UK White Paper on Banking reform was just released, and contains a :
delivering stability and supporting a sustainable economy
Responses are requested by 6 September 2012
Three month is a surprisingly short time, but it does indicate quite an urgency.
The main point is the separation of detail banking from international, wholesale and investment banking. Besides unwinding the tangled web of banking, there is the purpose to eliminate the implicit guarantee of being a systematically vital bank:
Investments made on the assumption of an implicit guarantee do not reflect investors’ true risk appetite which leads to capital accumulating disproportionately in some areas of the economy. They represent a major distortion to the European single market. The principle is that there are no bank owned states. It is proposed to do this by forbidding detail banking any involvement with international and wholesale and investment banking services
A detail bank lends money and accepts deposits from private persons and medium and small businesses. There is some uncertainty as to what f.i. derivatives should be allowed. The indication is that f.i. “normal” risk coverage when dealing in foreign currency is considered normal.
The many questions asked in the whitepaper does indicate both a need for clarification and definition on one side and on the other a dissatisfaction with the banks – at times very free – interpretation of technical terms. We saw that in the Greek debacle where a term like “credit event” was anything but clear – and what was worse each bank had their own interpretation to suit their purpose – or rather interpretations depending on whether it was money to be paid or received – very impracticable.
Apparently this white paper will sprout a whole catalogue of laws to regulate banks.
There is a definite Teutonic ring to this whitepaper – which will have results (in so far as there will be results) detrimental to the banks own perceived interests and rights. The political problem is that the European finance sector cannot afford an all out war with the major guarantors:
Primarily their own governments, taxpayers and states.
Secondly by default (taken literarily) of their own government the EU (mainly Germany).
Banks have banked on their own indispensability to the economy a little too much. The status of so called systematically importance has very different interest rate benefits according to OECD’s compilation from the credit agencies – measured in notches.
The graph illustrates how fast realism has set in, when the banks own estimate of their importance met reality. In 15 month the “uplift factor” – due to the EU and what the banks thought the EU should feel committed to – has vanished like new years resolves.
The banks will have time to rue their resistance to the Tobin-tax. I had a hunch that German Finance Minister Schäuble’s apparent acceptance of defeat in that matter covered a much bigger axe behind his back. It would be naïve to think that banks in other countries in the EU will get off easier.
I will just point to Angela Merkel’s repeated statements these last few days about the fictitious alignment of interest rates for different countries at the introduction of the Euro.
The EU has indeed opened the toolbox to save their economies – and not necessarily their banks.