|
|
The Zoom video of the 161st B4B can be viewed here
As it was just David and I speaking – prodded by Andrew’s questioning - David led off with thoughts about the Brexit negotiations. Gloomily, he feels that it is now less than 50:50 that there will be a deal at all. However, he was sanguine about the possibility of an extension - but only agreed at the very last moment.
Covid19 has dominated everything since our last meeting in mid-March when the number of new cases in Europe that day was just under 5,000 (versus the peak of 41,000 just three weeks later) - see attached Covid chart of daily new cases in Europe. The following day, the Commission set out its co-ordinated response to the pandemic – though much of the response is national as the EU itself has no role (competence in EU-speak).
Though small numbers were discussed in relation to say EIB lending, the really significant decisions were to authorise the fullest flexibility of the State Aid regime and the Growth Pact Framework. Eurogroup stated that the automatic stabilisers in the economy should be allowed to work fully and had already agreed national fiscal measures of 1% of GDP – combined with liquidity measures that amounted to 10% of GDP even in mid-March. Eurogroup also gave the ECB political cover for its decision to launch a €750 billion Pandemic Emergency Purchase Programme (PEPP) that allowed the purchase of Greek government bonds and a widening of eligibility criteria for other assets.
The rapid emergence of a vigorous debate on issuing jointly–guaranteed“corona bonds” seems to overlook that an EU institution – the ECB – may soon run its balance sheet up to €5 trillion (getting on for 40% of EZ GDP). EZ members are proportionatelyliable for this balance sheet! At the moment of the webcast, the Eurogroup President was reporting that the nearly all-night virtual meeting had failed even to agree reduced conditionality on ESM lending.
We also discussed the regulatory response to the need for major actions by the banking system. Just before our March meeting, the STOXX index of EU bank shares had hit a peakfor the year of 102 (back to the same level as 1/3 of a century ago!). A month later the index sank to 49 as bank shareholders began to digest the Covid implications – pricing banks at about 25% of their published book value.
The regulators sprang into action on two levels: relief measures on both capital and loan-loss provisioning. The Pillar 2 Guidance buffers were released immediately and the more relaxed CRD V composition of capital for Pillar 3 Requirements was immediately implemented. Together, this amounted to a release of €120 billion of CET1 capital – about 10% of the total in the banking system. So far so good. More controversially, banks were permitted to use more flexibility in the treatment of NPLs and the “expected credit losses” that will have to be reported under IFRS 9. If debtors do not pay due to a public moratorium then that individual debtor should not be treated as a missed payment. Moreover, that categorisation does not click in until a payment is 90 days past due.
I am not the only person concerned about this move and I cited Nicolas Veron’s recent paper on the subject. Investors already seem to have major concerns about the genuine quality of bank assets. If the authorities now connive to reduce the credibility of stated assets even further, then we may have started slipping down a slope where there may only be one buyer of new bank equity should it be needed. The risk of de facto nationalisation has returned very quickly. More in the months ahead.