Tuesday, 14 May 2013

EUROPE: Banking Union Challenges

The European Central Bank would like to encourage banks in Southern Europe to issue more loans.
The European Central Bank president says the ECB is considering buying asset-backed securities among possible options to support lending to small- and medium-sized companies.

Over the weekend, Draghi indicated that the plan is still under consideration. At a G-7 meeting near London on Sunday, Draghi said: "We looked at a variety of things, one of which was this ABS. We're still looking at that, it's one of many options. We don't have a position, certainly, on that."

Asset-backed securities got a bad name in the financial crisis and US housing crash in 2008. They were a key element in the housing bubble and served as a tool to bundle sub-prime mortgages -- investments which ultimately proved toxic for the banks that bought large quantities of them. They also, however, can be an important tool in freeing up capital to allow banks to lend more.

The ECB is keen to rally lending at banks, which account for about 80 per cent of corporate financing in the euro zone, compared with less than 20 per cent in the US. Lending to households and companies in the region contracted for an 11th month in March. Small- and medium- zed companies, which account for the bulk of employment in Italy and Spain, have been particular victims.

Acquisitions in the ABS market are not easy for the ECB to do because Europe is in a completely different set-up from the US, where there is a capital market. Now in this case the ABS would have to contain assets from the banking system of the euro system.

The motivation for considering such a move is clear. The ECB is eager to stimulate bank lending, particularly in Southern European countries where the debt crisis has made banks wary of issuing loans. But Germany is concerned that an ECB program of buying asset-backed securities could amount to the bank taking over some €70 billion in debt owed by Italy to private creditors.

German Finance Minister Wolfgang Schäuble and European Central Bank head Mario Draghi have never seemed particularly eager to avoid conflict with one another. Just in January, the two got into a mini war-of-words over the need to bail out Cyprus, with Schäuble openly questioning whether the country was systemically relevant.

Schäuble, however, is not just concerned about the threat Draghi might pose to EU treaties. He also on Monday voiced his concern that efforts to push ahead a bloc-wide banking union could be in violation of EU rules. Schäuble proposes a "two-step approach" that would leave bank bailouts in the hands of national authorities for now.

But what Schäuble seems to be forgetting is the fact that the ECB's role in this is going to be mostly catalytic because the ECB works with the EIB, with the commission, referring to the European Investment Bank and the European Commission. It is going to be very much up to these actors to act, rather than the ECB.

Germany has long been pursuing a "banking union" as a way to prevent a repeat of the euro crisis in the future. Euro-zone leaders would like a separate bank bailout fund, the ability to wind down banks that run into significant difficulties and clear rules regarding when and if taxpayers must be responsible for a bailout.

Now Germany argues that the plan of having a super-national authority for the entire euro zone,  require treaty changes before the have the necessary legal foundation. But ECB executive board member Jrg Asmussen  and Yves Mersch argued last week that it is not the case. They argued that the way forward in very tight economic situation in Europe is to look at ways to restart the ABS market.

By Guylain Gustave Moke
Political Analyst/Writer
World Affairs Blogger
Investigative Journalist

Photo-Credit: AFP