IREF Europe - Institute for Research in Economic and Fiscal issues

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IREF Newsletter

Every month IREF publishes a Newsletter on Financial and Banking Features that are affecting the EU.

They are authored by IREF Senior Fellows Gordon Kerr and John Butler, with Prof. Enrico Colombatto, experts with first-hand insight into financial markets and their interplay with government policy.

You can subscribe to the Newsletter (for free) by entering your email address in the box on the left.

Wirecard Exposes German Regulator BaFin

Gordon Kerr, Cavin O’Driscoll with Enrico Colombatto,

Wirecard Exposes German Regulator BaFin The usual reaction to major accounting-based corporate collapses is that they are ‘one-offs’. When the truth comes out, it is relatively easy to understand the methods and motives of the bad guys, and yet it always seems surprising that auditors and regulatory watchdogs did not spot the (...)


What are the Creditor Countries’ True Exposures Under TARGET 2?

Gordon Kerr, Cavin O’Driscoll with Enrico Colombatto,

What are the Creditor Countries' True Exposures Under TARGET 2? Ever since concerns were first voiced in Germany about the Bundesbank’s exposure to the Eurosystem’s payment and settlement system known as TARGET2, the Bundesbank itself has sought to assuage such concerns. In its March 2011 Monthly Report , the Bundesbank accepted that TARGET exposures (...)


ECB calls for European Integration via a Common Fiscal Policy Response

Gordon Kerr, Cavin O’Driscoll with Enrico Colombatto,

ECB calls for European Integration via a Common Fiscal Policy Response ECB President Lagarde announced a keenly awaited new policy statement on April 30th. There was to be no increase to the Euros 750 billion Pandemic Emergency Purchase Programme (PEPP), but the economic deterioration of member states would be closely watched and, if necessary, the size of the (...)


COVID-19 Responses Attempt to Pull Political Leaders Across Debt Mutualisation Red Lines

Gordon Kerr, Cavin O’Driscoll with Enrico Colombatto,

COVID-19 Responses Attempt to Pull Political Leaders Across Debt Mutualisation Red Lines In the past month, two new large liquidity injections have been announced. Firstly, a euros 750 billion Pandemic Emergency Purchase Programme (PEPP) was launched to “expand the range of eligible assets under the corporate sector purchase programme (CSPP) and to ease the collateral standards.” (...)


Do Central Banks Intend to Launch Central Bank Digital Currencies?

Gordon Kerr, Cavin O’Driscoll with Enrico Colombatto,

Do Central Banks Intend to Launch Central Bank Digital Currencies? A substantial and growing amount of press attention has been devoted to the subject of Central Bank Digital Currencies (CBDCs) since last year’s announcement of Libra which spooked regulators at central banks who are petrified of losing control of the mint. Central banks have a mixed track (...)


The European Stability Mechanism is Critical to the Future Functioning of the Euro

Gordon Kerr, Cavin O’Driscoll with Enrico Colombatto,

The European Stability Mechanism is Critical to the Future Functioning of the Euro In the ten years since the first iteration of the European Stability Mechanism (ESM) emerged, its status has changed markedly. Initially, it was just a clever example of financial engineering deployed by the ECB to enable certain EU member states to be bailed out without imposing the costs (...)


The Brydon Report on Audit. Will Banks’ Financial Statements Become More Reliable?

Gordon Kerr, Cavin O’Driscoll with Enrico Colombatto,

The Brydon Report on Audit. Will Banks' Financial Statements Become More Reliable? Sir Donald Brydon, former Chairman of the London Stock Exchange, published just before Christmas his wide-ranging review of the UK audit industry. This is likely to have significant ramifications for bank financial reporting throughout Europe because (with only a few national opt outs) (...)


Germany Remains Firmly Opposed to Banking Union

Gordon Kerr, Cavin O’Driscoll with Enrico Colombatto,

Germany Remains Firmly Opposed to Banking Union In November, Germany’s Finance Minister Olaf Scholz wrote an article in the Financial Times claiming that he had devised a common European Deposit Insurance Scheme (EDIS) [1] that could be acceptable to both sides of the hitherto gridlocked debate. Mr Scholz also circulated a document which he (...)


Central Banks’ Varied Approaches to the Financial Risks of Climate Change

Gordon Kerr, Cavin O’Driscoll with Enrico Colombatto,

Central Banks' Varied Approaches to the Financial Risks of Climate Change As the momentum has built behind calls for policy responses towards climate change, the ECB and the Bank of England have not been the quickest central banks to act. Back in 2011, the Banco do Brasil announced that banks must incorporate ‘Environmental and Social Risk’ in their reporting and risk (...)


FinTech Companies; little innovation and no reform of banking

Gordon Kerr, Cavin O’Driscoll with Enrico Colombatto,

FinTech Companies; little innovation and no reform of banking New entrants into every aspect of banking were encouraged by two recent regulatory developments: the Open Banking initiative and the ‘sandboxing’ exemptions from regulations. Open Banking, part of the Payment Services Directive enacted October 2015, encourages customers to allow their data to be (...)


Paralysis and Circularity at the ECB

Gordon Kerr, Cavin O’Driscoll with Enrico Colombatto,

Paralysis and Circularity at the ECB A cynical English expression popular in sporting circles is “All the Gear and No Idea”. This is expressed, sotto voce, at the club bar when mocking a typically well-off amateur sportsman who has shown up at the ski slope, the golf course or the clay pigeon shoot with the most expensive equipment (...)


Facebook’s Libra; will it test the new ECB chief Christine Lagarde?

Gordon Kerr, Cavin O’Driscoll with Enrico Colombatto,

Facebook's Libra; will it test the new ECB chief Christine Lagarde? Facebook’s greatest recent challenge has been the fading of its brand. A veritable slew of newer social media platforms are cooler and more trendy than Fb, which now languishes in popular esteem as the social platform of choice for the out of touch greying generations, rather than youngsters. (...)


The Authoritarian Push for Tighter and More Centralised Banking Regulations

Gordon Kerr, Cavin O’Driscoll with Enrico Colombatto,

The Authoritarian Push for Tighter and More Centralised Banking Regulations


Will Monetary Union Become Fiscal Union? The Incoming New Personnel will Influence the Timing and Required Power Shifts.

Gordon Kerr, Cavin O’Driscoll with Enrico Colombatto,

Will Monetary Union Become Fiscal Union? The Incoming New Personnel will Influence the Timing and Required Power Shifts. Personnel changes are afoot, both of Central Bankers and Politicians. ECB President Draghi will step down at the end of October when his eight-year term expires. Half the ECB Governing Board will also be replaced at the same time. Bank of England Governor Mark Carney’s term expires at the end (...)


The ECB Is Getting Out Of Kilter With The Federal Reserve

Gordon Kerr, Cavin O’Driscoll with Enrico Colombatto,

The ECB Is Getting Out Of Kilter With The Federal Reserve The ECB is under twin pressures, both of which are only likely to increase. Firstly, with interest rates stuck at minus 0.4% ECB policy is diverging from Fed policy; secondly, problems with Europe’s banking look likely to be highlighted soon by the ECB’s Supervisory Board.
A) Interest Rate (...)


More Euro Deepening – The Currency

Gordon Kerr, Cavin O’Driscoll with Enrico Colombatto,

More Euro Deepening – The Currency Latest Political Developments
Given the media’s focus on the March 29th Brexit date, the views of present and former EU political leaders captivated recent mainstream media. Former Italian prime minister Paolo Gentiloni called Brexit ‘the biggest mistake by a European country since the war’. (...)


The Consequences of Future ECB Policies for Banking

Gordon Kerr, Cavin O’Driscoll with Enrico Colombatto,

The Consequences of Future ECB Policies for Banking In January, there were two interesting speeches by senior ECB figures which provided some insight as to likely future policy.
Speaking at an event in Riga to commemorate the fifth anniversary of Latvia’s adoption of the euro, ECB vice president Luis de Guindos (also a former Finance Minister (...)


The EU To Push For EMU Deepening After May Elections

Gordon Kerr, Cavin O’Driscoll with Enrico Colombatto,

The EU To Push For EMU Deepening After May Elections With little fanfare, the Eurogroup of 19 Eurozone finance ministries published in December its report detailing progress on how to strengthen and deepen the Economic and Monetary Union (EMU). Written in dry bureaucratic language, the Report Summary hardly appeared on the radar screens of (...)


The Effectiveness of MIFID II After 11 Months

Gordon Kerr, Cavin O’Driscoll with Enrico Colombatto,

The Effectiveness of MIFID II After 11 Months Background to MIFID, MIFIR and EMIR
Version 2 of the Markets in Financial Instruments Directive (MIFID II) is a particularly important piece of recent European Law due to the extent and scale of its impacts on professionals operating in capital markets. MIFID II was enacted in 2014, and the (...)


The Stand-off Between Italy and the EU is a Serious Threat to the Euro

Gordon Kerr, Cavin O’Driscoll with Enrico Colombatto,

The Stand-off Between Italy and the EU is a Serious Threat to the Euro Why all the fuss?
The nub of the dispute is Italy’s budget plans, which have been rejected by the European Commission (EC). The budget claims to increase public indebtedness by 2.4% in 2019 rather than the previously approved figure of 1.6%. However, the EC is unhappy about the violation of (...)


Central Banks in Europe Are About to Regulate Crypto-Assets.

Gordon Kerr, Cavin O’Driscoll with Enrico Colombatto,

Central Banks in Europe Are About to Regulate Crypto-Assets. In September, the UK cross party Parliamentary Committee dealing with bank regulation and central banking published its analysis of the opportunities and risks posed by ‘crypto-assets’, such as Bitcoin, Ether, as well as any other coin issued via an Initial Coin Offering.
The report makes stark (...)


The BIS Takes Aim At Cryptocurrencies:
Do They Understand The Economics Of Cool?

Gordon Kerr, Cavin O’Driscoll with Enrico Colombatto,

The BIS Takes Aim At Cryptocurrencies: To help understand the genuinely transformative business technology of blockchain in the context of cryptocurrency hype, Wharton professor David Werbach encourages the distinction to be drawn between three frequently confused concepts:
1. Cryptocurrencies such as Bitcoin, which are simply (...)


How Will Europe Deal With Italian Fiscal Defiance?

Gordon Kerr, Kevin Dowd and Cavin O’Driscoll, with Enrico Colombatto,

How Will Europe Deal With Italian Fiscal Defiance?


Euro Survival Depends Upon Federalization — Policy Options

Gordon Kerr, Kevin Dowd and Cavin O’Driscoll, with Enrico Colombatto,

Euro Survival Depends Upon Federalization — Policy Options Despite our regular reports highlighting some of the challenges facing those tasked with managing the euro, public concern about government debt levels appears to have subsided to its lowest level since 2008. This low level of public awareness is due to a combination of factors; the natural (...)


Buchanan’s Social Contract Unveiled
By Enrico Colombatto

Buchanan's Social Contract Unveiled WP 2018-05. Executive Summary.


What Impact Will The Open Banking Rules Have On Fintech’s Aspirations to Disrupt Traditional Banking?

Gordon Kerr, Kevin Dowd and Cavin O’Driscoll, with Enrico Colombatto,

What Impact Will The Open Banking Rules Have On Fintech's Aspirations to Disrupt Traditional Banking? Introduction
Given the tremendous success of technology companies in the last 15 years, nobody is surprised by the continuing enthusiasm among investors, entrepreneurs, and policymakers for disruptive financial technology (“fintech”). However, banking regulators and rule-makers have always (...)


An Appraisal of Sovereign Bond-Backed Securities

Gordon Kerr, Kevin Dowd and Cavin O’Driscoll, with Enrico Colombatto,

An Appraisal of Sovereign Bond-Backed Securities Despite the widely held view that the European sovereign debt crisis, and the euro itself, have been stabilized, we are not alone in the opinion that the deep problems not only remain but have probably been exacerbated by the ECB’s actions. Far from being addressed, these problems have only (...)


The Looming Crisis in the Private Provision of Public Services
Close Parallels with the Systemic Failure of Banks

Gordon Kerr, Kevin Dowd and Cavin O’Driscoll, with Enrico Colombatto,

The Looming Crisis in the Private Provision of Public Services The collapse in January of Carillion PLC, the UK’s second largest construction and outsourcing company has attracted considerable media coverage. Carillion was principally engaged in public sector contracts to build (and in some cases operate) hospitals, prisons, roads, and part of the new (...)


Our Outlook for 2018
Interest Rates To Stay Low. The Consensus View is that Europe’s Banks are Recovering but we are Not So Sure.

Gordon Kerr, Kevin Dowd and Cavin O’Driscoll, with Enrico Colombatto,

Our Outlook for 2018 The Interest Rate Outlook
Despite their shortcomings, European banks do not seem on the verge of collapse and few commentators, analysts or policymakers think that there will be any systemic wobbles in 2018. We do not necessarily disagree; with ECB interest rates still zero to negative and a (...)


Bitcoin: A fool’s Bubble or the Libertarian’s Anti-Establishment Currency Dream?

Gordon Kerr, John Butler, Cavin O’Driscoll with Enrico Colombatto,

Bitcoin: A fool's Bubble or the Libertarian's Anti-Establishment Currency Dream? Brief technical overview Let us begin with a definition of the terms ‘digital currency’ and ‘cryptocurrency’.
Digital currency – any currency that exists on a ledger. This term includes all the world’s major currencies as well as cryptocurrencies. Notes and coins are the physical form of euros, (...)


The Search for a New Risk-Free Rate

Gordon Kerr, Kevin Dowd and Cavin O’Driscoll, with Enrico Colombatto,

The Search for a New Risk-Free Rate The ECB has lost confidence in bank industry efforts to reform or replace Euribor; but finding a replacement, and designing transitional arrangements will not be a straightforward task. It also risks highlighting the uncomfortable truth that the volume of unsecured interbank lending is (...)


Merkel wins her fourth term in Germany; will this help drive banking union or will nationalist political parties manage to oppose it?

Gordon Kerr, John Butler, with Enrico Colombatto,

Merkel wins her fourth term in Germany; will this help drive banking union or will nationalist political parties manage to oppose it? Although there never seemed much doubt that Mrs. Merkel would be elected for a fourth term as Chancellor of Germany on September 23rd, it is not clear whether she will be strong enough to help the EU authorities push through banking union before any pro-nationalist political parties gain real (...)


Ten Years from the onset of the Great Financial Crisis. What has been reformed?

Gordon Kerr, John Butler, with Enrico Colombatto,

Ten Years from the onset of the Great Financial Crisis. What has been reformed? Ten years on from the late summer collapse of first Paribas’ money market funds and then the failure of the UK’s Northern Rock bank, the media have published a raft of reviews reflecting on the past decade of banking reforms.
Central bankers were quick to use the anniversary to make grand (...)


European Safe Bonds – Can Europe’s problems be Saved by Clever Financial Engineering?

Gordon Kerr, John Butler, with Enrico Colombatto,

European Safe Bonds – Can Europe's problems be Saved by Clever Financial Engineering? Electoral victories for Mark Rutte of the Netherlands in March, followed by Emanuel Macron’s presidential ascent in France in May and his landslide Parliamentary victory in June, have encouraged the view that closer integration of Europe’s banking and financial system is quite likely. The (...)


By Bailing out unimportant banks Italy has undermined Banking Union

Gordon Kerr, John Butler, with Enrico Colombatto,

By Bailing out unimportant banks Italy has undermined Banking Union The contrast between the actions of the Spanish and Italian governments in the past two months could hardly be more marked. As we reported in June, the Madrid government allowed the relevant European authority – the Single Resolution Board – to apply the bail-in rules to failed Banco Popular. (...)


Large Spanish Bank Failures Raise Investor Fears over Bail-Ins; whilst Pressure Grows in Italy over Monte Dei Paschi

Gordon Kerr, John Butler, with Enrico Colombatto,

Large Spanish Bank Failures Raise Investor Fears over Bail-Ins; whilst Pressure Grows in Italy over Monte Dei Paschi Bail-ins Expected after Banco Popular fails in Spain. Chewing gum accounting
Just as elections of political leaders have become difficult to predict, it is becoming harder to guess which of Europe’s beleaguered banks will be bailed out and rescued, or allowed to fail thus exposing creditors (...)


Banks in the US as well as Europe Push Back Against New Rules

Gordon Kerr, John Butler, with Enrico Colombatto,

Banks in the US as well as Europe Push Back Against New Rules Given the effort being invested into the banking turnaround story by the European authorities, and in particular the European Banking Authority, and the cohesive international supervisory effort being spearheaded by Commissioner Valdis Dombrovskis which we reported in March, you would have (...)


Liborgate Re-Rears Its Ugly Head

Gordon Kerr, John Butler, with Enrico Colombatto,

Liborgate Re-Rears Its Ugly Head Last month, we reported on compliance failures at very senior levels of the Bank of England, resulting in the resignation of Charlotte Hogg. There was another scandal, also involving the Bank of England and Barclays Bank, which was breaking just as we were going to press. We decided to defer (...)


Accommodative Monetary Policy is Encroaching on Fiscal Policy

Gordon Kerr, John Butler, with Enrico Colombatto,

Accommodative Monetary Policy is Encroaching on Fiscal Policy We believe that the ECB is presently using monetary policy in effect to conduct fiscal, as well as monetary policy. Elected politicians should be up in arms; that they are not would imply either that they do not understand this or that they simply accept it. This may provide an interesting (...)


Compliance Meltdown at the Bank of England

Gordon Kerr, John Butler, with Enrico Colombatto,

Compliance Meltdown at the Bank of England The Bank of England is the focus of two separate news items. Firstly, the BBC has apparently uncovered a videotape evidencing that the Bank strongly pressured commercial banks to falsify Libor submissions in 2008. If true, this contradicts denials we reported in 2012 when such allegations (...)


Unicredit’s Rights Issue – the figures don’t add up

Gordon Kerr, John Butler, with Enrico Colombatto,

 Unicredit's Rights Issue – the figures don't add up Unicredit’s well-publicised rights issue was reported by the press as a resounding success. Underwritten by Morgan Stanley and UBS, the €13bn issue, priced at a 38% discount to the bank’s theoretical value before the rights, closed early. Some big Italian investors publicly declared their (...)


Supervision cannot save insolvent banks

Gordon Kerr, John Butler, with Enrico Colombatto,

Supervision cannot save insolvent banks Regulators Provide Misleading Reassurances as to Bank Solvency
February 10th was the fourth anniversary of David Cameron’s “Bloomberg Speech” in which he promised an ‘in or out’ EU membership referendum if re-elected in 2015. This year, the EU’s Commissioner for Financial Stability, Financial (...)


Stress Tests don’t work

Gordon Kerr, John Butler, with Enrico Colombatto,

Stress Tests don't work Criticisms of bank stress tests continue to mount, particularly as banks continue to struggle. A new problem recently emerged: the marked shortfall between the market capitalisation of most European banks and their book values.
This should soon lead to a new stress test methodology. This (...)


Inflation To Rise – We expect UK, ECB and US Policy to Diverge

Gordon Kerr, John Butler, with Enrico Colombatto,

Inflation To Rise – We expect UK, ECB and US Policy to Diverge Purely for geopolitical reasons, namely frustration at the failure of the governments of individual member states to respond to repeated calls for “structural reforms”, your authors had taken the view in recent months that the ECB might increase interest rates this year.
Our views are changing. (...)


January’17 Financial and Banking Features Newsletter

Gordon Kerr, John Butler, with Enrico Colombatto,

January'17 Financial and Banking Features Newsletter Central Banks Pray for Electoral “Shocks”. Forced to Nationalise Monte dei Paschi, Italy Looks in Trouble, but Cleverly Plays its Sicilian Defence.
Central Banking
How will Central Banks cope with 2017 shocks? Perhaps new rules, one-off solutions, doubtless lots more QE. Populism will (...)


December’16 Financial and Banking Features Newsletter

Gordon Kerr, John Butler, with Enrico Colombatto,

December'16 Financial and Banking Features Newsletter The Eventual Impact of Rising Bond Yields. Further Cracks Appearing in the ‘Global Consensus’ of Bank Supervision.
Central Banking
Global Bond Market Yields are Rising
The ECB’s recently announced 6 month extension of its QE programme reminds us that the speed at which the programme will (...)


November’16 Financial and Banking Features Newsletter

Gordon Kerr, John Butler, with Enrico Colombatto,

November'16 Financial and Banking Features Newsletter The European Banking Can Nears the End of the Road
“The key thing to know about Lehman Brothers is that it did not cause the financial crisis, it revealed the financial crisis”
Central Banking
The Credibility of Central Banks is Irreparably Damaged. Critics of Policy Grow as More Evidence (...)


October’16 Financial and Banking Features Newsletter

October'16 Financial and Banking Features Newsletter As QE becomes widely discredited, German policymakers end their uneasy truce with the ECB. Banking woes deepen.
Central Banking
Central Banks under fire for crossing the line into fiscal policy. Claudio Borio, head of monetary and economic research at the Bank for International (...)


September’16 Financial and Banking Features Newsletter

Gordon Kerr, John Butler, with Enrico Colombatto,

September'16 Financial and Banking Features Newsletter The absence of structural reforms brings the effectiveness of ECB policy increasingly into question. The Financial Stability Board claims that banking reform is largely complete. Despite a quiet summer, there is plenty of evidence that it (...)


July’16 Financial and Banking Features Newsletter

Gordon Kerr, John Butler, with Enrico Colombatto,

July'16 Financial and Banking Features Newsletter Post Brexit, Sterling weakens. Brexit will retest Central Banks’ Firepower. Will Scotland’s Resurgent Independence Campaign Want to Keep the Pound?
The reaction of financial markets to the Brexit vote was well covered by the press. After initial sharp falls, stock markets throughout the (...)


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