Financial and Banking Newsletter

Introduction – Recent ECB Policy Developments Croatia became the 20th Eurozone member on January 1. Regular readers know our often expressed view that the euro is a deeply flawed currency…

There was universal relief in the UK and international media at the demise of Prime Minister (PM) Liz Truss and her replacement by the man she had recently defeated in…

Towards the end of August, every year investors focus on the Jackson Hole conference of the central banking global elite. Given widespread acceptance among central bankers that non-temporary inflation is…

When the history of the euro currency’s rise and decline in popularity is written, the month of June 2022 will be viewed as decisive. In June, the ECB committed to…

Tech has been on a tear for 15 years, and European financial technology (fintech) has been encouraged for multiple reasons, not the least of which is that the financial authorities…

In recent times, the EU authority has been challenged by Romania and Poland, both of whom have asserted the primacy of their domestic laws over EU treaty law in certain…

We analysed in May the extent to which ECB & Eurosystem funding, combined with new EU programmes such as the Pandemic Emergency Purchase Programme and the Next Generation EU Fund, are increasingly crowding out markets and becoming by far the dominant source of funding for both banks and member states.

As Europe emerges from the Covid economic slump and seeks to rebuild by deploying the multiple sources of liquidity we considered here, the main finance industry lobbying body for the UK and Europe is seizing the moment to push hard for reform of securitisation regulations. The Association of Financial Markets in Europe (AFME) seeks to water down Article 46 of the EU’s Capital Markets Directive such that banks and insurers investing in tranches of securitised bonds are required to allocate less capital than at present, thus facilitating greater leverage. This argument implicitly states that the Basel Rules for banks, and their sister Solvency 2 rules for insurers, are overly conservative and must be softened to enable this transformative, green, and sustainable recovery to take place.

We recently wrote about the extraordinary increases in debt financed by seemingly circular transactions between member state borrowing agencies and the ‘Eurosystem’ – the ECB and all the national central banks. A recent paper by Magnin and Nenovsky considers monetary data from Q4 2007 (when the financial system began to wobble) to Q2 2020. In this period, the euro area monetary base grew by 330%, money supply by 61%, and yet the CPI inflation metric was up only by 17%. Seeking to answer the question as to why such a low observable level of inflation has resulted from this “avalanche of public debt increases in the euro area”, the authors examined the institutional structure behind Eastern Europe’s socialist economies, in force for between 45 and 70 years, until ending around 1989.

The European Banking Authority (EBA) has been aware of the growing problem of non-performing loans (NPLs), especially in Italy, which quickly built up in the recessionary environment following the sovereign debt crisis from 2010. The EBA, hoping that banks could demonstrate solvency, introduced in 2014 new definitions of forbearance and of non-performance, aimed at relaxing the problem. However, despite the EBA’s efforts, Italian NPLs continued to grow at a rate of about 20% each year and peaked in 2015-16, when €341 billion, or about 17% of all Italian bank loans were classified as non-performing. In 2018 international accounting standard changes led to stricter rules requiring provisioning and loss recognition.[[IFRS9, implemented in Italy 2018]] The EBA then pressed banks to maintain more realistic valuations for NPLs on their balance sheets, making provisions which reduced profits and capital. However, these provisions were typically applied by banks to the most severe category of NPLs.