I guess I should say something about the new Basel III regulations.
I will present three “facts” that, I believe, says it all.
These three facts are as follows: 2019; financial markets rose when the news of the agreement was announced; and the agreement was more liberal than feared because a more restrictive agreement was opposed by the German government and the German banks.
First, the new capital requirements do not have to be fully met until 2019. There are some liquidity requirements that must be met by 2015, but this is still five years out.
By 2019, let alone 2015, the world banking structure will be entirely different than it is currently. The world of financial institutions is changing so rapidly due to the advancement of technology and the globalization of finance that over the next five years or so the way finance is conducted will be hardly knowable in today’s terms. I have written many times in the past year about how the United States banks have “gone beyond” the thinking of government legislators and regulators in terms of the creation of the Dodd-Frank financial reform act.
There is no way you can write successful banking regulations that attempt to prevent the recurrence of a past financial crisis. To require something to be done but then give these institutions nine years to conform…is a joke.
Second, financial markets responded positively to the news of the Basel agreements. To me, investors are saying, “Whew! The people writing the Basel rules didn’t do anything really stupid!”
Third, Germany rules the roost. How important is it for a nation to have a strong economy and its finances more under control than the other countries it is dealing with?
Very important! (Are you listening America?)
Especially in a time of economic and financial uncertainty, the player with the strong economy and the stronger financial position holds most of the cards. In order for a community to reach an agreement and have any hopes that the agreement will be implemented, the stronger nation must continue to participate in the community. Thus, concessions must be made.
One can interpret the announcement of the Basel III agreement in this way: the European community is still together but in reaching agreement it is apparent that Germany has the veto power. Germany will continue to have this power going forward until other nations get their economies and their finances in order.
Banks in Europe and in the United States were concerned about what would come out of the recent regulation writing sessions. They, of course, lobbied for less restriction and greater flexibility. The banks did want to have some influence on the outcome. The rules and regulations coming out of the negotiations could have been a lot more inconvenient for the banks.
Still, the large banks will continue on their way. Rules and regulations will always lag behind what the modern commercial bank and commercial banking industry can do, and does. I believe, that banking and finance will change more in the next five years or so than it has in the last thirty. Try and regulate that!
Showing posts with label German banks. Show all posts
Showing posts with label German banks. Show all posts
Tuesday, September 14, 2010
Wednesday, September 8, 2010
Watch the Currency, Stupid!
The value of a currency is “the single most important price in a nation’s economy.” So claims Paul Volcker.
If this is the case then the eurozone continues to have problems.
As information has filtered out that European banks may have more problems than originally thought given recent “stress tests”, the Euro has shown continued weakness, almost across the board.
“The euro suffered and haven demand sent the yen and the Swiss franc to record highs amid renewed concerns over the health of the eurozone financial system.
Analysts said nervousness was heightened by news from the German Banking Association, which said the country’s 10 biggest lenders might need another €105bn of additional capital. Hans Redeker, of BNP Paribas, said the outcome of the European bank stress tests were being put in doubt.
He added that there were increasing signs that countries on the periphery of the eurozone, such as Greece and Portugal, were showing a frightening decline of growth momentum with the risk that these economies were moving into a debt spiral.” (See http://www.ft.com/cms/s/0/9a698e7a-ba61-11df-8e5c-00144feab49a.html.)
This news seemingly resulted in declines in the euro against the dollar (down 1.4%); against the pound (down 1.2%); against the yen (down 1.8%) and to a record low against the Swiss franc (down 1.6%).
With all the weakness the United States dollar has experienced in recent months against other major currencies, the value of the dollar has shown substantial strength against the euro since the problems in the eurozone were exposed earlier this year. The euro reached a near-term high against the dollar in early December 2009, but then fell about 21percent against the dollar into early June 2010 as European nations rallied to stem their joint fiscal crisis. The euro recovered some after a “combined solution” was reached, but its value has declined once again and still rests around 16 percent below the December high.
Furthermore, there still seem to be unknown unknowns surrounding some of the nations in the eurozone (see “EU Probes Hidden Greek Deals as 400% Yield Gap Shows Doubt”; http://www.bloomberg.com/news/2010-09-07/greek-debt-deals-hidden-from-eu-probed-as-400-yield-gap-shows-bond-doubts.html) and some of the banks (see “German banking weaknesses come to light”; http://www.ft.com/cms/s/0/9f1c0752-ba9f-11df-b73d-00144feab49a.html).
Financial markets don’t like surprises.
It appears as if there are still some surprises to surface within the eurozone.
These revelations will continue to apply pressure to the leaders in Europe. It is so hard to form a common union where people want to maintain all the privileges of independence (fiscal and otherwise) yet hope to produce a common good (greater economic strength and unity).
Like any marriage, the partners have to give up some of the things that they cherished as individuals. Furthermore, openness and transparency is a “must” for any such relationship. The road to “unity” may be quite bumpy at times, but the partners must work through these periods and establish common understandings and good habits.
In the case of nations, there is an information market in which people can “bet” on whether or not the marriage will succeed. This market is the foreign exchange market. Right now, the market value of the euro is declining, indicating that the investors are concerned about how the eurozone marriage is working out. This weakness in the euro will continue until the fear of surprises disappears.
If this is the case then the eurozone continues to have problems.
As information has filtered out that European banks may have more problems than originally thought given recent “stress tests”, the Euro has shown continued weakness, almost across the board.
“The euro suffered and haven demand sent the yen and the Swiss franc to record highs amid renewed concerns over the health of the eurozone financial system.
Analysts said nervousness was heightened by news from the German Banking Association, which said the country’s 10 biggest lenders might need another €105bn of additional capital. Hans Redeker, of BNP Paribas, said the outcome of the European bank stress tests were being put in doubt.
He added that there were increasing signs that countries on the periphery of the eurozone, such as Greece and Portugal, were showing a frightening decline of growth momentum with the risk that these economies were moving into a debt spiral.” (See http://www.ft.com/cms/s/0/9a698e7a-ba61-11df-8e5c-00144feab49a.html.)
This news seemingly resulted in declines in the euro against the dollar (down 1.4%); against the pound (down 1.2%); against the yen (down 1.8%) and to a record low against the Swiss franc (down 1.6%).
With all the weakness the United States dollar has experienced in recent months against other major currencies, the value of the dollar has shown substantial strength against the euro since the problems in the eurozone were exposed earlier this year. The euro reached a near-term high against the dollar in early December 2009, but then fell about 21percent against the dollar into early June 2010 as European nations rallied to stem their joint fiscal crisis. The euro recovered some after a “combined solution” was reached, but its value has declined once again and still rests around 16 percent below the December high.
Furthermore, there still seem to be unknown unknowns surrounding some of the nations in the eurozone (see “EU Probes Hidden Greek Deals as 400% Yield Gap Shows Doubt”; http://www.bloomberg.com/news/2010-09-07/greek-debt-deals-hidden-from-eu-probed-as-400-yield-gap-shows-bond-doubts.html) and some of the banks (see “German banking weaknesses come to light”; http://www.ft.com/cms/s/0/9f1c0752-ba9f-11df-b73d-00144feab49a.html).
Financial markets don’t like surprises.
It appears as if there are still some surprises to surface within the eurozone.
These revelations will continue to apply pressure to the leaders in Europe. It is so hard to form a common union where people want to maintain all the privileges of independence (fiscal and otherwise) yet hope to produce a common good (greater economic strength and unity).
Like any marriage, the partners have to give up some of the things that they cherished as individuals. Furthermore, openness and transparency is a “must” for any such relationship. The road to “unity” may be quite bumpy at times, but the partners must work through these periods and establish common understandings and good habits.
In the case of nations, there is an information market in which people can “bet” on whether or not the marriage will succeed. This market is the foreign exchange market. Right now, the market value of the euro is declining, indicating that the investors are concerned about how the eurozone marriage is working out. This weakness in the euro will continue until the fear of surprises disappears.
Subscribe to:
Posts (Atom)
