Financial and Banking Newsletter

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)[[EDIS has since 2015 been envisaged as a Eurozone-wide scheme which would cover the costs of repaying deposits of up to euro 100,000 lost in future bank failures.]] that could be acceptable to both sides of the hitherto gridlocked debate. Mr Scholz also circulated a document which he believed provided a clever solution to the stand-off between the heavily indebted European member states (‘debtor countries’) and the rest of the Eurozone. In particular, since the 2010 outbreak of the first Greek sovereign-debt default crisis, a number of countries led by Germany resisted debt mutualisation and the sharing of the costs of other countries’ bank failures. In fact, the financially stronger countries demanded new banking rules, which would ensure that any common bank insurance scheme would apply only to banks demonstrably solvent at the scheme’s inception. The stand-off has endured for over two years because the weaker countries, and Italy in particular, continue strongly to resist any reform of the rules which would overtly expose any of their major banks as insolvent.

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 management strategies. In 2012, the Reserve Bank of India invoked its 1949 Priority Sector Lending legislation to encourage Indian banks to allocate credit to green projects: renewable energy infrastructures such as biomass fuel production, wind farms and solar. Last but not least, the governor of the French central bank recently suggested that the world authorities (i.e. taxpayers) should devote no less than $ 900 bn per year to address the climate problem and that the Bank will be ready to support the policymakers’ actions in this area. As a matter of fact, one of the earliest central banks to actively intervene on climate change was the People’s Bank of China. In 2007, working with other institutions like the Ministry of Environmental Protection and the China Development Bank, it acted to restrict financing from companies that failed to comply with environmental rules such as emissions targets. This might seem at odds with China’s huge programme of coal fired power station construction which is producing one new one each week.

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 shared with licensed FinTech startups. We provided some detail previously. Sandboxing is relatively new, and identifies the remarkable regulatory practice of waiving the rules to help companies creating new financial technologies (FinTechs) get a foothold. In particular, the concept of a sandbox is that the development of new useful innovative tech will be held back if the full range of regulations need to be complied with immediately. In banking, one obvious costly impediment to startups is the required minimum level of regulatory capital. Of course, there are reasons why these minima exist, so the decision to license a startup to ‘play about in the sandbox’ rather than comply is based on matters such as the number of customers exposed to the new tech, and perceived risks to the financial system. Obviously, at the inception of any new challenger bank these risks are small. But at what point is a tech startup adjudged to be mature enough that it should leave the sandbox and play with the grown-ups? And when instructed so to do by regulators, how will these new challengers cope?

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 and trendiest clothes, appearing confident. Sadly, he then falls flat on his face (literally in the skiing case), or fails to drive the golf ball past the ladies’ tee, or misses every clay. We suspect that outgoing President Draghi felt somewhat embarrassed along these lines as he delivered his penultimate press conference on September 12th, because everybody keenly awaiting his announcement knew that he and his crack team are aware that his 8-year tenure has been disappointing. The ECB has broadly two functions. In one it is paralysed – the quest for a “deeper” European Monetary Union (EMU), and in the other it is going around in circles – price stabilisation.

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.
Fb has 3.5 billion customers – half the world’s population. For these reasons, we think that its new currency Libra is interesting. In particular, it shines a light on continuing existential threat to the euro, which is only one of the presumably G7 currencies whose assets will back Libra. Will Libra succeed?

Reuters reported in May that “The European Commission is working on its biggest regulatory push on banking since the 2008 financial crash that could curb Britain’s access to the bloc”.…

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…

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,…

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…

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…