Saturday, July 7, 2012

7/7/2012: Banking union - a bit of a folly

Daniel Gros makes a cogent argument on banking union at :

However... his argument is partially self-defeating.

Unified banking operations for an Italian bank with german subsidiary he uses as an example, by allowing transfer of liquidity (funds / deposits) from German subsidiary to cover Italian parent's liquidity demand that arises from Italian bank's overall elevated riskiness would be, in effect, a case of mis-pricing risk for German customers of the Italian bank. Should these customers re-price risk post-banking union, the customers will walk out of the subsidiary and the Italian parent bank will still be short of liquidity.

Thus, unless Italian bank is made a German bank (or until), the problem will remain. The only way for the supervisory authority to avoid the problem arising in the short run is by deceiving German customers of the Italian bank.

In addition, in order to make an Italian bank into a German bank, common supervision will require full convergence of all banking models to a common denominator. Whether such a convergence yields a better Italian bank (by the standards of the day) and / or a less safe German bank is a matter of more than supervision, but of a full regulatory convergence.


Brian O' Hanlon said...

What we have in parts of the Euro zone today, is not an economic crisis, but an economic crisis which has morphed into a political one. The later has been largely defined by journalists and broadcasters. Policy makers are to a large extent, living side by side with journalists and broadcasters in the same echo chamber. This is quite unacceptable.

Journalists are always talking about a need to have a national conversation. Journalists always seem very concerned over issues such as loss of national sovereignty of one kind or another. Both are erroneous I believe, and more so, this framing of the problem has led to a position, where we fail to see even the richest opportunities (that may still exist, even in the midst of the worst crisis).

I telling ourselves, over and over again, that we have lost sovereignty, that message turns into something else. We may have lost sovereignty, but I dispute this analysis which seems to be very popular in Irish journalism, broadcasting and politics, that there is nothing left to be done - one sovereignty has been lost. I dispute this in the utmost.

On the contrary, solutions are very difficult to find (from a realistic policy making point of view), when one tries to operate at the national level. This idea of having a national conversation, which journalists always seem to return back to, is fatally flawed. The problem with the national conversation, as far as this island goes, is insufficient local or regional conversation to serve as the springboard for anything at national level.

I also have grown to despise the attempts of keen political observers, in Irish broadcasting and journalism, who choose to exercise their eagle eye to spot inconsistencies in the policy approaches of political parties.

For instance, those parties who may operate both north and south of the border in Ireland.

Journalists will often argue, that it is necessary to have the same 'policy' approach on both sides of the border. I.e. In all regions, on the island of Ireland. This is the very opposite, to what good policy formation should be about. Good policy making, should try to be tailored, and try as much as possible (unless necessary) to be spread like a blanket at national level.

It betrays a fatal lack of understanding about real policy making, if we claim that inconsistencies between regions on an island with diverse needs and problems, equates to a failure of the design of policy.

We can sit around and bemoan our loss of national sovereignty, but what we really haven't faced up to (and are perhaps unwilling to do), is to admit to the real need to design/implement policy at local levels first, and at national level, only later.

Really, is not at the national sovereign level that the opportunities lie - in good or in poorer times. There are a wealth of opportunities that exist, as we speak, for those who wish to fully exercise logic. BOH.

Brian O' Hanlon said...

To take this to a pure extreme (and perhaps absurd, though not really), I have recently commented elsewhere that what is occurring in parts of the island of Ireland, such as the western seaboard, is akin to austerity layered on top of a pre-existing austerity or lack of development.

In other words, what my thesis would suggest, is that the western part of the island of Ireland doesn't really need austerity applied to it. What may be more appropriate and cheaper in the given circumstances, is for some kind of stimulus to be applied in the western half of the island of Ireland.

I have also commented elsewhere recently, that the northern part of the island already operates under a different policy framework, and we don't find that weird.

Something, which undergraduates who write academic papers about, and we all could have genuine policy discussions about, are some really radical ideas, such as: would it make any sort of sense, if a particular region of Ireland were to be released from the IMF program earlier than another part?

Of course, there would be enormous rows over this, especially in national conference centres such as the Oireachtas.

My instinct though, is that in terms of timing and sequencing, the south western region of the island of Ireland, is probably affected quite differently by the current economic, social and political climate - than is the eastern coastal corridor. My instinct, suggest to me, that the south west region of the island is ripe at the moment for significant inward infrastructural and energy project investment.

The main reason being, the human capital and resources that are now available (as a kind of opportunity), in that highly industrialised part of the island. I should imagine that in the great European continental nations - they do not attempt to foster this delusion of one single 'policy' for all regions - within the sovereign nation. But in Ireland, in the republic, we seem to stick rigidly to that.

It may be an unfortunate historical by-product of partition-ism. But it is unfortunate, in Ireland, because it alters the way we view policy making opportunities, in a negative way.

My instinct, also suggests to me, that in the densely developed and populated eastern coastal corridor on the island, which is a very interesting area within Europe (and attracts all sorts of interesting visitors, including Mr. Gurdgiev), that economic stimulus in the plain sense may not even be the largest lever for policy making.

My instincts tell me, that social issues and understanding might play a crucial role going forward in more heavily urbanised areas such as the greater Dublin/eastern corridor, and possibly also in the other large centres of Cork or Belfast.

But the main point, I wished to bring to the table, is that we are herded by the journalist community in Ireland at the moment into these dead-end ideas, of 'national conversations', or 'national sovereignty'. But that is clearly, not where the game is at.

The best way to have a true 'national conversation' is to acknowledge, rather than to deny the existence of regions, and to stop thinking about the 'north' as some thing apart, some partition apart from the rest. The only way to have a real national conversation, is to allow strong committees to exist within our national parliament - committees, which represent at national level - the unique perspectives of the regions on the island.

And also, not to find fault in political movements or parties, which seek to vary their policy strategies between the different regions.

Brian O' Hanlon said...

Correction: Good policy making, should try to be tailored, and try as much as possible (unless necessary), NOT to be spread like a blanket at national level.