With the EU’s leadership in transition, there are a lot of ideas for the new powers that be to sort through (or ignore, as they case may be) when it comes to reforming the continent’s financial infrastructure. There are also mixed verdicts on central bank interventions over the last decade, including by the ECB.
- Writing for the Peterson Institute for International Economics, Nicolas Veron argues that the European Commission must make creation of a true EU-wide banking union a top priority. Calling current steps towards a banking union incomplete, Veron says a true banking union, pooling risk and insurance, would break the “vicious circle” connecting banks and national governments, which are forced to prop up their failing banks at any cost.
- To do this, Veron explains that EU authorities must “decorrelate” banking credit from sovereign credit — something which can be done without changes to existing treaties. Veron makes clear that a banking union wouldn’t require eliminating structural differences between national banking systems, just breaking the chain between national governments and private banks. Finally, he makes it clear that he is not calling for immediate progress towards “capital markets union,” another long-term EU project that aims to strengthen banking across the union. Veron finishes with a short-term suggestion: do a better job fighting money laundering.
- Multiple authors have also addressed two new reports from the Bank for International Settlements, which deliver a mixed verdict on central banks’ interventions over the last decade, including the ECB. Writing for the Financial Times, Philip Lowe and Jacqueline Loh note that central bank interventions have been largely successful, steering markets away from volatility, steadying economic growth and avoiding deflation.
- On the other hand, also in the FT, Martin Arnold and Brendan Greeley highlight the BIS’ conclusion that the massive expansion in central banks’ balance sheets has had a negative impact on the functioning of financial markets. By buying trillions of dollars of bonds, central banks have definitely distorted markets, resulting in “scarcity of bonds available for investors to purchase, squeezed liquidity in some markets, higher levels of bank reserves and fewer market operators actively trading in some areas.”
- Some of the long-term effects may already be becoming clear, according to Arnold and Greeley, for example in last month’s sudden spike in U.S. short-term borrowing rates, which forced the Fed to inject $140 billion into markets.
- Looking even further down the road, the BIS warns that “some players may leave the market altogether, resulting in a more concentrated and homogenous set of investors and fewer dealers.” That could make it more difficult for the market to reallocate bonds when central banks begin unwinding their holdings.