Opinion

Hugo Dixon

Capital markets union needs deregulation

Hugo Dixon
Sep 15, 2014 09:24 UTC

By Hugo Dixon

Hugo Dixon is Editor-at-Large, Reuters News. The opinions expressed are his own.

One of the biggest projects for the next European Commission, which takes office in November, will be to create a “capital markets union.” President-elect Jean-Claude Juncker last week gave Britain’s Jonathan Hill the task of creating such a union “with a view to maximising the benefits of capital markets and non-bank financial institutions for the real economy.”

The prime goal of capital markets union should be to develop healthy sources of non-bank finance that can fund jobs and growth. The European Union suffers from clogged up and fragmented capital markets, which are a fraction of the size of their U.S. equivalents. Changing this is vital because banks, especially in the euro zone periphery, are on the back foot and not able to finance a recovery on their own.

How exactly should this capital union be created? In some cases, no doubt, there will have to be new regulations. One of the ironies of creating any single market – and the capital markets union project can also be viewed as completing Europe’s single market in capital – is that rules have to be passed to break down barriers that balkanise the market.

But new rules are not the only answer. The main thrust of capital markets union should be about liberating, not controlling, markets. In pursuing this, some of the regulations put in place in the wake of the financial crisis will need to be revised because they are holding back non-bank finance.

Gas and bank security have similarities

Hugo Dixon
Sep 8, 2014 09:56 UTC

Europe is currently conducting two stress tests. One is on its energy suppliers, to see how badly they would fare if Russian gas was disrupted. The other is on euro zone banks, to ensure they are strong enough to finance economic recovery.

It is hard to know which of the two is the more important. But it is clear that an effective regime for energy security requires many of the same elements as financial stability.

One is the need for credibility in the stress tests. Europe flunked its original bank assessments by modelling scenarios that weren’t sufficiently stressful. The new test being conducted by the European Central Bank looks more credible.

Is Greece losing its reform drive?

Hugo Dixon
Jun 23, 2014 08:34 UTC

By Hugo Dixon

Hugo Dixon is Editor-at-Large, Reuters News. The opinions expressed are his own. 

Is Greece losing its reform drive? Prime Minister Antonis Samaras has stuck to a harsh fitness programme for two years. But just as it is bearing fruit, he has sidelined some reformers in a reshuffle. There is only one viable path to redemption for Athens: stick to the straight and narrow.

The Greek economy is not out of the woods yet, although the measures taken to balance public finances and restore the country’s competitiveness are having their effect.

EU needs more non-bank finance

Hugo Dixon
Jun 2, 2014 08:40 UTC

The European Union needs more non-bank finance. Banks are on the back foot. On their own, they won’t be able to fund the jobs and growth the EU is desperate for. Non-bank finance needs to take up the slack.

The European Central Bank and Bank of England have made a good start by identifying the importance of reviving securitisation – the process of packaging loans into bond-like securities which can then be traded on the market. The two central banks have just published a joint paper describing blockages in the system which have all but killed EU securitisation since the financial crisis.

But securitisation is only one piece of the non-bank finance landscape. Similar leadership is needed to invigorate venture capital, equity investment, bond issues for small companies, shadow banking and so forth.

How to fix the UK’s housing mess

Hugo Dixon
May 19, 2014 09:56 UTC

By Hugo Dixon

Hugo Dixon is Editor-at-Large, Reuters News. The opinions expressed are his own.

The Achilles’ heel in Britain’s strong economic recovery is the mess in the housing market.

House prices are rising yet again – by 10.9 percent in the year to April, according to Nationwide. This raises the risk of yet another cycle of boom and bust, so much so that the Bank of England recently described rising house prices as the “brightest light” on its risk dashboard.

EU’s half-baked bank union could work

Hugo Dixon
Mar 10, 2014 16:12 UTC

The European Union’s half-baked banking union could be made to work – even though it wasn’t strictly needed to solve the euro zone’s problems and what has been agreed isn’t what the designers wanted.

The original advocates of banking union saw it as a way to prevent the euro collapsing during the dark days of early 2012. The idea was that a well-funded, euro-wide deposit insurance scheme would stop savers panicking. Meanwhile, if banks got into trouble, a strong euro-wide safety net would be able to bail them out.

During the crisis, savers and investors lost faith in the ability of weak governments to rescue their banks. That’s why banking union enthusiasts wanted euro-wide support systems.

ECB faces severest stress test

Hugo Dixon
Feb 24, 2014 10:25 UTC

A lot is riding on the cleanup of euro zone lenders being overseen by the European Central Bank. The progress so far is encouraging. But clarity is needed on a few points to ensure that lenders really do get a good scrubbing and are therefore able to support the zone’s fragile economic recovery.

The ECB is in the midst of a so-called comprehensive assessment of euro zone banks. This has two elements: an “asset quality review” (AQR) to determine whether the loans and other assets held on their balance sheets are valued properly; and a “stress test” to check whether they could withstand a severe economic downturn.

To pass the test, banks are supposed to have a “common equity Tier 1 capital ratio,” a measure of balance-sheet strength, of 8 percent in the baseline scenario; and a ratio of 5.5 percent in the adverse scenario. The whole exercise is supposed to be finished by October before the ECB officially takes over from national authorities in November as lead supervisor for the zone’s banks.

Athens can capitalise on market interest

Hugo Dixon
Nov 18, 2013 09:45 UTC

Greece has been the markets’ whipping boy for most of the past four years. But in the last few months, sentiment has changed and international investors are bottom-fishing – in particular for banking assets.

This gives the country a double opportunity: lenders can use it to clean up their balance sheets by selling non-performing loans; and the state can privatise its stakes in the banks. Both should grab the chance while it lasts.

Greece’s banks have been in a terrible mess as a result of the crisis. Not only were they loaded up with government bonds, which got haircut; even the big four that survived are weighed down by about 65 billion euros of non-performing loans, equivalent to around a third of GDP.

The City has huge scope to expand

Hugo Dixon
Oct 28, 2013 10:14 UTC

Finance has rightly been in the sin bin for the last six years. And the cleanup job isn’t finished. But Mark Carney, the new Bank of England governor, is correct to stress how a large and expanding City of London is good for Britain, Europe and the world – provided it is properly organised.

Carney’s comments, in a speech last week, will seem heretical to many – maybe even to his predecessor, Mervyn King, who showed a barely disguised disdain for financiers. Would it really be healthy, for example, for the balance sheets of British banks to reach nine times GDP, double the current ratio – as Carney projected they could by 2050?

British public will have some big questions about the potential resurgence of finance. Will taxpayers be asked to swoop in again to bail out bust banks? If a rescue is needed, would the government have the wherewithal to support a gigantic sector? Is it wise for the UK to put so many of its eggs in the finance basket?

Bundesbank right to focus on doom loop

Hugo Dixon
Oct 7, 2013 08:48 UTC

Germany’s Bundesbank is not afraid of playing the role of bad fairy. Last year it opposed the European Central Bank’s scheme for buying potentially unlimited quantities of sovereign bonds – a promise which ended the hot phase of the euro crisis. Last week, it criticised rules that encourage euro zone banks to load up on their own governments’ debts.

Jens Weidmann, the Bundesbank president, is right to put this topic on the agenda. After all, the exposure of banks to governments is one half of what has been dubbed the “sovereign-bank doom loop.” When governments such as Greece got into trouble, they dragged their banks down as well. (The other half of the doom loop involves troubled banks dragging down their governments.)

The problem is how to break this loop without triggering a new crisis in vulnerable countries such as Italy and Spain. After all, if their banks were suddenly told to cut their holdings of Italian and Spanish bonds, Rome and Madrid would be hard-pressed to fund themselves.