Stop coddling Europe’s banks

Morris Goldstein 11 January 2012

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After initial denials, Europe’s leaders have started to acknowledge that IMF Chief Christine Lagarde was right. Through their statements and decisions, policymakers are showing their agreement with her assessment in August 2011 at the Federal Reserve’s Jackson Hole symposium that there was an urgent need for recapitalisation of Europe’s banks (Lagarde 2011).

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Topics:  EU policies International finance Politics and economics

Tags:  ECB, IMF, financial regulation, banks, Eurozone crisis, EFSF, euro bonds

Europe must change course on banks

Nicolas Véron 22 December 2011

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The Eurozone crisis keeps evolving along multiple dimensions. On the sovereign debt front, no deal is yet in sight on Greece’s debt restructuring, and Italy and Spain face major refinancing needs in early 2012. On the institutional reform front, the summit on 8-9 December fell short of delivering a true fiscal union (O’Rourke 2011), and tensions between the Eurozone and the UK have been brought to boiling point. On the growth front, a possible deep and prolonged recession looms.

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Topics:  EU policies Europe's nations and regions International finance

Tags:  financial regulation, banks, Eurozone crisis

Deleveraging in the Eurozone

Vincent O'Sullivan, Stephen Kinsella 17 December 2011

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The capital shortfall at EU banks is 8% higher than originally thought, according to the latest assessment from the European Banking Authority (EBA 2011) released on 8 December. In the aggregate, European banks need to raise €114.7 billion as an exceptional, temporary capital buffer against sovereign debt exposures and to ensure their individual Core Tier 1 capital ratio reaches 9% of risk-weighted assets by the end of June 2012.

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Topics:  Financial markets International finance

Tags:  eurozone, leverage, banks

What is the value added of banks?

Christina Wang 08 December 2011

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Like an organ of the human body, the financial system calls most attention to itself when it malfunctions. But in normal times, is the financial system like the human heart, circulating essential capital throughout the economy? Or is it like the appendix, doing little when healthy but devastating when ill? Since the truth is probably somewhere in between, how can we calculate the contribution of finance to a modern economy?

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Topics:  International finance

Tags:  financial sector, banks, financial system

The interplay of sovereign spreads and banks’ fragility in the Eurozone

Damiano Sandri, Ashoka Mody 23 November 2011

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European policymakers are confronting a heightened crisis characterised by a perverse and seemingly intractable interplay between sovereign debt pressures and financial-sector fragilities (Wolff 2011). Three questions arise:

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Topics:  Financial markets International finance

Tags:  eurozone, spreads, banks

How much capital do European banks need? Some estimates

Viral Acharya, Dirk Schoenmaker, Sascha Steffen 22 November 2011

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The European banking system is freezing up. Several banks are not able to fund themselves in the market. The lack of market confidence in European banks is fed by the ongoing uncertainty about Eurozone sovereign debt (as well as real estate) to which these banks are exposed.

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Topics:  Financial markets International finance

Tags:  eurozone, sovereign debt, banks, recapitalisation

If banks should act as utilities, why not treat them as such?

Charles A.E. Goodhart 30 August 2011

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Nobody thinks that utility-operating companies – whether in transport, such as railways, in energy, such as electricity, or telephone or water – are too big to fail. If they lose enough money and go bust, then, if another company cannot be found to take over the franchise, the government steps in to take over the operations. They keep the capital and (most of) the workers to continue running the utility. No one would think that it would make any sense to rip up the railway lines, electricity pylons, or water pipes, to sell them for scrap, and to push the skilled workers into unemployment.

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Topics:  Global crisis International finance

Tags:  financial regulation, banks

Capital, politics and bank weaknesses

Jon Danielsson 27 June 2011

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Bank capital has emerged as a key element in the post-crisis financial regulatory reforms. Basel III is now likely to include a 7% equity-to-risk-weighted-assets capital requirement.

7% was a compromise. Some countries wanting more capital now intend to implement stricter standards unilaterally. This is making some of the others unhappy, and a bitter debate has erupted within the EU on whether individual EU member countries should be allowed to require more capital than the Basel III, and hence EU, minimums.

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Topics:  Financial markets

Tags:  capital requirements, banks

Do banks learn from crises?

Ruediger Fahlenbrach, Robert Prilmeier, René M Stulz 27 May 2011

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On 17 August 1998, Russia defaulted on its debt. This event started a dramatic chain reaction. As one observer put it, “the entire global economic system as we know it almost went into meltdown, beginning with Russia's default” (Friedman 1999). As Russia defaulted, a number of investors, including banks, made large losses. For example, the market capitalisation of both CitiGroup and Chase Manhattan fell by approximately 50% in the two months following the Russian default. 

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Topics:  Global crisis International trade

Tags:  Russia, risk-taking, financial crises, banks

From financial crisis to Great Recession: Evidence on the transmission role of banks

Shekhar Aiyar 12 May 2011

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How did problems originating in one asset class in one country propagate internationally, sparking the Great Recession? A standard stylised explanation relies on the globalisation of the banking system, and has two parts.

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Topics:  Financial markets Global crisis International finance

Tags:  global crisis, banks, Great Recession

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