The President of the European Commission proposes measures to tighten control over banks European Commission President Jose Manuel Barroso called on European countries to tighten control over the financial sector in response to the global financial crisis.
In particular, it is intended to limit the amounts that banks can issue as loans to individual borrowers; increase the ability of supervisory authorities over the work of European banks and introduce new rules for assessing investment risks.
“The EU needs tighter financial control and greater consistency in the banking guarantee systems that exist in various countries,” he said, presenting to the Commission a plan designed to introduce more stringent regulation of banks.
Barroso expressed confidence that the existing system, based on standards developed by individual governments, can cope with the current crisis. At the same time, the European Union, according to him, needs more coordination of actions to restore confidence in banks.
The banking crisis, said the head of the European Commission, has a negative impact on the real economy and emphasizes the urgent need for reform. He made a special emphasis on the need for joint work to urgently save banks in trouble, as well as to find long-term solutions to the problems of the banking sector.
The measures proposed by the European Commission relate primarily to international banks. The Commission recognizes that the new rules will not be able to help solve the current crisis, but at the same time they believe that they should strengthen confidence in the market and the strength of the banking system when they come into effect in two years.
Meanwhile, French President Nicolas Sarkozy proposed holding a summit on the financial crisis in Paris next Saturday with the participation of France, Germany, Britain and Italy.
As the representative of the French government, Luc Chatel, said the current crisis shows that “the financial system is running out of steam.” President Sarkozy, he said, would like to discuss the problem with other world leaders as well as part of the G8 meeting. The French president, Chatel said, is already negotiating with other European leaders on this issue.
The proposed meeting will be attended by the head of the European Central Bank, Jean-Claude Juncker.
Control, nationalization, mergers
The European Commission welcomed the decision of the British government to allocate 50 billion pounds for the purchase of the mortgage portfolio of Bradford & Bingleys and the sale of its deposits and branches to the Spanish bank Santander.
Bradford & Bingleys, specializing in providing loans for the purchase of housing and its subsequent lease, became the second British bank, which this year came under the control of the government.
Santander will merge Bradford & Bingleys’ network of deposits and branches with Abbey National, which the Spaniards acquired back in 2004.
The European Commission also decided to extend the study of the possibility of restructuring the German bank WestLB, to protect which it was necessary to allocate 5 billion public funds after it went to risky investments in the midst of the financial crisis.
Meanwhile, a survey conducted by Reuters among economists revealed a prevailing opinion: the interest rate of a loan in Britain will decline, possibly already in October.
According to respondents, the Bank of England will try in this way to give impetus to a stagnant economy, despite high inflation.
There will be no bankruptcy
While the US authorities are trying to agree on a program to save markets, Europe has decided not to wait for the decisions of the Americans and take preventive measures to maintain its financial system. The European Commission is going to limit lending to citizens, tighten capital requirements for banks, and increase the amount of insurance coverage. In addition, it is planned to strengthen central European supervision of credit institutions.
As European Commissioner for Common Market Charlie McCreevy said yesterday, the European Commission “intends to learn the lesson of the current crisis” and will develop new rules for bank lending to prevent such situations. According to Mr. McCreevy, the new package of measures developed by the European Commission is based on restrictions on the amount of funds that the bank has the right to lend to one client. “Banks should save more funds designed to cover the risks of the most financially dangerous operations,” he stressed. “In addition, the European Commission intends to increase the level of guaranteed personal contributions.” Now, according to European standards, in the event of bank bankruptcy, depositors are returned a deposit of up to 20 thousand euros. According to the European Commissioner, this limit should be “significantly increased.”
According to Bloomberg, EU regulators have also proposed tightening capital requirements for EU banks. In particular, to issue debt securities secured by assets, banks will have to reserve a larger amount of capital.
In addition, the head of the European Commission, Jose Manuel Barroso, called for greater control over the activities of cross-border banks. Currently, almost all the leading European banks are transnational, and they are controlled mainly by bodies subordinate to national governments. For better supervision of such structures, the head of the European Commission called for the creation of effective monitoring bodies at the level of European Union institutions.
According to Belgian media, the European Commission on Tuesday gave the European Commissioner for Competition Neeli Cruz with special powers to make quick decisions on the provision of support to the banking sector by the executive branch of the European Union. She was given the right, without waiting for weekly meetings of the European Commission, to approve or reject measures of state support of the banking sector by national governments.
In addition, Europe is once again ready to support its financial system with public money. Yesterday, Reuters reported that at a meeting of representatives of four EU countries (France, Germany, Italy, the UK), members of the G8, a plan will be proposed on Saturday that provides for the allocation of 300 billion euros to stabilize the situation in the European financial market.
This money is likely to be needed. Yesterday, the London interbank rate LIBOR, a key indicator for the global economy, reached a historic high of 6.88%. As you know, based on it, interest is calculated on the majority of loans provided on the global financial market. Such a high rate reflects the difficulties of the interbank market: banks still refrain from providing each other with short-term loans to maintain liquidity.
Although France initiated the plan for 300 billion euros, the Prime Minister of this country, François Fillon, argues that the crisis does not pose a particular threat to his state. He admits that European banks, especially French ones, are holding a pretty good punch, because they are not built according to the model adopted in the USA. However, he continues, European banks “are so interdependent that the risk of a crisis spreading over the entire financial system is real, French banks are not immune from difficulties if any major European bank collapses.” “That is why we assure the French that the state fully guarantees the functioning of the country’s banking system,” said Mr. Fillon. He assured that the state is ready to use all the methods at its disposal to protect French banks: “We will provide ourselves with the means to avoid a major financial catastrophe. There will be no bankruptcy. ”
However, not all European countries have the same optimism. The largest Belgian bank Fortis announced the possible failure of the transaction to sell half of its management company to the Chinese group Ping An in connection with the deepening credit crisis. Saved by the Benelux authorities from ruin, the bank was going to sell assets of Fortis Investments management company in the amount of 2.15 billion euros to the second largest Chinese insurance company Ping An Insurance.
Larger players also have problems. As reported by Bloomberg, citing informed sources, the Swiss bank UBS AG intends to reduce 1900 jobs. The bank’s management, which suffered the largest losses in Europe as a result of the credit crisis, plans to lay off employees mainly from investment banking departments (up to 10% of the state), as well as operations with shares and securities with fixed income. However, according to UBS staff, the cuts will affect administrative staff.
In the UK, the nationalization of banks’ mortgage business continues. Following Northern Rock, another major British bank, Bradford & Bingley, fell victim to the crisis. In accordance with the plan for his salvation, the state will take responsibility for servicing mortgage loans in the amount of about 50 billion pounds. The bank’s retail business was sold to the Spanish group Santander for 20 billion pounds. “The European Commission was able within a day to decide that the measures of state support proposed by the British government comply with the EU rules for providing assistance to companies in financial difficulties,” the EU executive body said in a statement.
According to The Times, the British withdraw their deposits from the country’s banks and transfer them to deposits in neighboring Ireland, whose government decided to guarantee all deposits in local commercial banks in full. Dublin has already been accused of creating difficulties for non-Irish banks, as large private and corporate depositors worried about the safety of their deposits will rush to Ireland for security guarantees.
However, despite all the measures proposed by the European Union, of course, it will not be possible to avoid the negative impact of the financial crisis on the economy. The chairman of the Eurogroup, the governing body of 15 EU countries, Jean-Claude Juncker said yesterday that the forecast for the economic growth of the euro area countries for 2009 should be reduced to 1%. He noted that the growth of the global economy, including the performance of large states of the euro area, in particular Germany, Italy and France, “has definitely slowed down.” Mr. Barroso called the situation with the global financial crisis very serious: “We are going through a crisis, but we have the means to overcome it together with our world partners.”
However, thanks to the initiatives of the financial authorities, as well as pending the decision of US politicians on the fate of the package of assistance to banks, European markets grew yesterday. Shares of Barclays Plc. added 4.4%, UBS – 6.7%, automobile concerns Daimler AG and Porsche SE – more than 8%. “The hope of a bill is the strongest support for the market,” said Bernard Maeder, managing director of Credit Suisse Equity Fund.
The Securities and Exchange Commission (SEC) of the United States, contrary to the calls of some lawmakers, is not yet ready to radically change the system under which the assets of companies and banks should be recorded in the balance sheets at their current market price, Bloomberg reports. The SEC allowed companies and banks to rely more on their own judgments when evaluating the price of assets that are not traded on the market or whose trades are actually frozen. Currently, banks are required to quarterly adjust the value of a number of assets based on their current market price. Many lawmakers believe that amid falling mortgage prices, it was this rule that led billions of dollars in write-offs by financial companies, which ultimately undermined market confidence. Some lawmakers have proposed a moratorium on its application and a clause in the government bill to support the US financial system. In their opinion, the current market prices for securities related to mortgages are completely divorced from reality, since there is a “fire” sale of all these obligations. Their opponents believe that such a step can be compared with the behavior of a patient who scolds a doctor for having been given a true diagnosis.