(re)Designing a European Banking System

Just following up on Philip’s earlier post, contrast this (gated) piece from the FT’s Wolfgang Munchau:

The resolution system likely to emerge later this year is also flawed. It will end up protecting only the taxpayer of the creditor countries from bank failures in the debtor countries. But it will not accelerate the resolution of the eurozone’s undercapitalised banks. My suspicion is that the ultimate intent of the Franco-German legislation is to secure the position of their national champion banks.

with this report on redesigning Europe’s banking system, just out from Re-Define, a think tank. Munchau highlights the national political need for renationalisation of finance, which the Re-Define paper argues exactly against this approach.

By Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

19 replies on “(re)Designing a European Banking System”

Munchau’s ‘suspicion’, on very strong empirical evidence, is a ‘fact’. Even an adult could get it.

@Stephen — Thanks for the link, it is a well-written opinion piece by Munchau. His estimate of the additional capitalization needs of Eurozone banks could be correct given the likely impact (worldwide not just Europe) of the big increase in required capital ratios under Basel 3. When one bank tries to increase its capital ratio it is difficult, when all banks worldwide try to do so simultaneously it is even more difficult.

I’m just absolutely amazed at the resilience of the ‘money multiplier’ model of banking.

In Re-Define’s paper they talk about banks ‘using deposits to make loans’. They also describe how a bank will take in $100, keep $10 on reserve and lend out $90, indirectly creating $90 in the background.

There is just so much wrong with this description of how banks operate that I’m not sure where to start. Fundamentally I suppose this model would only apply if banks processed every loan in cash form although I have other issues with it but I won’t go into detail here.

In the paper linked below I describe how banking actually operates and understanding the system has to be the starting point for any discussion on how to design a good banking system.


Given my understanding of how modern banking actually operates I’m perhaps in a better position to design a good banking system than Re-Define. My attempt at a redesign is linked below. It involves banks acting as the intermediaries many of us think they are.


everyone should be suitably shocked, shocked, that France and Germany are likely to default to protecting flag carrier interests in the absence of heat from the markets pressurising them to play it straight.

There’s a nice piece of technical analysis by John Hussman at the bottom of this FT piece that is relevant to the question of whether the current direction of drift in EZ policy is happening in a possibly delusional state of complacence absorbed osmotically from the tone set by the markets recently. His conclusions are more emphatic than mine and I suspect might have more of a whiff of data mining, but the chart alone is worth a look.


Surprised no commentary on Mr Sinn from the PrimeTime programme last night.
Nice juxtaposition between his pragmatism and RTE’s appalling histrionic whinge-stoking.

Did he speak too frankly? Did he speak too logically? I agreed with him.

Now, could we have a real debate please? No histrionics, no self-flagellation – a real reasoned debate with a crisis plan? Or have all the people capable of doing this emigrated?


The only interesting part of the so-called ‘interview’ was Herr Prof. Sinn’s body language. Figure it out.

V. poor selection of interviewer.

I respectfully disagree.
This man bats very very well. We have not promoted any of our similarly abled economists to any prominence at all. We have knocked and criticised anybody with a spark of wit until we are left with the cocophony of dullards cheer lead by glorified Kweeners on RTE.

Why are our brightest and best not on our airwaves teasing out the best way forward. Dunn said nothing that others here haven’t said but he said it with clarity and conviction.

You can’t have austerity without debt forgiveness. Said it for a long time but have always met with resistance.

Time to clear the decks. Moaners and Irish haters should be thrown to the sides. We are in a fight – let’s fight. Germany has never been conquered by anyone – it took 60 Norman knights setting cattle on fire to beat several thousand Irish in 1169. More Germanic pragmatism and less self defeating wailing is what’s needed.

And btw I know his policy will be seen as self serving for Germany but fair play to them they know you get very little by being nice

@ Gavin
Come on now. My oldest will be 18 in 9 years time. If she chooses to stay here she will spend her working life paying off someone else’s debt as the country crumbles around her. She will probably emigrate as will the others.

I think that’s important – pity nobody else does. Big picture time now!


” If she chooses to stay here she will spend her working life paying off someone else’s debt as the country crumbles around her. …Big picture time now”

That is very important. Regrettably the short term interests of many people making the key decisions outweighed any concerns about the next generation.

Seamus Coffey has two posts on the Hans Werner Sinn interview.

One has to be careful with Sinn. He has his own personal agenda with the ECB. But he is correct on this issue. Regrettably he does not seem to realise how far the horses have bolted.

The best approach to the ECB right now right now is a letter along the following lines;

March 31
Dear Mr Draghi

I have today advised both IBRC and the ICB that we have rescheduled payment of the PN to IBRC, so that the capital payments will be spread over 40 years.
The above rescheduling is necessary for this State to maintain its solvency into the future.
Please note that it is the considered view of this government that the ECB entered into an arrangement with the previous Irish government to fund a bank that was clearly insolvent and undue pressure was brought to bear on that Irish government to enter into this legally questionable PN arrangement.

We trust you will understand our reasons for taking the above actions.
We remain, as always, committed to ever closer cooperation with both the ECB and our European partners.

Beir Beannacht

@ Eureka

You missed some comment on the other thread.

Sinn is simply offering the Irish taxpayer the choice between walking into the cannon’s mouth i.e. playing Russian roulette with the economy (as I understand it was put in the Dáil) or suffering it out. In the process, he throws figures around with total abandon and little regard for the truth while at the same time putting across a populist message to the German audience he is really interested in.

It is good to note, however, that he cannot avoid admitting to the assistance that is actually being provided, both by the ECB and other governments, some not even in the EA, even if he overstates it.

@ All



@ All

Off topic but of topical interest.

Apart from the possible news from Frankfurt, another major item of news will be the outcome of the fraught negotiations on the EU long-term budget for 2014-2020. The eurosceptic UK blog Open Europe has produced a briefing note which is informative but succeeds in the remarkable feat of not mentioning Germany as a key player, the largest contributor both in gross and net terms (i.e. deducting payments the country receives in return).


The nub of the political difficulty dividing the major capitals is that Germany pays only a quarter of its assessed contribution, with the Netherlands, Sweden and Austria to the cost of the UK rebate. Austria has been ejected from this bed while Denmark wants to climb in.

It is matter of simple logic that the other large countries i.e. France, Italy and Spain have to make up for the shortfall, Germany’s “rebate on the UK rebate” being the biggest element.

A knotty problem for Merkel which Open Europe tries valiantly to gloss over (against the background of the fact that Merkel – ever the canny operator – did not reject outright Cameron’s “vision” for the future of Europe)

from the Bloomberg Link (DOCM Donie)

Monetary Financing’
“We are optimistic that an arrangement, agreeable by all parties, can be found in the context of the current discussions,” Brian Hayes, a junior minister in Ireland’s finance ministry, said late yesterday in parliament, without giving details of the blueprint.

Paul Bolger, a spokesman for the Irish Finance Ministry, and Nicola Faulkner, a spokeswoman for the Irish central bank, declined to comment on the plan. A spokeswoman for the ECB in Frankfurt said that talks on the matter are ongoing and any conclusions on the outcome are premature.

“There are a few preconditions on which any rescheduling of the notes has to be based — it has to meet the test of no monetary financing, which is a bedrock of ECB policy,” said Philip Lane, an economics professor at Trinity College Dublin. “There are many ways to come up with something.”


“The ECB don’t want the Irish central bank to be tied to a specified holding period so this could be sufficient fudge for a deal on the notes,” said Conall Mac Coille, chief economist at Dublin-based securities firm Davy. “I expect they’ll end up holding the notes for at least four to five years.”

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