domingo, julho 29, 2012

European Deposit Insurance still missing

I have discussed the need for pan-European deposit insurance at least 20 times in my blog PPP Lusofonia, beginning in November 2010, before the full dimension of the crisis was visible, so you might say I am obsessed with protecting local depositors and stabilizing local bank funding.  The topic is finally drawing some deserved attention in 2012, even if only to say "nein"! 

If only the refusal was justified. The fact that "no one of the top German economists is proposing deposit insurance" may  just mean that they all think alike and  that none of them are willing or able to look at the real needs beyond German borders, or that they wouldn't recognize a black swan if they saw it.   

Voilà a good example of the value of diversity!
Having witnessed bank runs in  Argentina many years ago, I would very much like to be proven wrong, for the right reasons. That is, to see the European banking crisis resolved and the Euro saved without the need to guarantee retail deposits.   What I fear, however,  is to be proven right  for the worst reasons, if the divergence and capital flight continue and result in a severe haircut to local savers, a la"corralito". 

So let's keep the concept on the table, of a European Deposit Guarantee Scheme  that would protect small (250.000€), local deposits from the risks of bank insolvencies and currency redenomination and convertibility.   A retail Deposit Guarantee is not inconsistent with the opposition to pooling wholesale bank liabilities  and with requiring  the large wholesale creditors of insolvent banks to take losses on  their risky exposure.  These are two very different sources of bank funding with different loss absorption capacities and behaviours.  To treat the deposits of local families and shopkeepers in the same manner as the bank bonds held by foreign hedge funds is absurd in economic and regulatory, as well as social, terms.

Another issue is whether we need a Deposit Guarantee scheme, or a self-funding Deposit Insurance scheme.  In the beginning, a super-sovereign guarantee is probably needed because the insurance fund would not have enough assets to be credible, unless it was funded by revenues from a new European tax on financial transactions.  That would be poetic justice indeed, to have hedge fund and program trader finance the security of local retail savings, which are so critical to the rebalancing of the Eurozone.  

But the German economists’ opposition to pooling distressed bank liabilities seems to be a case of "do what I say, don't do what I do".  In fact, German and other international banks have used this lengthy creeping crisis period to reduce their inter-bank exposure in the distressed countries, as they have been the primary beneficiairies of the ECB bailout largesse. 

Meanwhile the TARGET2 balloon keeps inflating. The Bundesbank's TARGET2 credit claims jumped  from €498 billion  in Dec-2011  to  €728 billion  as of June 2012, (starting a €96 billion  in June 2008). And  the imbalances are accelerating.  This reflects the tsunami of capital flight  such as the €163 billion that left Spain in the first five months of 2012, according to the BdE.  
How many weeks will it take  for the Bundensbank's net claims to reach €1.000 billion? 

This quote from an early blog post  remains sadly current, nearly two years later.
30-Nov-2012,  The Euro Stability Pact, the Single Currency and the Single Market  
...Thus, financial markets are likely to remain volatile, until the EU resolves the underlying balance of payments problems of the unbalanced “Single Market”, not just the symptomatic stresses within the “Single Currency”.  Among other things, this means protecting domestic retail depositors in the deficit countries rather than cross-border professional investors from the surplus countries, who are, even   now, enjoying the benefits of moral hazard...
Mariana Abrantes de Sousa

11 comentários: far the most effective means of arresting the bank run ... disse...

"But deposit insurance is different, even though it is by far the most effective means of arresting the bank run. That makes sense, but the problem is that a deposit insurance program would be a new initiative. That might be more readily challenged before the constitutional court. Chancellor Merkel may realize this. She may realize that a challenge to a deposit insurance initiative might bring to light the issue of the constitutionality of Target 2 and thereby threaten an even more intense run on the banks of the periphery of Europe.
It may be these considerations that have so far delayed any move by the EU to arrest the current bank run with the only truly effective bazooka – jointly guaranteed insurance in euros for bank deposits in all euro member nations."

Let the widows and orphans go hang disse...

here is virtually no appetite for the kind of FDIC style Eurozone-wide deposit insurance needed to halt the bank run which is still afflicting the EMU

Guardian ... wealth doesn't.trickle donwn... disse...

Wealth doesn't trickle down – it just floods offshore, research reveals
A far-reaching new study suggests a staggering $21tn in assets has been lost to global tax havens. If taxed, that could have been enough to put parts of Africa back on its feet – and even solve the euro crisis

Hoover, Caballo GmbH disse...

If Merkel will be remmembered as the Hoover of the Eurozone, Schäuble may be remmembered as Caballo

ECB Wonderbar disse...

Centrally issued eurobonds and pan-European deposit insurance (debtor side) is translated into collectivization of debt, not acceptable, NEIN

Replacement of cross-border inter-bank funding by ECB emergency lending, (creditor side) collectivization of credit exposure is wunderbar, vielen Dank, JA!

m.....0 disse...

@ ppplusofonia
I'm not saying you're obssessed. I'm not even saying you're wrong. I'm just saying your suggestion is, right now, impossible. For instance, today, the German deputy govt spokesman Mr. Streiter, said: (a) that German position to euro bonds unchanged + shared debt liability not in germany's interest (and here you might note that, in the German debate, both eurobonds and deposit guarantee is translated into collectivization of debt), (b) that government has full confidence in ECB + it sees no reason for legal action against ECB.

PPP Lusofonia disse...

Bank funding can be seen as a layer cake, with shareholders taking the first loss at the bottom and secured or cash-collateralized creditors at the top. Small retail depositors should be near top also, above bond holders and inter-bank creditors.
This investor segmentation has to be much more thorough, by type of investor rather than by type of debt instrument. Only then can you hold the different classes of investors to account, including the shareholders who are supposed to take the fist loss. One would presume that selling hybrid risk-bearing debt to illiterate investors who sign by thumbprint would be considered illegal in most EU and OECD jurisdictions. If the illiterate/widows/orphans can prove they hold these investments from the beginning, regulators should "save their savings" and fine the irresponsible banks who sold them the risky paper.

The unintended consequences (capital flight) that we are seeing now have a lot more to do with the mis-treatment of local retail depositors, whose confidence is critical to any crisis solution, than to the theat to the wholesale creditors and investors who've had nearly 3 years to get paid back (thanks to ECB emergency funding), hedge or provisision eventual losses.

Curiously, there is little mention Deposit Insurance despite references to to US-FDIC set up in the 1930's to protect local retail depositors, and segregate these from wholesale funding, including profession bond investors and inter-bank lines of credit.
Why the taboo regarding an pan-European Deposit Insurance scheme for retail depositors?

Under good prudential regulation, the taxpayer can reasonably be expected to come to the aid of small local retail savers, but should not bailout professional investors.
In a nutshell, follow the Iceland, not the Ireland, model.

Der Spiegel disse...

Capital outflows from Spain more than quadrupled in May to €41.3 billion ($50.7 billion) compared with May 2011, according to figures released on Tuesday by the Spanish central bank.

In the first five months of 2012, a total of €163 billion left the country, the figures indicate. During the same period a year earlier, Spain recorded a net inflow of €14.6 billion.

Eyes on the TARGET2 disse...

Cuidado com o balão do Bundesbank na sistema de compensação TARGET2, cujo saldo credor saltoyu de €100 B em 2008 para €498B a 12/2011 e para €728B a 6/2012. Isto reflecte a fuga de capitais do Clube Med, como os €162B que sairam da Espanha de Jan-Maio/2012.

Quantas semanas vai demorar até o saldo credor do Bundensbank no TARGET2 para chegar a € 1.000 B?

Soluções precisam-se disse...

... eliminar a incerteza é essencial, de modo a travar a implosão económica da Grécia...

e dos outros países deficitários da Eurozone

PPP Lusofonia disse...

A Espanha deveria estudar bem os exemplos da Islândia e da Irlanda, e seguir o primeiro:

- Reforçar as garantias dos depositantes de retalho
- Deixar que os credores internacionais grossistas resolvam o seu próprio problema de sobre-exposição ao sector bancário espanhol.

Seguir o exemplo da Irlanda e assumir os passivos todos da banca seria fatal para a Espanha.