Erste Group is making its feelings known about what should be done about the euro. Its CEO Andreas Treichl says regulation should be handled centrally, adding that deposit insurance should be treated the same way. “If we want to keep the common currency, we need a fiscal union in Europe,” he said. “And that must also mean that the states are prepared to subordinate their banking supervision to a European regulator.”
Meanwhile, Hospodarske noviny reports that Pavel Kysikla, Ceska sporitelna’s boss, says Greece, Spain and Portugal should leave the Eurozone. “If it’s communicated well, leaving the euro is manageable,” he says. “There are only a few months left to take this decision.”
“Greece [leaving] is bearable, Spain and Portugal would mean a bigger hit,” says his colleague on the Czech government’s economic council, Pavel Kohout. “But the expenses of these countries leaving would be lower than them staying in the eurozone.”
Bank stocks have jumped after hints that some of the toughest bits of the Basel III regulations could be lifted. Apparently they might not be forced to go to their shareholders and beg for more cash. It’s the uncertainty over how much equity banks will have to raise to meet the new regulations that’s been depressing the outlook for profits in the banking sector.
Hold your horses! says the European Union’s internal market commissioner Michel Barnier. Basel III will NOT be watered down. His statement reads as follows:
A few weeks ago, some people were accusing us of damaging the economic recovery by implementing rules which would be too tough for banks because they would impede their lending to the real economy.
Today, others seem to accuse us of the opposite with suggestions Europe would not be implementing Basel properly, thus not learning all the lessons from the crisis. Both criticisms are unjustified and simply factually wrong. And they will not affect my determination. I will not be swayed by various pressures.
Europe will implement Basel III: we have said it before and I confirm it to you today, the Commission’s proposals to implement Basel III will respect the balance and level of ambition included in Basel 3
Some people get the glassy-eyed look when banking regulations and the word Basel come up, but the issues are kind of crucial to the way business gets done. Rather than take our word for it, read the Alphaville’s review, which seems to be as relieved that something has been done, as the fact that it will take until 2019 to implement full. The biggest talking point is how much more equity the banks have to keep on hand (up to a whopping 7% now…), and whether banks would be wise to exceed that amount.
Watch for some banks to tap the capital markets in the near future as the moves towards compliance begin. Deutsche Bank, for example, is looking to finance its deal for Postbank, but its capital increase will have been influenced by the new reules as well. Santander’s purchase of WBK is also timed interestingly.
The FT carried a warning about problems that could arise from financial reform, as a crackdown on derivatives is probably underway. The idea is to make most derivatives be cleared by central counterparties. The derivative counterparty would be required to keep as much cash on hand as the potential liability under the contract. This could help reduce systemic risk by curbing the activities of hedge funds, but the FT warns that under EU regulations, real estate fund managers are being classified the same as hedge fund managers.
Unlike other industries, in the majority of cases, derivatives used by property companies are secured against the physical assets of the business. It goes without saying that a number of property companies will be unable, or unwilling, to put forward large amounts of cash as margin when the swap is already secured against the property itself. These companies will then have two options: either they restructure the hedging (by converting to fixed-rate loans) or they liquidate. The banks, of course, should be delighted with these alternatives as about the one thing they will value more than being able to impose higher margins in a restructuring is actually getting their money back.
This would fundamentally change the way in which property companies manage their risk. Companies will have to choose between funding themselves on a more expensive and less flexible basis, probably ill-suited to their business plans, or not hedging at all. The latter assumes, of course, that the banks would be willing to provide funding on an unhedged basis.