Category Archives: Problem definition

Recapitalising banks to revive lending

This past week’s Economist highlights Europe’s continuing economic crisis and how deferred loss recognition by banks may translate into “pressure in the streets”. This article also notes that loans “to non-financial firms contracted in May by 4.1% in Italy, 5.0% in Portugal and 9.7% in Spain.”

Europe’s Zombie Banks

In the same week, the ECB’s Benoît Cœuré noted that “Reviving credit growth is one of the most pressing challenges for the euro area today” and that “… governments have to ensure that banks are properly capitalised and that their balance sheets are cleaned up.”

Reviving credit growth in the Euro area

Similarly, Harald Benink and Harry Huizinga from Tilburg University argue that bank losses should be acknowledged and imposed upon subordinated and common debt holders.

The urgent need to recapitalise Europe’s banks

The apparent success of bank recapitalisation in the US is one one of the supporting arguments.

Is forced re-capitalisation the way forward for Europe’s beleaguered economy?

Have US policy makers effectively addressed their structural banking sector issues and demonstrated the most appropriate policy response to the global financial crisis?

 

 

Initiatives for transparency on securitizations in Europe

Re-capitalizing major banks is not sufficient to reestablish robust liquidity in the European credit risk transfer market. Restoring investors’ confidence and progressing reforms require enhanced transparency and standardization, notably on repo’s and securitizations.

Many policy makers recommendations listed in the forum topic “Shadow Banking Regulation in Europe” focus on enhancing disclosure and information-gathering by authorities. “While progress is being made, the exercise underscored the need for significant improvements in data availability and granularity to adequately capture the magnitude and nature of risks in the shadow banking system,” the FSB said.

For securitizations in Europe, here are the most important transparency initiatives currently sponsored in Europe by central banks and by the banking industry :

Considering policy recommendations on transparency, the following questions remain open for debate :

  1. Will more transparency also revive Europe’s secured lending and securitization markets?
  2. What additional infrastructure changes would strengthen market liquidity and robustness?
  3. Will transparency on market flows and counterparties help to restore investor confidence?
  4. What other initiatives would help reviving desirable credit risk transfers ?