Financial and Banking Newsletter

The UK’s 2019 current account deficit with the EU was GBP 118 billion. The Trade and Co-operation Agreement (TCA), commonly referred to as the Brexit agreement, is therefore of greater value to the EU by protecting this imbalance with tariff free trade, than to the UK. However, by excluding services from the Treaty – 42% of UK exports to the EU are services – key decisions about the terms of future trade in financial services such as capital markets and banking, have been deferred to this year. By carving services out of the TCA, the EU has skilfully taken the upper ground in this area. We analyse the present situation and identify possible headwinds that might limit the EU’s exploitation of this advantage.

The concept of central bank issued digital currencies (CBDC) has been around for several years, arguably since bitcoin became established around 2015. The topic is now very hot even in Europe, with Sweden planning to launch a retail focussed e-krona in 2021. Switzerland is also working on this very topic.

Background and History of Citizenship Investment Schemes (‘CIS’).

Sixteen EU member states (plus the United Kingdom) operate schemes enabling a residency permit to be obtained by a non-EU citizen in return for a substantial investment, minimum €1 million. Residence in most member states confers the benefits of visa free travel throughout the Schengen area. Three other member states, Bulgaria, Cyprus and Malta, offer full and immediate citizenship in return for the requisite investment. Citizenship of any member state of course enables full freedom of movement throughout the EU.

Whilst diplomatically presented as a merger, the union of Spain’s third and fourth largest banks, announced mid-September, is in fact the acquisition of Bankia by Caixa. Shares in multiple European banks rose on the news – Société Générale and Paribas of France were up 5%, Commerzbank’s shares rose 8%, while two other Spanish banks mooted to be considering merging, Sabadell and Bankinter, climbed by 11 and 6% respectively. Many commentators welcomed the news, believing the merger is a force for good. Bigger banks are stronger. However, there are several aspects to this transaction that should be of concern to bank stakeholders, taxpayers and regulators.

Whichever candidate wins the forthcoming US election, America’s big banks expect continuing concessions in the two key areas of monetary policy and bank regulation. Monetary policy looks unlikely to change much, with the Federal Reserve (Fed) under Jerome Powell committed to keeping interest rates lower for longer, trying to create some price inflation and growth. In terms of regulation, banks expect to be allowed to increase the sizes of their balance sheets. With little investor appetite for fresh equity, this implies a relaxation of the rules restricting leverage. Do banks prefer one candidate over the other?

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 malpractice and stop it earlier. Let us take a brief look back at the major accounting shocks of the past 20 years, the measures taken to prevent these scandals recurring, and then assess the effectiveness of these measures in the light of what we know about Wirecard.

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 constitute risks, but sought to play them down as “risks associated with the Eurosystem’s liquidity supply”. The Report reassured the reader that even if a Eurozone central bank were to default, an actual loss would only arise if the collateral such bank had posted failed to cover the exposure, and even if there was such a shortfall, the “cost of such loss would be shared among the national [central] banks”. The Bundesbank’s view on this subject obviously carries weight. With a net claim of 919 billion euros as at end April 2020, it is the largest creditor of TARGET2.

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 programme would be adjusted in the future. She further endorsed the proposed new euros 1 trillion Recovery Fund which is supposed to take the pressure off the ECB in supporting member states’ efforts to rebuild virus hit economies. Media reported that the ECB was ‘keeping its powder dry’.

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.” And secondly, on 9 April the euros 530 billion SURE funding package (Supporting Unemployment Risks in Emergency) was agreed.

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 record in understanding and predicting trends in alternative payment technologies, and prior to Libra were relaxed that bitcoin was unlikely to attain mass adoption. Jerome Powell, head of the Federal Reserve gave congressional testimony shortly after the Libra announcement denigrating it on several counts. Nonetheless, Libra doubtless turbocharged central banks’ research.