Transcript Document

Portoroz Business Conference November 2013
Rethinking banking after the
crisis
Professor Brian Lucey
Trinity College Dublin
November 2013
Portoroz Business Conference November 2013
Banking Crises are costly
In Debt
In lost output
IMF preliminary estimates are of crisis cost > $12tr
Portoroz Business Conference November 2013
But are relatively infrequent
Were we “overdue”? (Data from Laven “systemic crises database”
Portoroz Business Conference November 2013
GFC was a worldwide phenomena
Portoroz Business Conference November 2013
Main thesis of this talk
• GFC was a function of overly large and
powerful banking sector
• Need to “rein this in”
• But this will be costly
Portoroz Business Conference November 2013
Good news : Long-term trend 1
Share of World GDP
100
90
80
70
60
50
40
30
20
10
0
Rest of World
North America
Sub-Saharan Africa
European Union
China, People's Republic of
India
Russian Federation
2018
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
Brazil
Portoroz Business Conference November 2013
This is a GOOD THING
• Companies need consumers with sufficient income to
purchase goods
• Consumers need companies with sufficient profits to
innovate
• Both need modern, effective, banking systems to
intermediate spatially and temporally
• The latter has broken down… it needs fixing
Portoroz Business Conference November 2013
Slow steam ahead…
% Growth in world GDP Share
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
92-00
00-10
10-
Portoroz Business Conference November 2013
GDP PC Slovenia tradepartners
Portoroz Business Conference November 2013
Euro crisis continuing
• Europe continues to be bedeviled by a
combination of imbalances
– Personal financial indebtedness
– Banking weakness
– Governmental financial weakness
– Balance of Payments issues
Portoroz Business Conference November 2013
Personal financial indebtedness
• Significant net wealth
• Significant hidden strains on household budgets
• Euro Household Finance survey useful database
but major caveats on household size, role of
homeownership, corporate etc
• Banks mispriced debt issuance to consumers
Portoroz Business Conference November 2013
PSC growth was widespread
60
Belgium
50
Bulgaria
40
Czech Republic
30
Germany
Denmark
Estonia
20
Ireland
Greece
10
Spain
France
0
Croatia
-10
Italy
Cyprus
-20
Latvia
Lithuania
-30
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Portoroz Business Conference November 2013
PSC Growth > GDP usually
Years since 2001 when PSC growth > GDP Growth
Sweden
Slovakia
Romania
Poland
Netherlands
Hungary
Lithuania
Cyprus
Croatia
Spain
Ireland
Germany
Czech Republic
Belgium
0
2
4
6
8
10
12
Portoroz Business Conference November 2013
PS Debt as % GDP
400
2012
350
%increase
300
250
200
150
100
50
0
-50
Since 2001 most countries have seen significant rises Median debt/GDP is 136%, rise 61%
Portoroz Business Conference November 2013
Low income = vulnerable
•
43.7% of households in the euro area have (some type of) debt; 23.1% have
mortgage debt, while 29.3% have non-mortgage debt.
•
median value of mortgage debt (€68,400) substantially exceeds the median value
of non-mortgage debt (€5,000).
•
median debt-asset ratio among households having debt is 21.8%, the median
debt-income ratio is 62.0%, the median debt service-income ratio is 13.9% and
the median loan-value ratio of the household main residence is 37.3%.
•
low-income households particularly financially vulnerable to economic shocks.
For these households, an adverse shock to labour income or to interest payments
is more likely to lead to an unsustainable debt burden and economic distress.
Portoroz Business Conference November 2013
Household Debt by country
250
200
150
100
50
0
Debt to Income
D service / Income
Portoroz Business Conference November 2013
Government weakness
• Bailouts were in one
way or other the order
of the day
• A Doom Loop was
created
• Bank Capital escaped
relatively unscathed.
5000
0
-5000
-10000
-15000
-20000
-25000
-30000
-35000
-40000
-45000
BE CZ DE IE ES HR CY LT HU NL PL RO SK SE
Portoroz Business Conference November 2013
Balance of Payments issues
• We cannot export our way out of this crisis…not
even Germany can
• Persistent imbalances are a problem. And they
are not all on one side of the equation
– Overly large surplus => unwarranted deflationary bias
– Overly large deficit => unwarranted expansionary
bias
Portoroz Business Conference November 2013
Trade balances improving
Portoroz Business Conference November 2013
German demand weakness
“The most interesting panel is the third one, which shows that
German exports to countries outside the EU have increased rapidly,
but German imports from these countries have fallen recently. This
suggests that weak German demand should have played a role”
Brughel 13 November .
Portoroz Business Conference November 2013
Germany needs to spend…
Germany lagging in final consumption..
150.0
140.0
German Final Consumption
slowest growing behind
Netherlands and Greece..
130.0
120.0
110.0
100.0
EU28
Germany
Ireland
Greece
Spain
France
Croatia
Italy
Netherlands
Austria
Slovenia
Finland
United Kingdom
United States
Japan
Portoroz Business Conference November 2013
Germany needs to spend…
Portoroz Business Conference November 2013
Banks weaknesses
• Not delivering on SME Finance
• Senior Debt overreliance
• Incoherence at European level regarding
funding model
Portoroz Business Conference November 2013
SME a core-periphery problem
V large percentage of firms
in Greece (61%), Spain Italy
(both 50%) and, to a lesser
extent, Portugal (40%)
reported that this is a very
pressing problem (scale 710), while the
corresponding percentage
in Germany and Belgium is
around 30% and in Finland
it drops to 24%. At the
same time, 55% of firms in
Finland, 45% in Belgium,
and 43% in Germany and
Austria considered access
to finance a not pressing
problem
Portoroz Business Conference November 2013
Discouragement/ profitability a
problem
in line with weak profits
the share of SMEs having
sufficient internal funds
and therefore not
applying for a loan was
considerably lower in
Greece (28%) and
Portugal (33%).
Especially in Greece
(14%) and Ireland (16%),
the fear that their
application
would be rejected was
considerable, reflecting
the difficult situation in
the banking sector and,
in particular in Greece,
the weak profit
developments for SMEs
Portoroz Business Conference November 2013
Policy Incoherence
• Banks need to become more stable =>
deposit base needs to increase
• Bail in possibility reduces attractiveness of
deposits
• Senior Debt remains a large part of funding
Portoroz Business Conference November 2013
Senior Debt overreliance
Portoroz Business Conference November 2013
Problem of Banking sector
• General issue : financial sector is a sector of the
economy not the whole.
• Danger that it has become “tail that wags the dog”
• Financialisation of quasi or full public goods gathers
apace
• Banking system is broken
Portoroz Business Conference November 2013
Solving this ?
• Two elements on this
– Shrinking the size of the system and the size of
the elements of the system
– Shifting emphasis from the broken banking
model to a more sustainable approach
Portoroz Business Conference November 2013
Shrinking the system
• Banks and the financial sector are
– As a whole too large
– Individually too big to fail and too big to bail
– European fumbling has created a bank-sovereign ‘doom
loop’ that is as yet unbroken
– Bank governance and organization focused to much on
shortterm
– Danger of more and more Minsky Moments
Portoroz Business Conference November 2013
Moral Hazard Redux… and redux
• Banks fail in their ability to price risk
– Corporate
– Macroeconomic
– Systemic
• Banks get bailed out, some people go
– But culture remains the same or worse
– Stulz findings
Portoroz Business Conference November 2013
Stulz
• Banks that did poorly before do poorly again
• Shareholder board alignment => taxpayers on hook
• As per Eurozone SME DEMAND biggest issue
Portoroz Business Conference November 2013
Towards sustainable finance
• Three things need to happen
– Supply side arguments alone don’t work. Need
for demand and supply ‘stimulation’
– Banking needs to be treated as an utility.
– EU needs to decide to U or not. U implies costs on
all sides
Portoroz Business Conference November 2013
Utility Banking.
•
What would this look like?
– Banks small enough to fail
– Remuneration and governance linked to long-term social and economic wellbeing
– Pooled, prefunded deposit insurance
– Bank resolution including bail in, coco bonds
– Chicago plan of 100% deposit backing for credit?
•
This would not be costless….
– Higher cost of capital (as high as fragmented union?)
– Lower credit creation (deleveraging is happening anyhow)
– Loss of internal bank diversification
Portoroz Business Conference November 2013
Bordo-Lane NBER 2010 : era of strong regulation = era of less crises
Portoroz Business Conference November 2013
Unity
• Can we have in the future a monetary but not
fiscal union?
• Political misalignment with common good
• Myopic politicians and voters