Europe’s efforts to boost lending and reduce financial fragmentation won’t succeed unless banks can move money freely between countries, European Central Bank policy makers said this week.
The cross-border banks who provide much of the financing inside the euro area aren’t now able to send their money where it’s needed, said ECB Executive Board member Benoit Coeure. As a result, borrowers are judged on where they live instead of whether or not they deserve a loan.
“Credit allocation in the euro area remains very much influenced by the location of borrowers, rather than their creditworthiness per se,” Coeure wrote in an article prepared for a conference in Milan. He called for a “genuine single market” for capital so that credit can flow “without reference to location.”
Comments from Coeure and fellow Executive Board member Peter Praet show regulators are concerned about ringfencing, when banks are required to hold funds in one country that can’t be accessed by units elsewhere.
EU regulators worry that practices designed to ensure safety at home could instead fuel systemic problems by hampering cross-border banks’ ability to lend or manage their cash flow.
This in turn frustrates the ECB’s efforts to restore growth across the euro area, not just in the 18-nation bloc’s healthiest members. Investment fell in the second quarter for the first time in more than a year, dropping 0.3 percent as annual economic growth slowed to 0.7 percent.
Structural Changes
Anemic growth has made it harder for many euro-area nations to pay for the structural changes needed after the financial crisis. Italian Finance Minister Pier Carlo Padoan said in Milan that national reforms won’t work without access to “a truly European financial market where credit and capital can flow freely across borders.”
Koos Timmermans, the vice chairman of ING Groep NV’s banking unit, countered that lenders are penalized by local prudence. Cross-border banks must hoard cash in “liquidity-rich” countries, leaving subsidiaries in other markets to fend for themselves on capital markets, he said.
“Local regulators limit the transferability of capital and liquidity between banks of the same group in different countries, in order to optimize the solvency and liquidity of the local unit,” Timmermans said.
“This makes bank lending in the liquidity-poor countries unnecessarily expensive and interest rates in the liquidity-rich countries unnecessarily low.”
‘Trapped Capital’
Douglas Flint, chairman of HSBC Holdings Plc, echoed those concerns. “Europe’s economy relies on bank credit” and “trapped capital and liquidity” can’t support growth, he said.
Even so, national regulators should be cautious in loosening financial requirements because a supervisory decision could have fiscal implications, said Guntram Wolff, director of the Brussels-based Bruegel research group. Strong countries with “stable and cheap” deposits could effectively end up bankrolling losses in other jurisdictions, he said.
“I think there is a logical inconsistency between the absence of any ringfencing and purely national deposit insurance,” Wolff said.
“In case it comes to a bank restructuring, it would be the national deposit insurance covering it even though the losses would actually have come from losses in a different country.”
The ECB is pushing back against these impulses. European Union leaders sought to break the link between sovereign nations and bank balance sheets when they set the stage for banking union in June 2012, and policy makers now want to make good on those aims.
‘Economies of Scale’
“Banking union can improve risk-sharing by dispersing the costs of bank failure in a crisis event and enforcing a level playing field in bank creditor protection,” Praet said in Milan. He called for a system where lenders are “exploiting cross-border economies of scale.”
It won’t be enough for spreads to stay contained so that countries on the euro zone’s periphery can borrow closer to German rates, Coeure said. Reducing market fragmentation “cannot mean simply that prices on euro-denominated financial assets converge,” he said.
The ECB is trying to forestall region-wide concerns by scouring balance sheets at about 130 banks before it takes on euro-area supervision in November.
This Asset-Quality Review may deliver longer-term benefits by easing resistance to the financial union that policy makers want, said Carsten Brzeski, chief economist at ING DiBa AG in Frankfurt. “Ringfencing is a typical natural and national reflex,” he said.
“Would you want to be the national supervisor who failed to pick out the rotten fruit? To me it seems that with the latest ECB measures, the AQR and the start of ECB bank supervision these national reflexes should gradually disappear.”
bloomberg.com
The cross-border banks who provide much of the financing inside the euro area aren’t now able to send their money where it’s needed, said ECB Executive Board member Benoit Coeure. As a result, borrowers are judged on where they live instead of whether or not they deserve a loan.
“Credit allocation in the euro area remains very much influenced by the location of borrowers, rather than their creditworthiness per se,” Coeure wrote in an article prepared for a conference in Milan. He called for a “genuine single market” for capital so that credit can flow “without reference to location.”
Comments from Coeure and fellow Executive Board member Peter Praet show regulators are concerned about ringfencing, when banks are required to hold funds in one country that can’t be accessed by units elsewhere.
EU regulators worry that practices designed to ensure safety at home could instead fuel systemic problems by hampering cross-border banks’ ability to lend or manage their cash flow.
This in turn frustrates the ECB’s efforts to restore growth across the euro area, not just in the 18-nation bloc’s healthiest members. Investment fell in the second quarter for the first time in more than a year, dropping 0.3 percent as annual economic growth slowed to 0.7 percent.
Structural Changes
Anemic growth has made it harder for many euro-area nations to pay for the structural changes needed after the financial crisis. Italian Finance Minister Pier Carlo Padoan said in Milan that national reforms won’t work without access to “a truly European financial market where credit and capital can flow freely across borders.”
Koos Timmermans, the vice chairman of ING Groep NV’s banking unit, countered that lenders are penalized by local prudence. Cross-border banks must hoard cash in “liquidity-rich” countries, leaving subsidiaries in other markets to fend for themselves on capital markets, he said.
“Local regulators limit the transferability of capital and liquidity between banks of the same group in different countries, in order to optimize the solvency and liquidity of the local unit,” Timmermans said.
“This makes bank lending in the liquidity-poor countries unnecessarily expensive and interest rates in the liquidity-rich countries unnecessarily low.”
‘Trapped Capital’
Douglas Flint, chairman of HSBC Holdings Plc, echoed those concerns. “Europe’s economy relies on bank credit” and “trapped capital and liquidity” can’t support growth, he said.
Even so, national regulators should be cautious in loosening financial requirements because a supervisory decision could have fiscal implications, said Guntram Wolff, director of the Brussels-based Bruegel research group. Strong countries with “stable and cheap” deposits could effectively end up bankrolling losses in other jurisdictions, he said.
“I think there is a logical inconsistency between the absence of any ringfencing and purely national deposit insurance,” Wolff said.
“In case it comes to a bank restructuring, it would be the national deposit insurance covering it even though the losses would actually have come from losses in a different country.”
The ECB is pushing back against these impulses. European Union leaders sought to break the link between sovereign nations and bank balance sheets when they set the stage for banking union in June 2012, and policy makers now want to make good on those aims.
‘Economies of Scale’
“Banking union can improve risk-sharing by dispersing the costs of bank failure in a crisis event and enforcing a level playing field in bank creditor protection,” Praet said in Milan. He called for a system where lenders are “exploiting cross-border economies of scale.”
It won’t be enough for spreads to stay contained so that countries on the euro zone’s periphery can borrow closer to German rates, Coeure said. Reducing market fragmentation “cannot mean simply that prices on euro-denominated financial assets converge,” he said.
The ECB is trying to forestall region-wide concerns by scouring balance sheets at about 130 banks before it takes on euro-area supervision in November.
This Asset-Quality Review may deliver longer-term benefits by easing resistance to the financial union that policy makers want, said Carsten Brzeski, chief economist at ING DiBa AG in Frankfurt. “Ringfencing is a typical natural and national reflex,” he said.
“Would you want to be the national supervisor who failed to pick out the rotten fruit? To me it seems that with the latest ECB measures, the AQR and the start of ECB bank supervision these national reflexes should gradually disappear.”
bloomberg.com
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