Where to start after such a frenetic week of news.
Good and bad……
On the positive side of the balance sheet, there was unexpected agreement and, one might argue, some progress at an EU summit which ended in the early hours of Friday morning with agreement to radically restructure Spain’s €100bn bank recapitalisation plan.
This was offset however by the news of £290m of fines levied on Barclays Bank, in response to an investigation into the banks manipulation of the key interest rate, LIBOR (London Interbank Offer Rate). Trashing the reputation of the UK banking industry even further was the news that four banks had agreed compensation arrangements with the FSA following yet another round of miss-selling, this time of interest rate swap products. We’ll come back to the banks later, but not before asking ……when will they learn?
Angela Merkel was forced into perhaps her most significant Euro concession yet as the Spanish and Italians blocked progress on all other agenda items at the European Leaders Summit, pending getting a deal on short term rescue measures.
Moving the burden of bailout……
The result was a deal whereby EU bailout funds will eventually be used directly by Spanish financial institutions rather than being injected via the Spanish government. Great news for the government, who can simply sweep the burden of the banking bailout off its sovereign books.
Italy likely to apply……
There were also further concessions for Italy, setting the stage for Rome to become the 6th applicant for EU assistance. Ireland, which off course has suffered its own bank meltdown will also be considered for similar treatment.
But there’s a but…….
However, the rescue for Spain’s banks will only come after the creation of a single banking supervisor to be run by the European Central Bank. The current hotchpotch of 17 different banking supervisors will be replaced one regulator for all Eurozone banks.
This is perhaps the most significant step taken, for the long term at least, since the start of the crisis and it is certainly positive in that it is the first sign of a willingness to change the underlying structures that have contributed so much to the difficulties now faced.
Vague statement only…….
Yet, already the doubters are asking questions……. and who can blame them? For now, the proposal amounts to little more than a vague statement of intent, one that has prompted more questions than answers. Will the new regulator have the power to rein in risky practices and hold offending banks accountable, for example, and will it be willing to exercise that power? Or will it be weak and overly beholden to national political factors that have too often got in the way of making bank supervision effective in Europe?
It is by no means a moot point, given that previous stress tests of European banks passed most banks as satisfactorily capitalised, despite the fact that some turned out to be deeply troubled and in need of bailouts.
Keep the tin hat to hand…….
The effectiveness of this first step to proper structural reform within Europe will very much depend on the detail of the plan, as well as the effectiveness of its implementation. It will be some time before we have answers on that front so keep the tin hat handy still!
Meanwhile, UK banking institutions have their own, unique problems, and without doubt, entirely self inflicted, as it has become apparent that ‘fixing’ of the libor rate by a number of banks, not just Barclays, was endemic.
This story has much more to come as we will, bit by bit, get a truer picture of who was engaged in this practice and for how long, how often and to what gain.
Diamond will go…….
Whatever the future detail, there seems little hope that Diamond Bob will be able to sustain his position as CEO of Barclays, as the clamour grows for heads to roll, despite his Chairman falling on his sword this morning, and quite right to. How he expects to keep his job, having been the head of the investment banking subsidiary responsible when it happened, seems to be a good example of the disconnect that has developed between the world of banking and that other place they don’t like to talk about…..the real world!
It will be interesting to see how long it takes for Mr Diamond to go……perhaps we should have a sweepstake……..I could fix the odds!
2nd July 2012