EU warning US to speed up on banking reform

1st June 2011

"The level playing field must be a reality, not an empty slogan," Barnier wrote in the May 27 letter which the newspaper said it had obtained.

"As you may recall, we implemented Basel II already in 2006," Barnier wrote. "It is essential to respect the deadlines agreed last year."

The United States has yet to fully implement Basel II. In November, global regulators endorsed Basel III – a new set of rules that will phase in tougher bank capital and liquidity requirements over six years from 2013.

Barnier, who is in charge of a regulatory overhaul of banking in the EU's 27 countries, was quoted as saying he believed the U.S. approach on bonuses for financial executives "leaves too much latitude for financial institutions" and allows them to "circumvent globally agreed principles."

"I think you agree with me that bankers' bonuses is a matter that continues to cause public outrage," he wrote.

"Getting this matter right is key to restoring our citizens' confidence in the financial system – and ultimately – their confidence in the public authorities regulating the financial institutions."

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24 thoughts on “EU warning US to speed up on banking reform”

  1. Here’s the take of SNB on negative equity: http://www.snb.ch/en/mmr/speeches/id/ref_20110928_tjn/source/ref_20110928_tjn.en.pdf

    A central bank is not a private company, it cannot go bankrupt. It has a structural long-term profit because of seigniorage and, apart from political reasons, can run with negative equity. Furthermore, the ECB does not participate in the Greek bond exchange (though in my opinion it most certainly should, exchanging bonds at purchase price).

    The only real way out for Europe (apart from returning to national currencies) is for the ECB to sign the check and more or less peg the periphery bond yields.

    As someone else put it: Imagine the fire department stating that it will only use 1000 litres of water (EFSF) when fighting a house fire. Do you feel comfortable with that or with the fire department committing to use any amount that is necessary to get the job done (ECB)?

    1. Anonymous says:

      Trichet, Strass-Kahn, Lagarde and Juncker have spent over a year stating that Greek default is not possible. Now they want to call it a voluntary restructuring ….

      Seigniorage is just a fancy word that dishonest bankers and politicians use to obscure the printing of money. This ultimately leads to hyperinflation – please google Weimar hyperinflation, it wasn’t pretty.

      In Sofia in 1996 I saw what happened after the Bulgarian communist party government printed too many banknotes. It was -20 degrees and people were hungry and cold because their worthless currency  could not buy FOOD or HEATING FUEL. Civil disorder brought down that government.

      Perhaps Greeks
      could start selling their Porsche Cayenne’s – The Telegraph reports there’s
      plenty in Larisa. More porsche’s that Greeks declaring 50,000 euro
      taxable income. The eurozone should cut out the cancer of systematic tax avoidance and
      dishonest euro entry statistics.

      If the Greeks want a fire department they should pay tax to fund it.  If
      Greeks want pensions paid and police on the streets then Greeks should pay
      tax to fund it. If the Greeks want to print away their debt then they should revert to a national currency

      1. The old hyperinflation myth:

        1) Governments spend through an account at the central bank. Every outlay is performed by ‘money printing’. By definition a budget deficit will increase the money supply no matter how it is financed.
        2) A budget deficit financed by the central bank purchasing government bonds (instead of banks) will only result in the private sector holding bank reserve accounts instead of bonds (which are ultimately long-term reserve accounts).
        3) Hyperinflation is an outcome of government deficits, especially combined with large failures in an economy’s production capacity. Foreign debt denominated in gold or foreign currencies helps a lot. That’s what happened in the Weimar republic or Zimbabwe.
        4) If the ECB buys government debt it will buy bonds for already performed government spending. It will just move bond prices close to their par value, nothing else.

        The central bank is the one that sets the interbank rate and can set the bond yield at any maturity it pleases. That’s the privilege of monopoly on bank reserves.

        1. There really isn’t any good way out for Greece. In the long run, going back to the Drachma and repudiating 95% of the debt is their best answer, though there will be 2-3 years of Depression. The Troika’s answer is for them to pay most of their debts and have the Depression last a decade or more. 

        2. ExpatinBG says:

          Hyperinflation is not a myth, it has happened enough times in the past 100 years to be proven beyond reasonable doubt.

          If you want to print away the Greek debt, then start printing Drachma. The Germans refuse to allow seigniorage because they KNOW WHERE IT LEADS …

          1. Did you READ anything that i wrote? Hyperinflation is a government deficit phenomenon, not a central bank phenomenon. If the government spends beyond the productive capacity of the economy and we have a breakdown in the underlying capacity then we can have hyperinflation.

            That has nothing to do with the current hard austerity situation in Eurozone. An ECB intervention will just move bond values closer to their par values and yields closer to the long-term interbank rate. How exactly is that considered inflationary?!
            ECB will just increase European banks bank reserve accounts which will just end up in its deposit facility (which pays 0,75% instead of the high bond rates).

            ECB maintains bond yields in exchange for austerity. Where’s the inflation risk in such an environment?

          2. JW says:

            KK I think this analysis is correct.

          3. ExpatinBG says:

            Yes I read what you wrote. And I recommended that you leave the euro. And I recommended that you practise your seigniorage with Greek drachma. If you are correct then Greece will be wealthy, but if I am correct then the drachma will join the Zim dollar.

    2. Anonymous says:

      Hi Kostas and thank you for the link. The message is familiar but I had not seen that particular paper.

      It is a blog post or two to fully discuss this but let me quote from the SNB itself.

      “So, as a rule, the question of whether the SNB’s equity is too low does not arise. True, in a crisis the fulfilment of its monetary policy mandate can result in losses, and even in a situation in which equity is negative for a short period. Yet, because of the structural profit potential, this kind of situation is only likely to be temporary. Thus, a central bank can usually restore a positive equity position all on its own ”

      I discuss the word temporary and the use of it by central banks rather a lot…..

      And I notice the use of “usually restore” at a time when events are very unusual.

      As a theme here my contention is that there is a clear difference between the SNB which is backed by the Swiss taxpayer and the ECB which in its “Euro” operations is implicitly backed by the 17 National Central Banks who are explicitly backed by their own taxpayers.

      For example if Greece does default what happens if it also defaults on the ECB?

      1. If Greece defaults on ECB holdings then ECB will have negative equity. Depending on political will, it will just have to run with negative capital for some time until its profits restore a positive balance.

        Surely it won’t stop operations or declare bankruptcy :)
        Unfortunately (for the European people) most of the current problems are a matter or political will rather than economic barriers.

  2. JW says:

    Hi Shaun, following on from KKs comments, is the ECBs legal remit that much different from the SNB ( or any other national central bank)? MMS advocates would argue that the ECB could create the necessary funds at the ‘click of a mouse’. More classical economists would say, ah yes but also create inflation.
    So which is the ‘lesser evil’? To risk inflation and indirectly tax 99% of the EZs population; or take the risk of bank closures and possible Greek social mayhem resulting from Greek default? Of course it could be argued that a ‘moral and ethical’ system should allow a 3rd alternative, ie ringfencing the fall-out to just the actual people who agreed and took the ‘bad loans’; but our economic system is rigged to protect this from happening and inevitably leads to socialising the costs.
    I can’t see a solution to Italy other than the ECB route, its public debts are too big for any ‘sticking plaster’ to work.

    1. DaveS says:

      If you believe that that the deficit countries will solve their problems by a return to growth then perhaps “temporary” inflation is the lesser evil. However I feel there are deeper structural problems with these economies and QE simply perpetuates these. This will make it impossible to exit QE and the resulting stagflation will fatally damage these economies – I fear the social mayhem will then be much greater and much more widespread. Of course the cynic in me says that this is well understood by Mervyn and co. but as you correctly point out – the economic system is “rigged”

      1. JW says:

        Hi Dave S, any QE from the ECB is likely to create inflation in Germany,Holland etc although it would be used to absorb the debt.

    2. Anonymous says:

      Hi JW

      Actually the inflation issue is not one that I am discussing particularly here. I do think it is an issue but am thinking in this instance of the flaws in the structure of the ECB with its implicit backing by the 17 National Central Banks as I have described in my reply to Kostas.Like so many Euro zone issues it has not been properly thought through and planned for and it comes directly through the linking of separate nations.

      In Kostas’s SNB paper it does not occur as it is in effect an adjunct to a state which can raise taxes, issue its own currency and so on…

      Taking your last sentence not only do you risk inflation but you create yet more moral hazard in my opinion.

      1. JW says:

        Shaun, surely the Board of the ECB is able to sanction large Bond purchase without an EU treaty change? Thus it could embark on a QE if Germany sanctioned it.
        How do you suggest the Italian situation is dealt with if not QE?

  3. Drf says:

    “As I have pointed out before the song “more,more more” aptly represents
    Mr.Posen’s views where he always wants more QE and everybody else has to
    suffer yet more inflation.” 

    Absolutely correct Shaun; but of course although he claims to be a “Keynesian” like all of them he demonstrates that he is at best only a semi-Keynesian and has no balance, in that he only like the goodies so favoured by the left-wing, namely the QE phase and never the Keynesian redemption phase on the economic up-trend or when inflation gets out of control. (That Keynesian phase is supposed to ensure of course that the temporary boost to the economy to reduce the pain of the downturn does not lead to inherent structural inflation in the longer term, like that which we have seen due to semi-Keynesianism practised continuously over the last 80 years or so; but of course the redemption phase would loose votes in a democracy, so the Posens like to omit it and thus we get the rampant ongoing inflation to fund an unsustainable Socialist macro-state – the EU!)

    1. JW says:

      Drf, must admit I always find it difficult to differentiate between a fascist state and a communist one. However if you think that multi-national corporation domination of economies lies at the heart of today’s economic woes, its probably more a fascist state we are looking at in the EU, and for that matter in the US and the UK. Whatever its called, the 99% in all these ‘states’ are plundered by the 1%.

      1. Drf says:

        Hi JW; I am afraid I could not disagree more with your reply.  The EU very clearly by its predominant characteristics now revealed is an extreme Socialist state; if you want to call that Communist then I would not disagree.

        1. JW says:

          Drf, not surprised you disagree from your previous posts, personally I find this ‘left or right’ stuff a waste of time. ‘Free market capitalism’ clearly controls the world. That is translated as multi-internationals and their investors. If thats ‘communism’ to you, then fine.

          1. Drf says:

            JW; we do not have Capitalism in the Western world at present nor have done so for some long while. Once the state bails out any enterprise or entity which has become insolvent and has introduced a Welfare emporium then it has enforced a departure from capitalism. In the latter present scenario when supposed enterprises like Banks have been bailed out their debts from insolvency have been effectively socialised, but the profits have not! That is not Capitalism.

            In any case a common error which all Socialists make is to believe that there is Capitalism and Socialism as two extremes; that is not so. All advanced forms of civilisation are based on capital investment. They are thus capitalist in that sense. You cannot have enterprise, industry or technological advancement without the investment of increasing amounts of capital and skills; this is what makes the emergent nations unable to enter the advanced plateau of economic development. The only political difference is who owns the necessary capital – individuals or the state. Inflation destroys capital as Lenin observed. Significant inflation particularly over long sustained periods, as in the UK for example, by its debasement of the capital employed destroys the wealth-creating processes, and sets back an economy in an extreme case to a similar position of an emergent nation. We can observe these long term effects of sustained political idiocy in the UK as an example, using continuous inflation as a key part of government financing, in a pretence of Keynesianism, but as I pointed out deliberately omitting the redemption phase thus generating cumulative and ongoing inflation. This has been a significant component in the destruction of the UK’s industrial and technological base over the last 80 years or so, for which it will now pay dearly.

            So it is impossible as you claim to not “waste time” with the left and right stuff if you are going to properly analyse cause and effect in modern economics! As I have pointed out previously, politics and economics are inseparable, because politics is actually about how you configure economics.

    2. Anonymous says:

      More plausibly policymakers have been cozened by economists of a certain type into believing that the economic system is self regulating and moderating.  Other economists saw the moderation in the relationship between economic variables  as a prelude to serious problems.  

  4. Anonymous says:

    A W “Bill” Phillips was certainly an interesting character.  He left school at 15, took up various jobs including being a crocodile hunter and gold miner.  He qualified as an engineer through a correspondence course.  He was decorated for his part in the defence of Singapore and was a prisoner of war of the Japanese.  

    His place in the history of economic thought should parallel that of Sir George Cayley in aeronautics.  That is if Economics can get itself into a fit shape.

    Phillips own research programme was stunted by the lack of programming power in the 1950s. He adapted methods developed in engineering to provide a diagram of a dynamic model of the economy.

    In his view economics was peculiarly bad shape to develop economic policy recommendations as it relied (and relies today) upon comparative static equilibrium analysis where “the time path of income, production and employment during the process of adjustment from one state to another”.    As part of this research Phillips hypothesised that there was a non-linear relationship between “the level of production and the rate of change of factor prices.  Non-linear relationships between economic variables in a dynamic model of the economy mean that there are cycles rather than the economy flipping out of control.  

    There is every difference between this and the trade off in equilibrium between inflation and money wage rates.  This emanates from Phillips late (1958) empirical work which focused on just one factor that would affect the rate of change of money wages – the level of employment.  Phillips in fact put forward three factors:  (1) the demand for labour (time) relative to supply. (2) the rate of change of employment affecting the rate of change of money wages. (3)  a feedback between the rate of change of inflation and the rate of change of money wages.

    What happened in engineering and science, but not in Economics, was improving computing power in the 1970s and 1980s meant that these models became a reality. Researchers found that non-linear models even with a small number of variables exhibited behaviours at the aggregate level that could not be explained by behaviours at the component level.

    Economics at the time was going in the opposite direction: making Macroeconomics consistent with Microeconomic assumptions about rationality and maximising individuals and firms.

  5. More cheerful news: “Italian Prime Minister Silvio Berlusconi on Wednesday failed to issue growth-boosting measures demanded by European Union authorities ahead of the Group of 20 summit,raising further doubts about the government’s willingness to pass economic reforms aimed at restoring investor confidence in the country.”

  6. JW says:

    Drf, I believe you are saying, in summary, that capitalism has to include failure, ie bad decisions are punished, investors can lose wealth. Here we agree.
    However you seem to equate this not happening because of ‘socialists’? I suggest it doesn’t happen, and we have ‘socialisation’ of costs, because the 1% who own/run most of the capital have rigged the system so that the ‘cost’ is continually borne by the 99%. This is not ‘left or right’ politics, you can label the 1% anyway you want.

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