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.

What about the ugly Europeans?

Paul Krugman has a follow-up post to his earlier one where he points out that being pro-European is one thing, but that being pro-EMU in the 1990s was another.

I have one gripe with the piece: it wasn’t only ugly Americans (and eurosceptic Little Englanders) who were €-sceptical. Here is a newspaper article by Peter Neary, for example, written in 1997, and I have already linked to a longer 1997 piece by Neary and Thom, as well as to a 2000 article by Thom and myself that make my own feelings on the subject pretty clear.

More important, however, are PK’s concluding comments:

Was the euro a mistake? There were benefits — but the costs are proving much higher than the optimists claimed. On balance, I still consider it the wrong move, but in a way that’s irrelevant: it happened, it’s not reversible, so Europe now has to find a way to make it work.

I couldn’t agree more. The logical move at this stage (and some cynics thought this was the point of EMU all along) would be a move to fiscal federalism, so as to smooth out asymmetric shocks, but the French and Dutch votes of 2005 make that a pretty implausible scenario. It is the logical move, though.

View from the Top

Gary McGann [Smurfit CEO] gives his views on the Irish economy in this FT video .

The Long-Term Gains to Debt Repayment

The FT has quite a lot of articles and letters on the Iceland situation.   This op-ed provides an interesting historical perspective on the gains to debt repayment.