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Angela Merkel Says Existing Banking System Needs To Be Overhauled

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Angela Merkel Says Existing Banking System Needs To Be Overhauled


Financial Times has:


The plan, agreed at a meeting this week between top aides to José Manuel Barroso, commission president, and Michel Barnier, the EU’s senior financial regulator, would strip existing national supervisors of almost all authority to shut down or restructure their countries’ failing banks, giving those powers to Frankfurt.

Under the proposal, ultimate authority would pass to a new ECB “supervisory board” separate from the ECB’s existing governing council. Although its make-up is still being debated, the leading plan would create a 23-member board: a national representative from each eurozone country plus six independent members, including its chair and vice-chair.

This should be read in context with German Finance Minister Wolfgang Schäuble’s article in Financial Times:


The key lesson of the crisis, one sadly confirmed by the recent Libor scandal, is that self-regulation and light-touch supervision just do not work in the financial sector. Without adequate rules and careful policing, the interests of individuals and those of the system will invariably diverge. Left to its own devices, the market will self-destruct.

Comment: If anybody thought Germany would leave it to the free market forces and bankers’ whims to smash the world economies – they have another thing coming.


This also means that it should focus its direct oversight on those banks that can pose a systemic risk at a European level. This is not just in line with the tested principle of subsidiarity. It is also common sense; we cannot expect a European watchdog to supervise directly all of the region’s lenders – 6,000 in the eurozone alone – effectively.

Comment: This is a frontal attack on the major banks – a direct declaration of war!


 I couldn’t agree more with his reasoning: The single states have not been able to deal effectively with the bank manipulation. It will take national sovereignty away from the euro-zone countries, but that would be an illusory sovereignty, because the existing “system” has just handed what in different constitutions is a national power over to the banks. The move would actually transfer power back to the elected representatives: Rather, a 10% share of something good, than 100% misery.


In addition, if the supervisor is to reside at the ECB, decision-making in supervisory and monetary policy matters should be strictly separated so as to pre-empt conflicts of interests between the central bank’s supervisory and monetary mandates. The presence of such a Chinese wall would also make it easier for EU members that do not use the euro to participate in the supervisory system, thereby protecting the coherence of the single market.

Crucially, it would endow the supervisor with the necessary degree of accountability to the European Parliament and Council, with no additional risk to the independence of the ECB in monetary matters.

Comment: Here is the rub! While having made no bones about handing over national sovereignty to the EU – a very sore point – I don’t think the sugarcoating on the pill is quite thick enough to carry the proposal through referenda in various countries. It is clearly intended to play up to the European parliament that has been sitting for years with nothing else to do, than a somewhat perfunctory supervisory role – generally a retirement home for enfant terrible and politicians with a great future behind them.

I do not think Schäuble is so naïve as to think his proposal/demand will survive in the form he presents it; but even though you can’t buy real love with money – you can get something very similar.

Indubitably the various national bank inspections will – if not outright resign authority – be forced to toe the line. The prying open of the Swiss banks indicates that there are some juicy scandals in store for those who do not take a hint.


Indeed, the centerpiece of the rule book – the translation of the Basel III capital requirements for banks into European law, also known as CRD IV – is still being negotiated between the member states and the European parliament.

I think the final compromise should give national authorities some discretion in imposing capital surcharges on systemically relevant banks beyond the requirements of Basel III – as the G20 members have already agreed to do for globally systemic banks.

Comment: The few regular readers of this column will be singularly un-surprised! This is a brassknuckled fist in the eyes of the major banks. All their claims to indispensability are brushed aside: “Live with the rules – or die – I don’t care!”


I also support the suggestion of the MEPs to embed common language on variable pay into the CRD IV directive. Immediate cash bonuses for top bank executives should not exceed their fixed pay. And why not give a large quorum of shareholders the last say on setting these executives’ long-term variable pay as soon as it exceeds a given level?

Comment: Kicking with a hobnailed boot in the banker’s groins – giving them three larynxes! A somewhat populist proposal that will delight every household – is there anything Schäuble won’t stoop to do to bankers if it suits his purpose or just plain revenge? Apparently not!

Bankers will look back with nostalgia on the good old days when the communists literally wanted to flay and hang them. Trust me: A German Finance Minister on the warpath is something to be feared:


After Lehman Brothers’ collapse, the international community agreed not to let another systemically relevant bank fail. This was the wise decision at the time. But we have to move further. Only if it equips itself with a credible supervisor and strong rules will Europe ensure that its taxpayers are adequately protected against such failures.

This position has not been arrived at without disagreement, as the Financial Times Germany reports:


The CEO of the Bundesbank is a lonely man in the circle of European CB CEOs. That is why Jens Weidmann apparently wanted to resign like his predecessor Axel Weber [now CEO of Swiss UBS AG (NYSE:UBS) ] – the Angela Merkel persuaded him to stay.

There is a clear power struggle between the Bundesbank and the ECB. The Bundesbank is vehemently against buyouts of sick PIIGS economies, as they are considered giving drugs to addicts.

If it was only Jens Weidmann or even Axel Weber that had reservations that could have put down to injured vanity; but even their predecessor  (as CEO of Bundesbank) Jürgen Stark resigned  his post in the ECB – 3 years before his term – in the ECB his position has been taken over by Jörg Asmussen.

Comment: One thing is for certain: Merkel can’t keep on going through CB CEOs like changing underwear – and she is a very neat person. Jörg Asmussen has as much as hinted (in an interview referred to here on ValueWalk) that the reason was the sloppy conditions put on Italy in their buy out: A mistake that will not be repeated. I must say Jacob Wolinsky was very perceptive when he some time ago asked me, what was going on in Italy? Now I can answer partly: Nothing much!

But that is only partly true, as I saw in a Danish paper (can’t remember which) that Merkel and the Italian techonocratic Prime Minister  Mario Monti had met, and Angela Merkel said Italy was well under way with their banks. Italian banks suck; but the economy is not too bad.

Now the fight between the ECB and the Bundesbank is liable to end where the ECB is not going to bail out countries before they have implemented tough economic measures – just look what is happening to Greece at the moment. Simply put up or your country will grind to an absolute standstill – riots in Athens? We couldn’t care less!

The other fight between the ECB and the political side of EU is liable to end where Schäuble indicates: A European Bank inspection will be enforced; but non-systemic important banks will still be under national supervision. British banks such as Barclays and Royal Bank of Scotland will have the choice between either complying or be reduced to non-systemic important. Euro-zone or no Euro-zone: Schäuble does not write like he does without clout to back it up.

Draghi, the CEO of ECB does not appear to agree; but he has cancelled his appearance at the CB CEO’s annual summer camp in Jackson Hole:

A European bank inspection might get a coordinating role with the non-euro CB’s; but it is absurd to think they can administrate 6000 banks. The largest 20 will give them plenty of work as it is.

There is a qualitative difference between the largest banks and all the others.

The smaller banks are generally bankrupt by any sane evaluation of their assets, but the question of recapitalizing them, winding them down, firing management, etc. is hardly a trans-European matter – despite tin pot managers claims. The Systematically important banks however are quite a different matter.

The large bank move huge amounts of sovereign bonds and other debt and has the general swap-circus, investment banking, and other fancy structured investments playing one CB against the other. It is naïve to think that the Estonian bank inspection will have much influence on the local branch of Nordea f.i.

At this point it should be said that Angela Merkel is showing great leadership. She is nicknamed “Mutti” (Mom) in Europe – not inaptly. She might look exactly what she is: A middle aged housewife trying to make ends meet; but she is by all evidence very, very good:

She can deal out punishment and ground misbehaving politicians until she has use for them. She can deal with French drama-queens, Greek con-artists, smooth out ruffled feathers of CB CEO’s, cater to bruised egos, and give enraged finance ministers the support they need. Generally she engineers working compromises without wallpapering cracks in walls.

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