“Euro-zone banking – a fatal flaw ?” by

J. Paul Horne Independent International Market Economist at

Global Interdependence Center Investment Panel Paris, France Tuesday, 11 March 2014 1

“Thanks, Greece, for saving the euro !” Euro changes since Greek crisis began Nov09: + Draghi guarantee: ECB will do whatever it takes to save € + Banking union with ECB as single regulator + European System of Financial Supervision (ESFS) (next slide) + European Stability Mechanism (ESM) to bail out states + EU fiscal pact for fiscal coordination, governance and stability + European Council on Systemic Risk is functioning + ECB: Unlimited 3-year financing for euro zone banks + Cyprus & Greece = Bail-ins as well as bailouts + EU-wide deposit insurance for small savers 2

Bund (lt) vs. Greek (rt) yield gap improves‌

Convergence of a sort.

Source: http://www.tradingeconomics.com/germany/government-bond-yield _ 4mar14 3

Weighty cultural, and financial, differences

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Source: IHT, 5mar13 4

Euro peripherals debt & belt-tightening

Source: Martin Wolf in Financial Times, Jun13 – OECD & IMF data 5

European System of Financial Supervision (ESFS) Includes: + European Banking Authority (EBA) – EBA and ECB conducting Euro bank stress tests + European Systemic Risk Board (ESRB) – chaired by ECB + European Securities and Markets Authorities (ESMA) + European Insurance and Occupational Pensions Authority (EIOPA)

EBA risk assessment of European banking system

Markets believe in Draghi « guarantee »

Source: EBA « Risk Assessment of the European Banking System », Dec13 7

EBA: Fragmentation of Euro banking system ?

Source: EBA - « Risk Assessment of European Banking System », Dec13 8

Top 20 EU banks CT1 Ratios improve EU banks’ CT1 ratios up as much as US banks but with less equity.

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Source: EBA « Risk Assessment Of European Banks », Dec13 9

Euro Area Forecast 2014 - 2015 Real GDP 2012 2013 E 2014 F Euro zone Germany France EU-28 U.S. World

-0.7 0.7 0.0 -0.4 2.8 3.1

-0.4 0.4 0.3 0.1 1.9 2.9

2015 F

1.2 1.8 1.0 1.5 2.9 3.6

1.8 2.0 1.7 2.0 3.2 3.9

12.0

11.7

Unemployment Rate Euro zone

11.4

12.1

Source: European Commission, 25feb14 10

Germany – Just Resting Up…

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USD-EUR rate : 1999 to Feb14

Euro crisis began Nov09. USD:EUR avgd $1.309 since.

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“Conceptual convergence” of central banks’ policies and objectives ? – J-C Trichet 1) « Price stability » circa 2% = key target 2) Communication is essential 3) Surveillance of bank & non-bank risks must be shared by CBs 4) Monetary & credit creation by banks & nonbanks essential responsibility of CBs 5) Unconventional monetary policy (bond-buying or liquidity injection) must assure system liquidity 6) Forward guidance to markets necessary but must NOT damage CBs’ credibility. 13

The ECB vs. the Fed – different approaches

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