Europe has been in a continuous state of systemic banking fragility since August 2007. This puts it in contrast with the United States, where the phase of systemic banking crisis ended in 2009, even though the broader economic crisis has proved difficult to address and casts a shadow on America's long-term fiscal outlook. One indication of Europe's prolonged state of fragility is that the ECB's extraordinary liquidity support to euro area banks (in the ECB's parlance, fixed-rate full allotment in refinancing operations), introduced in October 2008, remains in place to this day. By contrast, the closest comparable program on the US side, the Federal Reserve's Term Auction Facility, was gradually phased out and expired in March 2010. Similarly, in October 2008 the European Commission's Directorate-General for Competition Policy (DG COMP) made its enforcement practices on the control of State Aid to the banking sector more flexible on the basis of Article 87.3b of the European Community Treaty, which allows for aid "to remedy a serious disturbance in the economy of a member state." This adaptation of competition policy to crisis times has been continuously in place since then, and European Commissioner for Competition Policy Joaquin Almunia recently announced that it would remain so until early 2012 at least.
In comparison with the United States, the European banking sector has until now gone only through modest restructuring as a consequence of the crisis, particularly in the euro area. Among major European financial institutions, only Halifax Bank of Scotland (HBOS) in the United Kingdom and Fortis in the Benelux countries were dismantled or forcibly merged into competitors at the height of the crisis, in comparison to Countrywide Financial, Bear Stearns, Lehman Brothers, American International Group, Washington Mutual, Wachovia, and Merrill Lynch which were merged or restructured in the United States. Moreover, the US bank receivership process administered by the Federal Deposit Insurance Corporation meant that a significant number of small-and medium-sized banks (and some large ones, such as Washington Mutual) were allowed to fail. In Europe, where most countries did not have an orderly resolution process for depository institutions in 2008-09, senior creditors were made whole in almost all cases of individual bank problems, and so were junior creditors in the vast majority of cases.
In the spring of 2009, the US Supervisory Capital Assessment Program (commonly known as "stress tests") identified ten of the country's 19 largest financial institutions as undercapitalized, and the subsequent wave of capital strengthening helped investors regain trust in the institutions at the core of the US financial system, even as smaller banks continued to fail in large numbers in 2009 and 2010. In the European Union, no similar process of triage and recapitalization was conducted in time to restore confidence. A first round of European "stress tests" in September 2009 had negligible market impact as only aggregate numbers, not bank-by-bank results, were published. A second round of stress tests led to the publication of bank-by-bank results for 91 financial institutions across the European Union in July 2010, but the disclosures lacked specificity and comparability, and some institutions that had passed the tests, such as Allied Irish Banks, were exposed as severely undercapitalized shortly afterwards. A third round of stress tests led to better disclosures in July 2011, but identified only limited recapitalization needs.
The European reluctance to accept bank failures and banking sector restructuring can be traced to various factors. To start with, banks are comparatively much larger in Europe than they are in America, compared with the size of national economies and even after the consolidation that the crisis has induced on the US side. According to the Bank for International Settlements, in 2009, the aggregated assets of the top three banks represented 406 percent of GDP in the Netherlands, 336 percent in the United Kingdom, 334 percent in Sweden, 250 percent in France, 189 percent in Spain, 121 percent in Italy, and 118 percent in Germany, compared with 92 percent in Japan and "only" 43 percent in the United States. This is due to a combination of two main factors. First, banks generally play a larger role of financial intermediation in Europe than in the United States, where non-bank financial intermediaries and capital markets provide a larger share of total capital and credit. And second, many European banks have aggressively expanded internationally, thus increasing the scope of activities that, to the extent that these banks aren't allowed to fail, are implicitly supported by taxpayers in the home country. On average, the largest European banks have 57 percent of their activity outside of their home country (in the rest of Europe and in the rest of the world in about equal proportions), while the average ratio is only 22 percent among a comparable sample of the largest US banks.
Moreover, there is a high degree of interdependence between banking systems and policy making systems in most Western European countries. This interdependence also exists in the United States, as my Peterson Institute colleague Simon Johnson has repeatedly argued, and its specific forms vary widely from one country to another. In Germany, many locally elected officials sit on the boards of local public banks, an activity from which they typically derive a not insignificant part of their personal income; publicly-owned banks at regional (Land) and sub-regional levels are often used as tools for local economic development policy. In Spain, a similar situation used to exist with the local savings banks (Cajas), even though this is now changing as many Cajas are being merged and restructured under compulsion from the central government. In Italy, non-profit foundations with strong links with local political establishments are key shareholders in most prominent financial institutions. In France, the regional component is perhaps less strong but at the national level, financial policymakers and bank executives tend to come from the same small pool of senior civil servants, and it is common practice for the former to switch to a high-level bank position at mid-career. In all these countries and elsewhere in Europe, this interdependence is a significant factor in the national political economy.
Moreover, the protection granted by national governments to their "home" banks does not have to be a function of cozy links between public and private-sector elites, as there is also a strong component of economic nationalism at play. In most euro area countries, banks are frequently seen as national or local "champions" whose prosperity is presumed to be broadly aligned with the national interest—even where this presumption does not rest on specific, compelling evidence. Resistance to cross-border bank takeovers remains deeply entrenched, particularly in France, Italy, and Spain, but also in parts of Northern Europe—even though the ongoing restructuring of the Spanish banking sector might eventually result in a change in attitudes there. The same factors help explain why national policy making communities are often in collective denial of the moral hazard created by the too-big-to-fail problem, as well as in denial of the conflicts of interest that are potentially embedded in the universal bank model which combines retail banking, investment banking, plus in many cases asset management, insurance activities, and proprietary investment within diversified financial conglomerates. In many Continental European countries, supervisory authorities harbor a culture that favors keeping sensitive information tight between themselves and the supervised entities, and are thus inclined to resist calls for public disclosures about financial risks and exposures, as was illustrated by controversies around the successive rounds of European stress tests.
No comments:
Post a Comment