Basel II Bank for International Settlements Banking Credit risk Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II, which was initially published in June 2004, is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face. Advocates of Basel II believe that such an international standard can help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. In practice, Basel II attempts to accomplish this by setting up rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability. The final version aims at: While the final accord has largely addressed the regulatory arbitrage issue, there are still areas where regulatory capital requirements will diverge from the economic. Basel II has largely left unchanged the question of how to actually define bank capital, which diverges from accounting equity in important respects. The Basel I definition, as modified up to the present, remains in place. Basel II uses a "three pillars" concept – (1) minimum capital requirements (addressing risk), (2) supervisory review and (3) market discipline – to promote greater stability in the financial system. The Basel I accord dealt with only parts of each of these pillars. For example: with respect to the first Basel II pillar, only one risk, credit risk, was dealt with in a simple manner while market risk was an afterthought; operational risk was not dealt with at all. The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk,operational risk and market risk. Other risks are not considered fully quantifiable at this stage. The credit risk component can be calculated in three different ways of varying degree of sophistication, namely standardized approach,Foundation IRB and Advanced IRB. IRB stands for "Internal Rating-Based Approach". For operational risk, there are three different approaches - basic indicator approach or BIA, standardized approach or TSA, and advanced measurement approach or AMA. For market risk the preferred approach is VaR (value at risk). The second pillar deals with the regulatory response to the first pillar, giving regulators much improved 'tools' over those available to them under Basel I. It also provides a framework for dealing with all the other risks a bank may face, such as systemic risk, pension risk,concentration risk, strategic risk, reputation risk, liquidity risk and legal risk, which the accord combines under the title of residual risk.It gives bank a power to review their risk management system. The third pillar greatly increases the disclosures that the bank must make. This is designed to allow the market to have a better picture of the overall risk position of the bank and to allow the counterparties of the bank to price and deal appropriately. On September 30, 2005, the four US Federal banking agencies (the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision) announced their revised plans for the U.S. implementation of the Basel II accord. This delays implementation of the accord for US banks by 12 months [1]. The Federal Reserve System is a private banking corporation and not part of the Federal government. On November 15, 2005, the committee released a revised version of the Accord, incorporating changes to the calculations for market risk and the treatment of double default effects. These changes had been flagged well in advance, as part of a paper released in July 2005. [2] On July 4, 2006, the committee released a comprehensive version of the Accord, incorporating the June 2004 Basel II Framework, the elements of the 1988 Accord that were not revised during the Basel II process, the 1996 Amendment to the Capital Accord to Incorporate Market Risks, and the November 2005 paper on Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework. No new elements have been introduced in this compilation. This version is now the current version. [3] On November 1, 2007, the Office of the Comptroller of the Currency (U.S. Department of the Treasury) approved a final rule implementing the advanced approaches of the Basel II Capital Accord. This rule establishes regulatory and supervisory expectations for credit risk, through the Internal Ratings Based Approach (IRB), and operational risk, through the Advanced Measurement Approach (AMA), and articulates enhanced standards for the supervisory review of capital adequacy and public disclosures for the largest U.S. banks [4]. On July 16, 2008 The federal banking and thrift agencies ( The Board of Governors of the Federal Reserve System; the Federal Deposit Insurance Corporation; the Office of the Comptroller of the Currency, and; the Office of Thrift Supervision) issued a final guidance outlining the supervisory review process for the banking institutions that are implementing the new advanced capital adequacy framework (known as Basel II). The final guidance, relating to the supervisory review, is aimed at helping banking institutions meet certain qualification requirements in the advanced approaches rule, which took effect on April 1, 2008. http://www.occ.gov/ftp/release/2008-81a.pdf One of the most difficult aspects of implementing an international agreement is the need to accommodate differing cultures, varying structural models, and the complexities of public policy and existing regulation. Banks’ senior management will determine corporate strategy, as well as the country in which to base a particular type of business, based in part on how Basel II is ultimately interpreted by various countries' legislatures and regulators. To assist banks operating with multiple reporting requirements for different regulators according to geographic location, there are several software applications available. These include capital calculation engines and extend to automated reporting solutions which include the reports required under COREP/FINREP. Regulators in most jurisdictions around the world plan to implement the new Accord, but with widely varying timelines and use of the varying methodologies being restricted. The United States of America's various regulators have agreed on a final approach - see [5] for the Notice of Proposed Rulemaking. They have required the Internal Ratings-Based approach for the largest banks, and the standardized approach will not be available to anyone. In India, RBI has implemented the Basel II norms. In response to a questionnaire released by the Financial Stability Institute (FSI)[6], 95 national regulators indicated they were to implement Basel II, in some form or another, by 2015. The European Union has already implemented the Accord via the EU Capital Requirements Directives and many European banks already report their capital adequacy ratios according to the new system. All the credit institutions will adopt it by 2008.Prof. Peter Spencer, of the Ernst & Young Item Club, regarded as "one of Britain's leading economists". It was then that a report of his views said:
…conflicts caused by the Basel system of banking regulations, which determine how much capital banks must to keep their books in order, are the root cause of the crunch and were serving to worsen the City's plight.
The regulations meant that banks forced to take off-balance sheet assets from troubled structured investment vehicles on to their books had little choice but either to raise money from abroad or cut back dramatically on their spending, he said.
He warned that, if London's money markets remained frozen and the authorities retain the strict Basel regulations, the full scale of the eventual credit crunch and economic slump could be "disastrous".
courtesy Dr Richard North.Basel II Accord
From Wikipedia, the free encyclopedia
Basel Accord - Basel I
Basel IIBackground
Monetary policy - Central bank
Risk - Risk management
Regulatory capital
Tier 1 - Tier 2Pillar 1: Regulatory Capital
Standardized - F-IRB - A-IRB
PD - LGD - EAD
Operational risk
Basic - Standardized - AMA
Market risk
Duration - Value at riskPillar 2: Supervisory Review Pillar 3: Market Disclosure Business and Economics Portal Contents
[hide][edit]The Accord in operation
[edit]The first pillar
[edit]The second pillar
[edit]The third pillar
[edit]September 2005 update
[edit]November 2005 update
[edit]July 2006 update
[edit]November 2007 update
[edit]July 16, 2008 update
[edit]Basel II and the regulators
[edit]Implementation progress
[edit]See also
[edit]References
[edit]External links
Wednesday, October 01, 2008
The smoking gun
By general accord, much of the current financial crisis arises from "regulatory failure", something to which numerous references have been made, not least by the shadow chancellor over the weekend, when he complained that "Gordon Brown's regulatory mechanism has comprehensively failed".
Osborne has though been reticent about identifying the specific failure and it took his boss David Cameronyesterday to hint at the specifics. There is a need, he said, "to break the self-fulfilling cycle that is reducing banks' ability to lend." The problem is this, he added:When the value of financial assets falls, a new international accounting regulation called "marking to market" automatically downgrades the value of banks. They are less able to raise the money to carry on their business. That in turn causes further falls in the value of financial assets. And this is making the financial crisis worse than in previous downturns.
Cameron himself, however, blurs over the precise cause of this problem and it took The Guardian to add more detail. The paper tells us:A European Union directive passed in 2001 and adopted as a new accounting standard in the UK in 2006 dictates that banks have to value their assets on a daily basis. To do this they must base their calculations on the market value of each asset if it were liquidated that day. The problem with this is that as share values tumble in response to the credit crisis, millions of pounds are wiped off bank balance sheets causing a spiral of decline in asset values.
Actually, The Guardian has got it wrong. The "European Union Directive" in question is Directive 2006/49/EC of 14 June 2006 "on the capital adequacy of investment firms and credit institutions". Its short title is the Capital Adequacy Directive. This must be read in conjunction with Directive 2006/48/EC, the pair of Directives together implmenting the agreement.
That it is an EU directive, though, does not tell the whole story for it is this directive which implements crucial parts of the now notorious Basel II agreement. It is that agreement that which is the heart of the current problems which the banks are experiencing.
That Basel II is the problem – the "smoking gun", so to speak - has been widely promulgated for some time by acknowledged experts, most notablylast December by Prof. Peter Spencer, of the Ernst & Young Item Club, regarded as "one of Britain's leading economists". It was then that a report of his views said:…conflicts caused by the Basel system of banking regulations, which determine how much capital banks must to keep their books in order, are the root cause of the crunch and were serving to worsen the City's plight.
This theme was picked up by Ambrose Evans-Pritchard a few days later, who cited Spencer saying that, "the global authorities have just weeks to get this right, or trigger disaster."
The regulations meant that banks forced to take off-balance sheet assets from troubled structured investment vehicles on to their books had little choice but either to raise money from abroad or cut back dramatically on their spending, he said.
He warned that, if London's money markets remained frozen and the authorities retain the strict Basel regulations, the full scale of the eventual credit crunch and economic slump could be "disastrous".
Dismissing the assumption that banks are not lending to each other on the money markets because they lack confidence in each others' potential solvency, he argued that they were, in practice, prevented from lending the cash at all because it could leave their balance sheets falling foul of the Basel regulations.
"If these funding routes are not reopened it will have massive consequences for the economy as a whole," he said. "It will make 1929 look like a walk in the park."
He dismissed as "window dressing" the move announced by central banks around the world this week to pump extra money into the money markets and increase the type of collateral they will accept in return, in an effort to get them running again.
"This won't get to the core of the problem: the fundamental lack of collateral. As these problems drag on, the consequences for the macro-economy of not relaxing [the Basel regulations] are unthinkable."
Not only do the regulations, which stipulate that banks must have a minimum of 8pc capital among their liabilities, deter banks from lending to each other, they will also limit the amount they can lend to households and businesses. This could escalate the anticipated economic downturn next year significantly, he said.
The Spencer analysis was then essentially repeated at the end of January by another acknowledged expert, Prof. Tim Congdon.
In the context of the Northern Rock affair, Congdon asserted that, "the Basel rules have failed", then arguing that "the scientific precision of the Basel rules was shown to be hocus-pocus." Banks, he wrote:…did not know the true state of each other's capital and, hence, their ability to repay loans. Inter-bank markets seized up. If one bank - such as Northern Rock - ran out of cash, it had only one place to go, its central bank. But the assumption that the central bank would, quickly and reliably, extend a lender-of-last-resort loan to a solvent, but illiquid bank - an assumption written into banking textbooks for decades - was invalidated by the Bank of England's reluctance to lend in crisis circumstances last August.
So it was yesterday that Cameron stood up in front of the Conservative Party conference and declared that "…our regulatory authorities, together with the European regulators, need to address this difficult issue."
He did not name the Basel II agreement and, crucially, neither did he identify the more immediate cause of the problem, the EU Capital Adequacy Directive. Had he done so, of course, there would have been uproar, and the EU would have been catapulted to the top of the political agenda, which is the last thing Cameron would have wanted.
And it is the Directive which is now the problem. The reason for this is that, although the original Basel II agreement was produced in June 2004 with the assent of the British authorities – which had pushed hard to their adoption – the sponsoring organisation, the Basel Committee on Banking Supervisiondoes not produce legislation.
Instead, it "formulates broad supervisory standards and guidelines" and recommends statements of best practice in banking supervision "in the expectation that member authorities and other nations' authorities will take steps to implement them through their own national systems, whether in statutory form or otherwise."
Had the UK been an independent country in 2004 and subsequently, the government would have implemented the Basel II agreement into UK legislation, either through an Act of Parliament or through Regulations (SIs) – or a combination of both.
The trouble was that, not only was the UK a member of the European Union, financial services regulation was (and is) a "competence" of the EU and the UK had thereby ceded authority to legislate in this area. Thus, instead of being adopted into British law directly, it was adopted via an EU Directive.
That, at the time, did not present the government with a problem as it has been an enthusiastic supporter of the agreement. But, now that the flaws in the agreement have been exposed, or shown to be "hocus-pocus" as Congdon maintains, the provisions cannot be changed unilaterally by the British government. They are now part of EU law so, in order to achieve change, all we can do, as Cameron euphemistically put it, is have "…our regulatory authorities, together with the European regulators," address "this difficult issue."
And that equivocation is also part of the problem. One might ask why, if Cameron is now so (rightly) certain as to where the problem lies, his shadow chancellor has not raised it before.
To be fair to him, he has. He raised it on 21 April 2008 in the House of Commons in response to a statement by Alistair Darling on "financial stability". But it was only one sentence where he told Darling that the moves he had announced "should include reforms to the Basel accords."
Then, in a Newsnight interview on 17 September, just a few days ago, he mentioned it again, a reference which met with the approval of Telegraphcolumnist Gerald Warner, who noted:Osborne did not overreact to the crisis by rushing to propose a host of regulations to monitor the stable door now that the horse has bolted. Instead, he proposed revisiting the Basel II Accord, which is now four years old.
Thus, while Osborne has belatedly come to the view shared by Spencer and Congdon, and evidently passed this view to his boss, neither he nor Cameron have mentioned Directive 2006/49/EC, nor even the European Union. Yet it is the Directive which must be changed.
Yesterday, Cameron entitled his speech, "Together we will find a way through". What he did not specify, however, was how he was going to "find a way through" the EU labyrinth to remove a damaging piece of legislation that is at the heart of this crisis.
Thus, while Osborne is accusing Labour of being "in denial" over its role in the financial crisis, the Conservatives too are indulging in their own form of denial.
The elephant has re-acquired its cloak of invisibility.
The picture shows the headquarters of the Bank for International Settlements in Basel, which hosts the Basel Committee on Banking Supervision meetings.
COMMENT THREAD
Wednesday, 1 October 2008
Basel II Accord.conflicts caused by the Basel system of banking regulations, which determine how much capital banks must raise
(Redirected from Basel II)
=============================
Posts
Printable Version
The Crisis - Cause, Effects, and madness!
Richard North has done the work so why reinvent the wheel ?
I’m glad that Cameron, gets some credeit as just about the only
politician to have spotted this
I follow this resumé with Ambrose Evans-Pritchard’s overview of the
future of the euro [which you will have seen yesterday Will Hutton
of The Guardian - where else? - wants Britain to join] in which he
includes the startling “we may find that it destroys the European
Union” - nb NOT the euro - the EU itself!
And then there is the bizarre outcome of all the money the European
Bank has lent to individual banks! When they get it they don’t know
what to do with it and so they put it on deposit at a loss with - er
- the European Bank! Mad!
===========
EUREFERENDUM 2.10.08
The heart of the crisis
A number of British newspapers have picked up on the US "mark to
market" story. Bizarrely, though, none cross-link the story with
Cameron's speech on Tuesday.
One of the very small crowd is The Daily Telegraph which headlines,
"Financial crisis: SEC cheers finance companies with mark-to-market
ruling".
Writer Jonathan Sibun then tells us that the Securities and Exchange
Commission brought some much needed cheer to the US financial sector
after issuing accounting guidelines that could help curb the billions
of dollars of writedowns reported by the country's leading banks.
The US regulator, according to Siburn, has told banks that despite
fair-value accounting regulations they did not have to use only fire-
sale prices to value bad assets but could also use their judgement.
What is really interesting though is the response of the New York
Stock Exchange, which conjured up a "late rally" leaving the Dow
Jones index up 485.2 to 10850.7 and the S&P 500 up 58.3 to 1164.7,
its biggest one-day rise in six years.
As background, Siburn tell us that: "Fair-value accounting requires
companies to value their assets at current market prices." He adds
that, "Banks have been forced to push through billions of dollars of
writedowns in recent months after valuing assets at the same prices
raised by ailing companies undergoing last-ditch sale." Thus, we are
told that the SEC move effectively allows banks to switch from mark-
to-market accounting to hold-to-maturity accounting.
Actually, one of the value of forums and engaging on blog comment
section is that these lazy assertions are challenged, prompting more
research.
The problem, per se, is neither "mark to market" (or "marking to
market" as Cameron inexpertly put it). Nor is it that other jargon
issue: "fair value accounting". As Wikipedia helpfully tells us, both
accounting devices developed among traders in the 19th Century. There
is nothing new about either.
Where the problem lies is in the extraordinarily laborious system of
risk assessment, combined with a requirement to structure different
types of asset, giving rise to entirely artificial under-valuation,
which is the current cause of the bank liquidity problems.
It was this system which emerged from the Basel II process and which
was adopted by the United States, the EU and other financial
administrations.
Interestingly, the inherent problems with the system were recognised
months before the Basel II agreement was signed, when in January
2004, none other than the Financial Services Authority noted:
"There's a potential that the capital requirements for some banks and
investment firms could rise during a slowdown in economic activity,
at the same time that asset values are reduced and mark-to-market
losses are incurred."
This is the precise problem that the US authorities have addressed
and to which Cameron referred on Tuesday.
It now emerges that EU financial services commissioner Charlie
McCreevy was fully aware of the problem in March 2008 when, in front
of the Chartered Insurance Institute in London, he questioned the
"mark to market" rule, asking whether it was: "always the correct
rule when it comes to illiquid assets - or to liabilities for that
matter." He continued:
Does it make sense for example that the worse the credit or liquidity
risk attached to a company's bond liabilities gets, the greater the
boost to that company's balance sheet net assets becomes, as the
"mark to market" value of those bond liability falls? Are the "mark
to market" rules having unintended consequences especially in these
times of turmoil?
It was then that he announced that he was calling for an "analysis"
of the issue in order to "draw the lessons from the use of 'mark to
market' in the light of current market conditions."
Yet, nothing of this percolates the Telegraph story, even though the
very same rules that applied to the US until yesterday still apply to
the UK and all other EU member states. All we get is the bland
statement that, "Nicholas Sarkozy, the French President, is expected
to call for a relaxation of fair-value accounting regulations in
Europe…".
We do not even get that much from The Guardian, which is another
paper to cover the story. It offers the headline, "SEC gives banks
more leeway on mark-to-market," but has nothing on the EU dimension
and, like the Telegraph fails to make the Cameron link.
The Times, on the other hand, does frame its story on UK experience,
oddly not referring to Cameron either. It tells us that:
The heavy losses that many banks have taken on these assets have
seriously weakened their balance sheets, forcing them either to raise
more capital or rein in new lending. A number of leading banks have
pressed for a suspension of the mark-to-market rules. But others,
notably Goldman Sachs, have argued strongly against.
The critics say that such a move would be very dangerous and point to
the experience of the US savings and loan crisis, in which the lack
of such accounting rules meant that the insolvency of scores of
lenders went unrecognised for a prolonged period with very costly
consequences.
But if it would be dangerous to scrap fair-value accounting
permanently, that does not mean it should be ruled out as a temporary
emergency measure. If the American bank bailout plan fails, it should
be seriously considered.
Then the great Anatole Kaletsky has a go. He informs us:
In recent years, however, accountants and regulators have replaced
such probabilistic judgements of economic fundamentals with a
principle called "mark to market". Under this new approach, promoted
passionately by conservative financiers and academics who believe
that "the market is always right", banks base their profits not on
how much income they expect to receive in the future but on how much
money they could raise immediately if they sold all their loans and
mortgages in the market at the best price they could fetch.
This reform didn't make much difference when markets were working
smoothly and financial prices reflected long-term asset values. But
in the wildly volatile and panicky conditions of the past 12 months,
mark-to-market accounting has contributed hugely to the crisis.
That last sentence ties in exactly with the warning given by the FSA
in 2004 and so the conditions have come to pass where the banking
system is frozen into immobility by a system devised for the good
times, and which is wholly inappropriate for the current crisis.
What is so bizarre about all this is that the MSM around the world is
full stories about the freezing of London inter-bank lending – the so-
called Libor system.
There can be no doubt of the severity of this aspect of the crisis.
The Sidney Morning Herald - to name but one newspaper – is noting
that the market is seizing up but, like so many, is missing the real
cause and putting the reluctance to lend down to "trust" – something
completely dismissed by Prof. Peter Spencer. Thus, says this paper:
All the banks are hoarding their cash, bolstering their balance
sheets so they can settle their own obligations. They won't let the
cash out of their sight. The total disintegration of trust and
confidence is feeding on itself and the disaster scenario is,
according to some observers "the mother of all bank runs" should
foreign banks panic further and pull their money out of the US system.
Not one media organ has put the whole story together, linking this
seizure with Basel II and the EU's implementing directives, the heart
of this current phase of the crisis and the very mechanism that
prevents it being solved.
=-=-=-=-=-=-=-=-=-=-=-=-=-
Posted by Richard North
=====================
TELEGRAPH 2.10.08
So much for tirades against American greed
Ambrose Evans-Pritchard says it is ironic that European banks have
turned out to be deeper in debt than their US counterparts.
It took a weekend to shatter the complacency of German finance
minister Peer Steinbrück. Last Thursday he told us that the financial
crisis was an "American problem", the fruit of Anglo-Saxon greed and
inept regulation that would cost the United States its "superpower
status". Pleas from US Treasury Secretary Hank Paulson for a joint US-
European rescue plan to halt the downward spiral were rebuffed as
unnecessary.
By Monday, Mr Steinbrück was having to orchestrate Germany's biggest
bank bail-out, putting together a €35 billion loan package to save
Hypo Real Estate. By then Europe was "staring into the abyss," he
admitted. Belgium faced worse. It had to nationalise Fortis (with
Dutch help), a 300-year-old bastion of Flemish finance, followed a
day later by a bail-out for Dexia (with French help).
Within hours they were all trumped by Dublin. The Irish government
issued a blanket guarantee of the deposits and debts of its six
largest lenders in the most radical bank bail-out since the
Scandinavian rescues in the early 1990s. Then France upped the ante
with a €300 billion pan-European lifeboat for the banks. The drama
has exposed Europe's dark secret for all to see. EU banks took on
even more debt leverage than their US counterparts, despite the
tirades against ''le capitalisme sauvage'' of the Anglo-Saxons.
We now know that it was French finance minister Christine Lagarde who
begged Mr Paulson to save the US insurer AIG last week. AIG had
written $300 billion in credit protection for European banks,
admitting that it was for "regulatory capital relief rather than risk
mitigation". In other words, it was underpinning a disguised
extension of credit leverage. Its collapse would have set off a
lending crunch across Europe as banking capital sank below water level.
It turns out that European regulators have allowed even greater use
of "off-books" chicanery than the Americans. Mr Paulson may have
saved Europe.
Most eyes are still on Washington, but the core danger is shifting
across the Atlantic. Germany and Italy have been contracting since
the spring, with France close behind. They are sliding into a deeper
downturn than the US.
The interest spreads on Italian 10-year bonds have jumped to 92
points above German Bunds, a post-EMU high. These spreads are the
most closely watched stress barometer for Europe's monetary union.
Traders are starting to "price in" an appreciable risk that EMU will
break apart.
The European Commission's top economists warned the politicians in
the 1990s that the euro might not survive a crisis, at least in its
current form. There is no EU treasury or debt union to back it up.
The one-size-fits-all regime of interest rates caters badly to the
different needs of Club Med and the German bloc.
The euro fathers did not dispute this. But they saw EMU as an
instrument to force the pace of political union. They welcomed the
idea of a "beneficial crisis". As ex-Commission chief Romano Prodi
remarked, it would allow Brussels to break taboos and accelerate the
move to a full-fledged EU economic government.
As events now unfold with vertiginous speed, we may find that it
destroys the European Union instead. Spain is on the cusp of
depression (I use the word to mean a systemic rupture). Unemployment
has risen from 8.3 to 11.3 per cent in a year as the property market
implodes. Yet the cost of borrowing (Euribor) is going up. You can
imagine how the Spanish felt when German-led hawks pushed the
European Central Bank into raising interest rates in July.
This may go down as the greatest monetary error of the post-war era.
The ECB responded to the external shock of an oil and food spike with
anti-inflation overkill, compounding the onset of an accelerating
debt deflation that poses a greater danger. Has it committed the
classic mistake of central banks, fighting the last war (1970s)
instead of the last war but one (1930s)?
After years of acquiescence, the markets have started to ask whether
the euro zone has the machinery to launch a Paulson-style rescue in a
fast-moving crisis. Who has the authority to take charge? The ECB is
not allowed to bail out countries under EU treaty law. The Stability
Pact bans the sort of fiscal blitz that has kept America afloat. Yes,
treaties can be ignored. But as we are learning, a banking system can
implode in less time than it would take for EU ministers to
congregate from the far corners of euroland. [= 2 weeks! -cs]
France's Christine Lagarde called yesterday for an EU emergency fund.
"What happens if a smaller EU country faces the threat of a bank
going bankrupt? Perhaps the country doesn't have the means to save
the institution. The question of a European safety net arises," she
said.
The storyline is evolving much as eurosceptics predicted, yet the
final chapter could end either way as the recriminations fly. Germany
has already shot down the French idea. The nationalists are digging
in their heels in Berlin and Madrid. We are fast approaching the
moment when events decide whether Europe will bind together to save
monetary union, or fracture into angry camps. Will the Teutons bail
out Club Med? If not, check those serial numbers on your euro notes
for the country of issue. It may start to matter.
=====================
EU OBSERVER 2.10.08
ECB liquidity injections not working
LEIGH PHILLIPS
BRUSSELS - The billions of euros the European Central Bank has been
injecting into money markets since the start of the crisis in an
attempt to get banks to start loaning money to each other and other
businesses is not working.
Instead, banks are redepositing some of the monies back with the ECB
itself - over €100 billion overnight as of Tuesday (30 September -
the latest available figures) - as they are worried that the central
bank is the last safe place left to stash their cash.
As of last Tuesday (23 September), banks had "parked" €1.4 billion
with the ECB's "deposit facility." By Thursday, the figure had
climbed to €4.2 billion and jumping to €28 billion the next day.
On Monday, banks were now depositing €44 billion with the ECB and as
of yesterday, the latest figures available, the cash placed with the
bank for safekeeping had more than doubled to €102.8 billion.
An official with the ECB told the EUobserver that "never before" had
this happened. "It's very strange that banks are doing this."
"If you didn't have the economic turmoil in the back of your mind,
you would think this is an uneconomic decision," the official said,
explaining that banks are borrowing from the ECB at a rate of 4.8
percent but when they deposit the same money back in Frankfurt, they
are only earning 3.8 percent.
"So they're losing money," the official said. "The deposit facility
is not meant for parking your money. It's meant as a last resort when
a bank can't do anything else with its money.
"It shows that there's no trust, no confidence out there," the
official continued. "They're thinking if they're going to lose money,
at least parked at the ECB is the safest way to lose it."
Joking blackly, the official said: "At least the ECB is making some
money on these transactions."
Do they really not know?
Edward Harrison, you will be pleased to learn is a banking and finance specialist at Global Macro Advisors. However, you are not the first, by any means, to be told that. This nugget of information was shared with Guardianreaders this morning as they were assailed with the words of wisdom from the Mr Harrison, on how to solve the financial crisis.
Can it really be, one wonders, that Mr Harrison has not heard of Directive 97/9/EC, to which we referred this morning? Can he really not know that the action taken by the Irish government was illegal under EU law?Said this learned banking and finance specialist at Global Macro Advisors:
One really does wonder because, even for Guardian readers, one cannot imagine such a great sage advocating such a course if he really did know or believe it to be illegal – or the paper actually printing it.
No doubt one of the reasons why the "elephant" lives such a charmed life is because it simply is not mentioned in polite company. Thus did the BBC manage to report the "cap" on Northern Rock lending during its lunch-time bulletin and on its website without mentioning the EU.
On Thursday, reported the BBC, Northern Rock had said that it had seen a "sizeable inflow" of deposits in recent days owing to financial turbulence, the Beeb then informing us that, "It must cap its market share of UK retail deposit balances at 1.5 percent … This commitment was made as part of the nationalisation deal."
Er … this "commitment" was a specific condition imposed by EU competition commissioner Neelie Kroes as part of her directorate's "authorisation" of state aid to the bank, as set out in its press release of 2 April this year.
Even the BBC, however, is going to have some difficulty explaining away why it is, when parliament has not been recalled to discuss the financial crisis, Gordon Brown is rushing off to Paris this weekend to meet EU president Nicolas Sarkozy to do precisely what parliament has not yet done - discuss the financial crisis.
The interesting thing about the BBC though, is that while it seems reluctant to tell us how much power the EU already has, its airwaves are open house to paid advocates demanding more. Thus, on the PM programme it gave time, unopposed, to a spokesman from the EU commission-funded Centre for European Policy Studies arguing for a European solution to the financial crisis.
One can perhaps believe of Mr Harrison that he is truly ignorant of EU involvement in banking regulation. But the BBC? Its refusal on the one hand to acknowledge the major role of the EU in our affairs - and how muchdamage it has done - while happily promulgating EU-funded propaganda, really cannot be accidental.