ECB doesn’t dare touch Eurozone’s big banks

Participation of Olli Rehn, Vice-President of the European Commission, in the EC/ECB joint conference on Financial Integration and Stability. Ignazio Angeloni, Director General of DG "Financial Stability" of the ECB, Jonathan Faull, Director General of DG "Internal Market and Services" of the EC, Nadia Calviño, Deputy Director General of DG "Internal Market and Services" of the EC, and Olli Rehn, at the podium (from left to right). (EC Audiovisual Services).

Participation of Olli Rehn, Vice-President of the European Commission, in the EC/ECB joint conference on Financial Integration and Stability. Ignazio Angeloni, Director General of DG “Financial Stability” of the ECB, Jonathan Faull, Director General of DG “Internal Market and Services” of the EC, Nadia Calviño, Deputy Director General of DG “Internal Market and Services” of the EC, and Olli Rehn, at the podium (from left to right). (EC Audiovisual Services).

While the whole world knows that the Eurozone banks are very short on truly own capital and their overall leverage ratio is less than 3%, the European Central Bank avoids analysing in detail the exact magnitude of this crucial indicator. In its Banking Structure Report, which was published yesterday covering the period 2008-2012 and the first half of this year and spanning 50 pages, the ECB didn’t find the courage to report on that. In reality, Eurozone banks have ‘invested’ almost 33 times their capital, of which the 32 times correspond to other peoples’ money. They only hold €3 as capital every time they lend or ‘invest’ €100 borrowed money.

The authors of the report at the very end simply observe that the “leverage ratios of large euro area banks still tend to be lower than those of their US peers, even on a comparable International Financial Reporting Standards (IFRS) basis”. They add, though, that this is “especially the case for euro area banks with large or significant investment banking activities, including sizeable derivatives portfolios”. Thank God at the end they at last dared tell the truth, that the balance sheets of the large Eurozone banks are full of risky if not toxic investments, five years after the 2008 crisis.

Three times the GDP

At the very beginning of this report the ECB states that Eurozone banks’ assets reached €29.5 trillion at the end of 2012, or 12% less in comparison to 2008. This is three times the GDP of the single money zone, with the German and French banks accounting for almost half of it, at €7.6 trillion and €6.8 trillion, respectively. The three largest Eurozone banks Deutsche Bank, Crédit Agricole and BNP Paribas holding between them €7.6tn in assets. Neither Germany nor France can rescue those lenders if they fail.

The careful reader of this ECB publication should keep this in mind, while going through it. Not to forget that ECB itself was obliged to acknowledge that the large euro area banks hold “sizeable derivatives portfolios”. This is a timid way of telling everybody, that it is almost impossible to assess the risks hidden in this quite unpredictable financial universe. In other words the authors of the report couldn’t avoid acknowledging that Eurozone’s banking system is exposed to unknown risks. The bankruptcy of Detroit revealed that many Eurozone banks had an appetite for risky placements in US municipal debt.

A solid beginning

However, in the first lines of the report the ECB wanted to give the impression that it is overseeing on a solid banking system. It says “In aggregate, the median Tier 1 capital ratio (own capital) in the euro area increased from 8% in 2008 to 12.7% in 2012”. Mind you, this is the median not the arithmetic mean. The median is that value in a distribution which separates it in two halves and represents better the two extreme values of it (outliers). In this case, the arithmetic mean would have been a better approximation of reality because it’s not dragged to the extremes.

Even better though, the ECB could have used the two aggregates and simply put them in a fraction – capital over assets – and simply given us that percentage. But, yet again, it seems it’s too early to tell what is capital and what is not. In reality, this will be the essence of ECB’s supervision over the 130 largest Eurozone banks as from November 2014, when its mandate starts. Before that, the ECB will run a “comprehensive assessment” during the next twelve months concluding in October 2014, in order to test the ground of Eurozone’s real banking constellation.

Avoiding the leverage test

Banks, in order to avoid an in-depth audit on their entire balance sheet, discovered the risk weighted assets (RWA) exercise. They attach a certain risk element to each category of assets and, in this way, they calculate their RWAs. This exercise is performed in order to assess the Capital Adequacy Ratio of a lender. The problem is, though, that it’s the banks themselves that attach their assets to each risk category. Without an in-depth audit it’s impossible to arrive at a reliable assessment of capital adequacy ratio. On top of that, banks usually hold large off-balance accounts where it is very difficult to identify the real exposure to risks. Applying the RWA method to those accounts is even less productive.

Obviously the most reliable way to assess a bank’s trustworthiness is to accurately estimate its own capital and compare it with its assets. In reality, this is not a difficult exercise at all. Very simply, own capital is what the bank has received from shareholders plus what is withheld as reserve from annual profits. However, it seems that this simple exercise will expose very unpleasant things and that’s why it is avoided.

In any case the ECB would have a very difficult task in supervising this real jungle of Eurozone’s banks. The US and the Swiss lenders are much more strictly controlled by regulators. The problem is that in Eurozone the banks are doing also the work of the capital markets, unfortunately in a less transparent and competitive way.

 

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

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

Hydrogen power is here to stay. How do we convince the public that it’s safe?

These clothes were designed by artificial intelligence

Entrepreneurship’s key to success showcased by a serial young entrepreneur

4 things President Trump could learn from Jimmy Carter

How each country’s share of global CO2 emissions changes over time

Strawberries and child support; a Thai partnership

The story of 2018, in 10 charts

Hungary’s laws on helping vulnerable foreigners are ‘blatantly xenophobic’: UN rights chief

IMF’s Lagarde: Ukraine must fight corruption

Amid ongoing fighting in northeast Syria, hundreds cross Iraqi border in search of safety

One year on: EU-Canada trade agreement delivers positive results

You’ve heard of 5G, but what about the quantum internet?

Migrants: ‘A powerful driver’ of economic growth, ‘dynamism and understanding’

Central Africa: Security Council concerned by ‘grave security situation’, calls for better agency cooperation

Conflict, climate change among factors that increase ‘desperation that enables human trafficking to flourish’, says UN chief

To meet development goals, UN agriculture agency ‘cannot only focus on tackling hunger anymore’

How to make trade single windows more efficient with blockchain

Women-Friendly Spaces for Rohingya refugees: A place for protection and care

WEF Davos 2016 LIVE: “If we do not do properly the Paris agreement, then all 16 remaining goals will be undermined”, UN Secretary General Ban Ki-moon cautions from Davos

National parks transformed conservation. Now we need to do the same for the ocean

AI has huge potential – but it won’t solve all our problems

Brexit update: can the UK General Election of 12 December 2019 lead to a Brexit extension to 2030?

Schengen: new rules for temporary checks at national borders

The European Parliament launches a website on European election results

Skills, not job titles, are the new metric for the labour market

What lessons to draw from the destruction of Syria

UN health experts warn ‘dramatic resurgence’ of measles continues to threaten the European region

Will the European Court of Justice change data privacy laws to tackle terrorism?

UN ‘financial crisis,’ years in the making, Guterres tells budget body, proposes solutions

Why tourism policy needs to use more imagination

Moving from commitment to action on LGBTI equality

Myanmar and UN agriculture agency agree framework to improve nutrition and food security

Migration crisis update: The “Habsburg Empire” comes back to life while EU loses control

Can big events really go plastic-free? A water capsule made from seaweed may be the answer

Myanmar military target civilians in deadly helicopter attack, UN rights office issues war crimes warning

Historic first, as Tolstoy’s War and Peace lands in Geneva, to mark international centenary

Accountability for atrocities in Myanmar ‘cannot be expected’ within its borders – UN investigator

4 ways blockchain will transform the mining and metals industry

G20 LIVE: “Our response needs to be robust…otherwise we will only find the fire we are trying to put out”, UN Secretary General Ban Ki-moon just lit up G20 in Antalya Turkey

‘Make healthy choices’ urges UN agency, to prevent and manage chronic diabetes

Destabilizing Lebanon after burning Syria; plotting putsch at home: King and Crown Prince of Saudi Arabia

SDGs and the historical and economic impact on Brazilian health

COP21 Paris agreement: a non legally-binding climate pact won’t stop effectively global warming while EU’s Cañete throws hardest part to next Commission

Brexit: the time has come for the UK to clarify its position

UN ‘regrets’ new US position on legality of Israeli settlements

‘All atrocity crimes are preventable’ and can never be justified – UN chief

UN guidelines unveiled to prevent rising hearing loss among young smartphone listeners

Syria: Civilians caught in crossfire, UN refugee chief urges Jordan to open its border

Ukraine-EU deal sees the light but there’s no defeat for Russia

A Sting Exclusive: “Cybersecurity Act for a cyber-bulletproof EU”, by EU Vice-President Ansip

Here’s how to prepare South-East Asia’s young people for the future

A Sting Exclusive: “Youth voice must be heard in climate change negotiations!”, Bérénice Jond Board Member of European Youth Forum demands from Brussels

COP24: Huge untapped potential in greener construction, says UN environment agency

Mankind’s first tool to fight malaria also kills

This billion-dollar campaign wants to protect 30% of the planet by 2030

The Junior Enterprise concept, one of the best ways to develop practical skills

Wednesday’s Daily Brief: Guterres in Kenya, Prisoners sick in Iran, #GlobalGoals, Myanmar, Ukraine updates, and new space partnership

Polish PM chooses to focus on economy, amid questions on rule of law in Poland

UN agencies call for more resettlement and end to detention of asylum seekers in Libya

UN welcomes ‘record’ Brussels conference pledge of nearly $7 billion to support Syrians

More Stings?

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