Author: Karl Whelan

The IFA and Retail Food Prices

For most people, one of the few positive elements of the current slump is that the sharp decline in the cost of living has somewhat cushioned the blow of declining nominal incomes. But deflation has not been a good thing for everyone. In particular, farmers have been hard hit by declining food prices.

One can only have sympathy for farmers who are struggling with current market conditions. However, the current campaign by the Irish Farmers Association (IFA) aimed at blaming retailers for falling prices is based on poor economics and its calls for policy intervention should be resisted by government.

Continue reading “The IFA and Retail Food Prices”

Too Big to Fail: A Worsening Problem?

One of the themes stressed by the BarCap research is that the funding problems of weak banks are likely to see stronger, better-funded, European banks growing bigger at their expense, thus exacerbating the Too Big to Fail problem.

This isn’t a theoretical issue. Former IMF Chief Economist Simon Johnson has been flagging for some time that the crisis has seen the biggest six banks in the US substantially increase their overall share of bank assets. Johnson’s recent AEA presentation is well worth reading. It paints a depressing picture in which the rescue of the financial sector has boosted and emboldened the leading banks and, with a timid and perhaps compromised US Treasury unwilling to act, Johnson seems to be predicting an even larger crisis down the road.

It’s hard to know how much to agree with this diagnosis. Johnson is hardly the only person discussing this as a serious issue. For instance, Mervyn King has spoken in very strong terms about this issue, for instance in this speech which has many choice quotes including:

Anyone who proposed giving government guarantees to retail depositors and other creditors, and then suggested that such funding could be used to finance highly risky and speculative activities, would be thought rather unworldly. But that is where we now are.

Andy Haldane’s “doom loop” speech is further evidence of how seriously the Bank of England takes this issue.

In the US, while the Treasury has clearly whiffed so far on this issue, influential voices such as Paul Volker and St. Louis Fed President Thomas Hoenig have also emphasised the importance of dealing with TBTF. Even more officially, the Basle Committee is apparently now looking in to special treatment of global banks that are deemed to big to fail. So perhaps there are reasons to think that, um, this time might be different.

Still, with leading international banks making money again and huge bonuses back, it’s hard not to get the sinking feeling that the bankers will be able to water down proposals for tighter regulation and that we could heading down the same path yet again.

Barclay’s Capital on European Banks

There’s been some discussion  in comments here of some recent Barclay’s Capital research on the European banking sector and it raises a number of issues worth putting on the front page. (The Sunday Tribune also had a couple of nice articles using the Barcap research; one by Ian Guider and one by our old friend Jon Ihle.)

The BarCap research is not publicly available but FT’s Alphaville column dedicated three articles to it.

The first deals with the report’s discussion of twenty banks that it deems as Too Big to Fail. The list includes both Bank of Ireland and AIB, giving Ireland ten percent of Europe’s TBTF banks, so yet again we’re punching above our weight. The report discusses the implications of the TBTF banks having to carry additional regulatory capital because of their status as a particular risk to fiscal stability. AIB and BOI stand out as having the biggest capital requirements.

The second deals with the maturity profile of the outstanding senior debt of these 20 banks. Bank of Ireland stands out, in particular, as having very substantial funding problems this year. This point is further discussed in Jon Ihle’s article linked to above.

The third article discusses the idea that economic improvement may lead to credit losses turning out to be less than expected this year. I’d be surprised if the credit loss picture for the Irish banks improves much this year.

ECB Opinion on Bank Guarantee Extension

Writing in today’s Irish Independent, Emmet Oliver notes an important story. The ECB has released an opinion on the government’s proposed extension of its bank liability guarantee.

The ECB is unhappy that the guarantee continues to cover interbank deposits:

The extension of a guarantee to cover interbank deposits should be avoided as this could entail a substantial distortion in the various national segments of the euro area money market by potentially increasing short-term debt issuance activity across Member States and impairing the implementation of the single monetary policy, which is a unique competence of the Eurosystem under Article 105(2) of the Treaty.

They also appear to be unhappy that the guarantee does not have a minimum  maturity:

In the same vein, the ECB’s recommendations on government guarantees state that ‘Government guarantees on shortterm bank debt with maturity of three to 12 months could be provided so as to help revitalise the short-term bank debt market.’ Moreover, it is noticeable that under the draft scheme there is no stated minimum maturity for any guaranteed liabilities which means that liabilities with a maturity of less than three months may be guaranteed in practice.

The ECB’s concerns about national guarantees interfering with the normal operations of interbank money markets are not restricted to Ireland. Here’s a similar opinion offered on an Austrian extension of interbank guarantees.

The ECB also notes about the Irish guaratee scheme that

for the sake of transparency, a more precise indication should be given on the method to be used to calculate the fees.

These opinions are consistent with various earlier warnings from the ECB Executive Board members about their plans to remove their exceptional extension of credit and to return to their normal operational framework. Unfortunately, we are now being repeatedly reminded that those who told us that the ECB would be lending €54 billion to Irish banks were not at all accurate.

NAMA Links to FF Exposed

Some of you may have always suspected that NAMA will be a body with close links to FF. This appears to be the smoking gun. Indeed, I’d say that this story doesn’t leave mushroom for doubts any more.