Is it the ECB which is the Euro area bad bank?

by Shaun Richards

A feature of the credit crunch era is that some subjects have never gone away in spite of all the official denials. Another is that establishment’s use crises to try to introduce policies which they would not be able to get away with in ordinary times. As today we are looking at a central bank this is of course about the subject closest to their hearts which is “The Precious! The Precious!” which for newer readers is the banking sector. So let us get straight to the issue in the Financial Times which has taken a brief holiday from its role as the house journal of the Bank of England to bid for the same role for the ECB or European Central Bank.

European Central Bank officials have held high-level talks with counterparts in Brussels about creating a eurozone bad bank to remove billions of euros in toxic debts from lenders’ balance sheets.

After my reply I somehow doubt I will be getting the role.

But they already have Deutsche Bank?

Indeed this is quite a different message from the one given to the European Parliament by Mario Draghi in February 2016.

However, we have to acknowledge that the regulatory overhaul since the start of the crisis has laid the foundations for durably increasing the resilience not only of individual institutions but also of the financial system as a whole. Banks have built higher and better quality capital
buffers, have reduced leverage and improved their funding profiles.

I have emphasised the use of central banking language as I have picked out that word for some time. He emphasised the point later.

In the euro area, the situation in the banking sector now is very different from what it was in 2012……….making them more resilient to adverse shocks.

Indeed the non performing loans we are now supposed to be worried about were apparently fixed.

There is a subset of banks with elevated levels of non-performing loans (NPLs). However, these NPLs were identified during the Comprehensive Assessment, using for the first time a common definition, and have since been adequately provisioned for. Therefore, we are in a
good position to bring down NPLs in an orderly manner over the next few years.

Er, well we have had a few years since so…..

Geography

The article gives us a good idea of one of the countries pressing for this.

“The lesson from the crisis is that only with a bad bank can you quickly get rid of the NPLs,” Yannis Stournaras, governor of the Bank of Greece and member of the ECB governing council, told the Financial Times. “It could be a European one or a national one. But it needs to happen quickly.”

I have no idea how you could form a Greek bad bank but anyway that would have even less of a life than a May Fly so let’s not worry too much. If we switch to the state of play it does not seem to have progressed as Mario Draghi told us four years ago.

Greek banks have by far the highest level of soured loans on their balance sheets of any eurozone country, making up 35 per cent of their total loan books — a legacy of the 2010-15 debt crisis that pushed the country to the brink of exiting the eurozone.

Yes the numbers are down but the crisis started in 2010 so we are a decade on now. When will it ever go away?

But plans by Greece’s big four lenders to sell more than €32bn of NPLs — almost half the total in the country — are likely to be disrupted by the coronavirus crisis,

We could have a quiz as we wonder how much would be paid for that and whether it would help much? Regular readers will recall that we were told it was a triumph when some of the NPLs of the Italian banks were sold. Would you want them now? I rather suspect the problem has been kicked like a can elsewhere. I note the Bank of Italy reporting this in its latest Economic Bulletin.

approving a debt moratorium on outstanding bank loans, and increasing public guarantees on new loans to firms.

The latest Financial Stability Report was somewhat upbeat on the subject.

At the end of June, the stock of NPLs net of
provisions fell to €84 billion (€177 billion gross
of provisions), 7 per cent less than at the end
of 2018.

Although even by then ( November) the Bank of Italy was troubled by the slow down in the Italian economy and of course now we know that essentially 2019 saw no economic growth at all.

In the fourth quarter of 2019 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) decreased by 0.3 per cent over the previous quarter and increased by 0.1 per cent in comparison with the fourth quarter of 2018. ( Istat)

So we can see why Italy would be keen especially as we note this development.

In June, Italian banks’ exposure to emerging economies was €165 billion (about 5 per cent of assets),
6.4 per cent higher than at the end of 2018.

They got into trouble with this last time around.

Returning to the FT there is also a mention of a couple of places which the official and FT lines had been ones of recovery.

Total NPLs in the biggest 121 eurozone banks almost halved in four years to €506bn, or 3.2 per cent of their loan books, by the end of last year. But Greek, Cypriot, Portuguese and Italian banks still have NPL ratios above 6 per cent.

Portugal had been in a better economic run but those who followed the debacle at Novo Banco will be aware of the banking system problems.

Comment

There are quite a few issues for us to pick our way through. For example with the expansion of its role is the ECB already a bad bank itself? Let me hand you over the the present ECB President Christine Lagarde.

Second, we are buying public and private sector bonds in large volume to ensure that all sectors of the economy can benefit from easy financing conditions…….We have also extended our asset purchases to commercial paper, which is an important source of liquidity for firms.

It is also lending but with wider ( aka weaker) collateral requirements. I raise this issue because back at the height of the credit crunch issue the Bank of England ended one of its schemes early because of “Phantom Securities”. I am sure you get the drift.

A reply to the FT from Italicus raises another issue.

So the idea is to remove NPL from the balance sheets of banks so that they can keep on lending to people and businesses who can keep on not repaying their debts?

As Pink Floyd so aptly put it.

Tired of lying in the sunshine staying home to watch the rain.
You are young and life is long and there is time to kill today.
And then one day you find ten years have got behind you.
No one told you when to run, you missed the starting gun.

Next comes the issue that rules for banks are only applied when the seas are calm which is the reverse of what should happen.

The European Central Bank (ECB) today announced a temporary reduction in capital requirements for market risk, by allowing banks to adjust the supervisory component of these requirements.

Next comes the issue of what are Special Purpose Vehicles. The Italian versions for bad loans called variously Atlas and Atlante have rather faded from view. Not before some rather spectacular write downs though which weakened the banking sector they were supposed to support.

Also there is Deutsche Bank with its share price of 5.88 Euros.

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