Contradictions in the European banking sector are reaching a breaking point:
On the one hand, banks are loudly complaining about the difficulties of ensuring an adequate level of profitability. Bankers are also strongly resisting new requirements to reinforce their capital position.
On the other hand, many politicians and regulators are anxious to impose such measures. For all their past complicity with bankers, politicians in particular want to avoid future “taxpayer” funded bail-outs of financial institutions.
Enter the ECB. Its strategy to cope with the prevailing low growth environment is to pursue policies that are meant to encourage loans to the “real economy.” So far these measures have met with limited success.
Indeed, the combination of negative interest rates and the ECB’s recourse to quantitative easing on a massive scale, seems to yield outcomes that inhibit in part the smooth transmission of monetary policy.
Negative interest rates make deposit taking unprofitable, while “charging” customers for the service is strongly resisted, putting additional pressure on lending margins. Meanwhile, increasing QE drives interest rates down further, which creates new difficulties for pension funds and insurers, etc.
The universal banking model may have been adapted to the European scene prior to the introduction of the single currency because each national market was too small to sustain independent investment banks.
Within the framework of European Monetary Union (EMU), aiming at creating a “reserve currency” capable of competing with the US dollar, it is high time to recognize the fundamental “conflict of interest” imbedded within the “universal bank” structure:
Universal banks must constantly choose between either intermediating between “borrowers” and “depositors,” while retaining the credit risk on its own books (i.e., commercial bank loans) or between “issuers” and “investors” where the credit risk is passed on to the latter (i.e., capital market funding).
The potential for conflict is exacerbated when the “issuer” is also a “borrower” from the bank, or when the bank has an in house “asset management” arm. This problem was already recognized in the USA after the crash of 1929 and the depression of the 1930’s.
It lead to the separation of commercial and investment banking activities (Glass Steagall Act) as well as specific legislation to protect investors (Securities and Exchange Act).
This created the foundations on which the spectacular growth of the U.S. capital markets as distinct from its commercial banking sector was able to flourish. The separation created a sufficiently broad base for both sectors to operate profitably.
It is also true that the United States deviated from its previously virtuous path under the progressive “deregulation” of U.S. markets, initiated in the late 1970’s, including the repeal of the Glass Steagall Act (1998).
This triggered a chain of events which led to the uncontrolled expansion of the financial sector culminating in the crisis of 2007/8.
Read more: High Time for Europe to Shed its “Universal Banking Model” - The Globalist
On the one hand, banks are loudly complaining about the difficulties of ensuring an adequate level of profitability. Bankers are also strongly resisting new requirements to reinforce their capital position.
On the other hand, many politicians and regulators are anxious to impose such measures. For all their past complicity with bankers, politicians in particular want to avoid future “taxpayer” funded bail-outs of financial institutions.
Enter the ECB. Its strategy to cope with the prevailing low growth environment is to pursue policies that are meant to encourage loans to the “real economy.” So far these measures have met with limited success.
Indeed, the combination of negative interest rates and the ECB’s recourse to quantitative easing on a massive scale, seems to yield outcomes that inhibit in part the smooth transmission of monetary policy.
Negative interest rates make deposit taking unprofitable, while “charging” customers for the service is strongly resisted, putting additional pressure on lending margins. Meanwhile, increasing QE drives interest rates down further, which creates new difficulties for pension funds and insurers, etc.
The universal banking model may have been adapted to the European scene prior to the introduction of the single currency because each national market was too small to sustain independent investment banks.
Within the framework of European Monetary Union (EMU), aiming at creating a “reserve currency” capable of competing with the US dollar, it is high time to recognize the fundamental “conflict of interest” imbedded within the “universal bank” structure:
Universal banks must constantly choose between either intermediating between “borrowers” and “depositors,” while retaining the credit risk on its own books (i.e., commercial bank loans) or between “issuers” and “investors” where the credit risk is passed on to the latter (i.e., capital market funding).
The potential for conflict is exacerbated when the “issuer” is also a “borrower” from the bank, or when the bank has an in house “asset management” arm. This problem was already recognized in the USA after the crash of 1929 and the depression of the 1930’s.
It lead to the separation of commercial and investment banking activities (Glass Steagall Act) as well as specific legislation to protect investors (Securities and Exchange Act).
This created the foundations on which the spectacular growth of the U.S. capital markets as distinct from its commercial banking sector was able to flourish. The separation created a sufficiently broad base for both sectors to operate profitably.
It is also true that the United States deviated from its previously virtuous path under the progressive “deregulation” of U.S. markets, initiated in the late 1970’s, including the repeal of the Glass Steagall Act (1998).
This triggered a chain of events which led to the uncontrolled expansion of the financial sector culminating in the crisis of 2007/8.
Read more: High Time for Europe to Shed its “Universal Banking Model” - The Globalist
