Time to complete the EU banking market

The thing about this crisis is that people talk about fiscal policy this and quantitative easing that, but until the banks are fixed, the cause of the crisis will remain broken. And the banks won't be fixed until governments fix them.

Take Europe. Banks overlent. And that includes "disciplined" German banks. They all leveraged their muscles on the global financial playground, and now the tide has gone out and they have been caught with their trousers down (to borrow from Warren's Buffet of expressions).

One German bank I was told about lent several million euro to a property developer in Ireland who wanted to build another shopping mall in a small town that already had two of them. The German bank didn't even take a plane to go over and look, but eager as they understandably were to invest their bank's savings deposits and make them work, and as gullible as everyone was about the property bubble in Ireland, they just handed over the dosh.

But has that German bank been properly reprimanded for their silly actions? Unlikely. They probably blame the developer, who is likely bankrupt at this point.

The moral is this: it takes two to tango, and very willing partners they must be. Another lesson is that German banks, caught as they are in a domestic economy that is stifled by internal regulation that has smothered investment opportunities, will inevitably sniff around abroad in the brothels of other less restrictive markets for investment opportunities. In other words, fixing banks is not just about those banks located in places such as Ireland, but doing something to help the likes of German banks unleash a bit more of their savings in their home market. And that means tightening up in places like Ireland, while allowing more deregulation in Germany, notably in property sector. That's tango. Or ying and yang.

There are other issues too, such as competition and choice (or the lack of it) in European banking. I mean, it is hard to believe that Irish banks are subject only to Irish regulation, despite operating on a global interbank market. And that had depositors been burned, they could not put their money seamlessly into another European bank, such as Deutsche Bank.

In Paris for instance, there are several Barclays Banks, but these are just French banks with an English shop sign. I have a small Barclays account in London, but opening an account in the French bank here would not bring me under the wing of the English bank or offer me either advantages or favourable terms as a customer of the UK variety. This is frankly pathetic.

And in Dublin there is a French BNP, which has been there since 1973. Yet (at least until quite recently) it has only operated for investors, and is not in fact a retail bank. So when Irish banks began to tank during the crisis, customers could not move their funds into the BNP for protection.

Years ago I tried to wire money to my bank in Ireland. It would take a few days and would incur charges. I asked the lady why it would take so long. I will always remember her mocking cackle: "We are not a single banking market yet ya know".

Well, she was right, and this crisis has shown what a silly and dangerous situation that is. The European banking market is fractious and bunkered, and therefore weakened. It needs to be completed into a single banking market to protect consumers from the whimsical behaviour of their high street banks.

I am glad to see I am not alone in thinking this, and indeed Prof Barry Eichengreen of Berkeley California puts reforming the European banking scene as a priority for cleaning up the euromess. See Washington Post interview here:

Governments are the ones we need to make that happen. If they did, it might take some of the pressure off other reforms. Without action, no amount of tinkering with limited fiscal and monetary policies will produce the lasting growth and confidence we all want and need.

©RJ Doyle Oct 2011


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