Banking Dis-Integration in Europe

The WSJ carries an interesting report on how multi-country banking groups are using LTRO to ring fence affiliates in troubled economies (including Ireland), in order to limit the exposure of parent banks.

9 replies on “Banking Dis-Integration in Europe”

It seems to be me that this is a very serious development. If a subsidiary now fails or if there is a rogue subsidiary, what guarantees are the ECB going to provide to the ICB, that the loss will be covered.
The banks have managed to dump debts onto the sovereigns. They are now adopting a business model to make sure they can do this again by simply walking away from the subsidiary.

Now where are those capital ratios for subsidiaries?

Mr. Ryan said. “This funding transfers tail risk to the euro-system…from the private sector.” Its a long while since euro-system banks could truly be viewed as part of the private sector.

” Lloyds borrowed £11.4 billion ($18 billion) through one or more euro-zone subsidiaries. Chief Executive António Horta-Osório said last month that the bank planned to use the funds “to ring-fence noncore European assets” in Ireland, Spain and the Netherlands. ”

Its all a bit of a disaster really. After the 3 yr LTRO round is over, whither do these banks go then for funding? Markets are rightly concerned re their LTRO borrowings they could potentially be insolvent.

I’m slowly coming around to the view that the ECB already knows the euro is finished. What we see here is a process of LTRO retro fitting peripherals and the European banking system with shock absorbing airbags that hopefully will help them survive the inevitable crash ahead…..

Say hello to austerity, say hello to authoritarianism, say hello to the takeover of the EMU by the banking sector. The banking sector in the above scenario has no conditions attached that money will go to investment in jobs.

It does have ESM conditions attached the funding will not go to Keynesian stimulus investment in jobs and infrastructure. It will go to servicing debt. What a mess!

If ever there was a time to buy a personnel capital good well now is the time in my opinion.
So if you really need a car buy the Czech (German) Skoda Fabia Greenline (Its advertisements were all over the papers last week)

Buy a German wood Stove.

Buy a German MG42.

But if you cannot do all of these things use your imagination.

@ All

This Reuters report is also pertinent.

It seems to me that any continued discussion about the intricacies of central banking is neither here nor there. It confuses the symptoms with the causes i.e. the divergences in competitivity leading to balance of payments difficulties leading to doubts about the nexus of sovereigns/banks in the weaker economies leading to a real risk that the euro system will collapse.

Merkel – and the German establishment – can run away but they cannot hide from this fundamental problem.

I put a link here again to the most recent statement of the position of the Bundesbank.

There is one phrase in it which struck me forcefully. “A euro is a euro,
independent of which of the national central banks
puts it into circulation”. Unfortunately, this is not true if there is a doubt about the banks in which they happen to be deposited. Establishing your own bank, as Volkswagen has done, to find the creditworthy customers in states on the verge of bankruptcy is hardly the answer.

This quotation in the Reuters report also struck me.

“Rather than being a reflection of tensions between Weidman and Draghi, as widely reported, could the leaked letter be a reflection of Weidman’s dilemma in handling the conflicts between the complexities of monetary policy at the ECB and legalistic and accounting matters back at the Buba?” asked Erik Neilsen, global chief economist at Unicredit”.

I think that this is, in fact, the case.

There is the added irony that Ireland is best placed to show the way with regard to resolving the balance of payments conundrum. The most recent conciliatory noises emerging from Paris on the issue of corporation tax may be noted in this context.

@Jens Ulbrich & Alexander Lipponer of The Bundesbank

Clarification on Target-2 much appreciated.

@The Board of the Bundesbank

Perhaps Herr Weidmann needs a little .. er .. tutorial! Axel is online …

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