ECB’s first flight in Eurozone’s banking universe will be just a reconnaissance

Press conference by Michel Barnier, Member of the EC, on the establishment of a Single Resolution Mechanism for the Banking Union. (EC Audiovisual Services).

Press conference by Michel Barnier, Member of the EC, on the establishment of a Single Resolution Mechanism for the Banking Union. (EC Audiovisual Services).

The European Central Bank, in view of its new role as single supervisory authority of Eurozone’s banking system, a task that will officially commence in November 2014, is now testing the grounds of this real banking constellation, which comprises a round number of 6000 banks. The ECB will undertake with its own proper mechanism the supervision of the ‘significant’ credit institutions, with assets of more than €40 billion, that is approximately 130 financial firms accounting for around 85% of euro area’s banking system. The rest of the lenders will be supervised by national central banks, under ECB’s guidance.

However, in view of the problems which currently infest Eurozone’s banks, ECB first wants to test the grounds of this unexplored galaxy, with a twelve month ‘comprehensive assessment’, starting as from next month and planned to be concluded in October 2014. This assessment is an essential element of the preparations for the Single Supervisory Mechanism, providing the necessary clarity on the banks that will be subject to the ECB’s direct supervision which are around 130 financial firms. The SSM Regulation which foresees all that, comes into force in November 2013.

A demanding exercise

The exercise will comprise a supervisory risk assessment, an asset quality review and a stress test. According to ECB “The integrated outcome of the comprehensive assessment may lead to a range of follow-up actions, possibly including requirements for changes in a bank’s provisions and capital”. This is exactly where the problems begin.

Eurozone banks suffer from a combination of a super inflated investment portfolio and a growing package of bad loans. Both those illnesses get worse due to the general economic downturn. Banks’ assets are constantly loosing value, while the on-going misery in many countries, forces households and SMEs to fail servicing their debts. Both those diseases call for more good quality capital, if the lenders are to maintain their capital adequacy at the levels demanded by the relevant EU rules.

After the financial crisis broke out in 2008, a large number of major banks were forced to seek protection from governments. More than €275bn of taxpayers’ money has been injected to support euro area banks’ capital. Some of them managed to raise capital from their shareholders. According to ECB, “Since the onset of the global financial crisis, euro area banks have raised around €225bn of fresh capital”.

Half a trillion not enough?

This is not peanuts. Half a euro trillion is the equivalent of 5% of Eurozone’s GDP. Given that, ECB insists that this is enough. A relevant text on its site says, “Today, the median Core Tier 1 capital ratio of the largest euro area banks stands close to 12%, and most of these banks comply already with the minimum regulatory capital requirements of the fully implemented Capital Requirements Directive IV/Capital Requirements Regulation (CRD IV/CRR) framework”.

This passage is very carefully written. For one thing, it doesn’t say all the major Eurozone banks. Not a word for the rest of the lenders. In any case if this 12% Core Tier 1 capital ratio was true, then why have the lenders stopped lending in many Eurozone countries? The banks absorb the abundant liquidity offered to them by the ECB at 0.5% and keep it in their coffers. Actually, the total of outstanding loans is decreasing in Eurozone.

In short, if this 12% of capital adequacy was true, everybody would have been happy. Unfortunately it’s not. That’s why the ECB, in its note on this comprehensive assessment, clarified that the minimum capital adequacy threshold to be used in this exercise will be 8%. This said, the next issue that arises is the quality of capital to be included in this 8%. As every first year student of economics knows, bank balance sheets are real minefields. With the globalisation of the financial system it will be difficult to distinguish what is real capital and what is borrowed money. Lenders may very easily appear as shareholders. Let alone that banks do favours to each other and help their peers with short term money injections dressed as capital.

Of course the ECB is aware of all that. That is why it notes that “weaknesses remain, compounded by the perception that banks’ balance sheets are not transparent and concerns about their overall risk situation”. In this passage, ECB wants to stress that it is aware of what is going on in the banking industry and tries to appease the widespread public anger against the banks.

As noted above, though, the banks have the ability to use the entire world as their hiding place and it is impossible, under the present ‘laisser passer’ conditions, to any supervisor to reach the core capital. In view of that, there is a widespread feeling that this initial ECB’s reconnaissance flight in the banking constellation during the next twelve months will be of a training character. Of course, the central banks will not accept to cover possible ‘tigers’ lurking in the banks’ basements.

the sting Milestone

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

EU officially launches its first naval mission against migrant smugglers

London, Berlin, Paris to fight over EU budget

The Free World Experience Report – LGBTQI+ health on the spot

‘Bring to life’ precious moments caught on film or tape, UN agency urges on World Day

Eurozone’s credibility rock solid

These are the ‘positive’ tipping points that could slow global warming

Is academia losing its chance to capitalize on technology?

UN human rights chief denounces grave ‘assaults’ on fundamental rights of Palestinian people

Islamophobia is driving more US Muslims to become politically engaged, suggests report

How to create a trustworthy COVID-19 tracking technology

Insurer CEOs Reveal Marketing Strategies that Communicate the True Value of Insurance Products & Services to the Customer

European Agenda on Migration four years on: Marked progress needs consolidating in face of volatile situation

Keeping cool in the face of climate change

India should ‘unlock’ freedom curbs in disputed Kashmir, urges UN human rights chief

Commission concludes that an Excessive Deficit Procedure is no longer warranted for Italy at this stage

European Commission adopted Report on the Impact of Demographic Change in Europe

Secretary-General upholds value of UN Charter for a world in turmoil

Who cares about the unity of Ukraine?

Why CEOs need to become activists in sustainability

International tourism arrivals hit record high in 2017, UN agency reports

After swallowing effortlessly the right to be forgotten time for Google Ads now to behave

President David Sassoli to visit Skopje: “Remain on the European track”

Poverty data never tells the whole story

Parliament adopts deal to improve quality of tap water and reduce plastic litter

EU-China Leaders’ meeting: Delivering results by standing firm on EU interests and values

Three UN workers killed following Benghazi car bomb attack, as Security Council meets in emergency session, honours their ‘ultimate sacrifice’

Passwords should become a thing of the past. Here’s why

Security: better access to data for border control and migration management

Six steps that can help us to tackle homelessness

Central African Republic: Guterres says UN mission committed to protecting civilians, helping stabilize country, as violence flares

Venezuelans brave torrential border river, face exploitation, abuse – UN urges greater protection

FROM THE FIELD: Weather reports come to aid of Uganda’s farmers

Mine action is at ‘the nexus’ of peace, security and development: UN official

Germany’s fiscal and financial self-destructive policies

Commission pledges €100 million to help Mozambique recover from cyclones Idai and Kenneth

UN rights chief calls for release of hundreds abducted and abused in South Sudan

Bank resolutions to remain a politically influenced affair

Coronavirus: Commission starts testing interoperability gateway service for national contact tracing and warning apps

These countries have some of the highest voter turnout in the world

Commission launches the Fit for Future Platform and invites experts to join

Four ways Europe can become a global innovation leader

Human Rights: breaches in Cambodia, Uganda and Myanmar

Ten reasons to be optimistic in 2019

The European giant tourism sector in constant growth

What cryptocurrencies will do to the integrity of politics

Guterres in Davos: ‘Dysfunctional’ response to common problems, shows need for effective multilateralism

UN chief praises Africa for keeping ‘hearts and borders open’ in refugee crisis

Here are three ways the private sector can act as a sustainability catalyst for Globalization 4.0

Ethiopia planted 350 million trees in a day. And its fight against deforestation does not stop there

ECB policy is working, but new challenges need new responses

Stuck at sea: How to save the world’s seafarers and the supply systems they support

Slight easing of G20 GDP growth in first quarter of 2018

What slums can teach us about building the cities of the future

Coronavirus: Commission concludes exploratory talks with Valneva to secure a new potential vaccine

Employment and Social Developments in Europe review: why social fairness and solidarity are more important than ever

We have the tools to beat climate change. Now we need to legislate

Security Council urges ‘maximum restraint’ around Gulf region as Iran and United States trade diplomatic blows in New York

People, not technology, shape the future of manufacturing

Excise duties: Commission welcomes agreement on rules governing alcohol

Does hosting a World Cup make economic sense?

More Stings?

Advertising

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s