish bond rates - hence the lower rates being charged to our banks.

The banks are now tied to the ECB...so their funding is impacted by them in the way it would be impacted by the sovereign under normal circumstances.

The ECB is now the defacto sovereign funder as far as the banks are concerned, which is why mortgage rates haven't spiked dramatically. They have assumed the role that the sovereign normally holds.

Have a read of that PDF I linked to above and you'll see a plethora of transmission mechanisms between sovereigns and banks.

BTW...the ECB has so much crap on its balance sheet, that those cosy funding rates might not last much longer. If I was a mortgage holder in Ireland, I'd be scrambling for a long term fixed rate right about now...and by now I mean this summer.

antoobrien

Amberman wrote: »

The banks are now tied to the ECB...so their funding is impacted by them in the way it would be impacted by the sovereign under normal circumstances.

The ECB is now the defacto sovereign funder as far as the banks are concerned, which is why mortgage rates haven't spiked dramatically. They have assumed the role that the sovereign normally holds.

And here's where your argument falls flat on its face - the ECB doesn't represent a sovereign anything, it represents a group of sovereigns.

Amberman

antoobrien wrote: »

And here's where your argument falls flat on its face - the ECB doesn't represent a sovereign anything, it represents a group of sovereigns.

How it is composed makes no difference to the argument what so ever.

This is just about it's role.

antoobrien

Amberman wrote: »

How it is composed makes no difference to the argument what so ever.

Actually it does, when referring to a bank and a sovereign we generally refer to the country where ht e bank resides. So BOI & UB would be under the Irish sovereign, Natwest the British, ABN the dutch etc - and subject to the rules of each.

The ECB has pooled the wealth of the sovereigns for the benefit of the member sovereigns. It can not make changes extra changes e.g. Eurobonds without the agreement of the sovereigns.

So if we're talking about rates that Irish banks can get vs the sovereign rate the ECB has nothing to do with it - because the ECB is not a sovereign.

Amberman

The ECB is the body who is providing the funding...so yes, it does matter to the question we are discussing...which is the links between the monetary authority (normally sovereigns) and the impact on banks funding costs. Thats what we're discussing here.

antoobrien

Amberman wrote: »

The ECB is the body who is providing the funding...so yes, it does matter to the question we are discussing...which is the links between the monetary authority (normally sovereigns) and the impact on banks funding costs. Thats what we're discussing here.

You do realise that your equation of the ECB to a sovereign is flawed as the ECB has no sovereign powers? It's stretching the analogy but the ECB is more akin to a credit union for the Euro states.

Amberman

I get that...but it makes no difference to the point. The rate at which the monetary authority, (ECB, Sovereign, man on the moon...who cares!) funds itself has a direct impact on bank funding costs, which has a direct impact in the banks customers borrowing costs.

Thats the point...not that the ECB isnt a sovereign etc.