Banks from Northern Europe are offering...the safety of having your money parked in large, well-capitalized institutions based outside Europe's danger zone. The campaigns aren't subtle: HSBC Holdings PLC promotes its "safety and security" in Greece...
In Italy, consumer group Altroconsumo has been offering advisory services to jittery depositors since December. As a precautionary measure, the group is recommending that customers consider moving their deposits from domestic Italian banks to foreign banks that operate in Italy...
In Greece, HSBC's local unit is trumpeting "the safety and security of the bank with the greatest capitalization in Europe." The bank, with 16 branches scattered around Greece, is offering depositors 3.5% interest if they lock up their money for at least six month...
Foreign banks are offering competitive prices and the allure of safety. Barclays recently launched its new "depositos solvencia" Spanish savings productWhy is this good news, you may ask? It's just feeding the run away from local banks, which have invested heavily in now-tanking local economies and loaded up on sovereign debt.
Here's the answer. My favorite solution for Europe is sovereign default and keep the common currency. (Actually, that's my second favorite. Free market reforms tomorrow, start growing like China on Monday and pay back the debt is my real favorite, but we can only dream so much.)
The natural rejoinder is, what about the banks? Since the local banks have all loaded up on sovereign debt, then the banks will all go under, and won't that be a disaster?
My response has been to remind people of the difference between existing banks and a functional banking system. Countries need a functional banking system. They do not need all of the existing banks to continue, nor do they need all of the existing bank's creditors not to lose a cent.
Europe offers a particularly good playground here, because it's supposedly an open market. Greece is about the size of metropolitan Chicago. It can function well as Chicago does, with banking dominated by local branches of diversified international banks. If the local banks fail, that does not mean Greece will not have a banking system. Just transfer the assets and deposits of failed banks to HSBC, put up a new sign on the front window, and open for business.
And this news adds important facts to my scenario. Those large banks are already operating in Greece, Spain, and Italy and ready to take over.
Of course I am guilty of a bit of wishful thinking here. The article also shows how local banks are fighting back to keep their deposits. And it can't be long before local governments intervene to "save our banks from destructive international competition." In fact, the localization of bank regulation is one of the sadder parts of this whole mess. Had Europe really gone for a europe-wide banking system in the first place, that system would be in a lot less mess now.
Side note: The US discussion is all full of "the financial crisis proves we need more regulation." Europe's banks woes are entirely the product of regulation. What's failing is sovereign debt, debts of the governments that regulate things, not mortgage backed securities put together by greedy wall street bankers. The banks are full of sovereign debt because their regulators told them to do it, not because sneaky financial engineers got them to do it. Here is the fully regulated system on display for us.
Professor,
ReplyDelete- Can the “healthy” banks take the deposits of the non-healthy (which I imagine are by far a larger group)?
- Would the “healthy” banks remain healthy despite a Greek, Spanish and Irish (maybe Italy?) sovereign default?
- Let’s assume for a moment that the “healthy” banks can take the deposits and that they won’t be affected by the necessary sovereigns defaults. Would not they become by far too big to fail? With the corresponding problem of too much political power/lobbying and endangering the health of the country (e.g. USA).
Thanks.
"...In fact, the localization of bank regulation is one of the sadder parts of this whole mess. Had Europe really gone for a europe-wide banking system in the first place, that system would be in a lot less mess now. "
ReplyDeleteNot certain if you can make that assumption. Given how screwed up the Europeans are and now much of their economic decisions are dictated by political considerations. Perhaps we would now be looking at a situation in which there were NO healthy banks.
"Free market reforms tomorrow, start growing like China on Monday and pay back the debt is my real favorite, but we can only dream so much."
ReplyDeleteYou are not serious that you believe that there is some potential set of policies under which England, Ireland, Spain, Italy, France and Greece could start growing like China. They are at entirely different stages of development. China can still grow by adopting fifty year old western technologies.
Greece and Italy could grow by adopting 200 year old western technologies. Markets, property rights, rule of law, serious end to corruption, limited interevention, etc. etc.
DeleteI believe in the importance of property rights and the rule of law. I picked "Absalon" as a screen name because historically Absalon founded a city that became known as "Merchants Harbor", or "Merchants Haven" if you like, by imposing law and order and protecting the property of merchants. (Before you Google it, guess what the name of the modern city at that site is.) The rule of law and property rights have been instituted to a substantial extent in Italy and even in Greece.
DeleteChina is still coming off a low base and picking low hanging fruit and even their growth rate is slowing down as they start to converge with the West. Italy and Greece picked the low hanging fruit a long time ago.
In Greece, you have to submit a stool sample to export olive oil
Deletehttp://www.nytimes.com/2012/03/19/world/europe/in-greece-business-rules-can-puzzle-entrepreneurs.html?pagewanted=all
In Italy, it is common practice for people from small towns to take a public sector job, which often requires a move to a larger city, and then request a "closer to home" transfer after a year or two (automatically granted!), leading to towns like this one:
http://www.nytimes.com/2011/09/15/world/europe/italy-austerity-plan.html?pagewanted=all
I've even heard of a town in which *everyone* is a postman...no doubt an exaggeration, but you get the idea.
The United States may have already picked the "low hanging fruit"--although our gracious host might not fully agree. But its hard to refute that in Greece and Italy, there is a windfall lying uncollected on the ground. Unfortunately, the paperwork required to obtain permission to pick it cannot be processed at this time due to a scheduled strike.
Absalom is correct in the since that we all Ga-Ga'ed over China's remarkable rate of growth in the last 30 years but it was simply a matter of a backward agrarian nation industrializing and modernizing. India is undergoing similar growth now and they have a totally different system
DeleteHowever, it is also correct to say that a general turn to free-er markets, less bureaucracy, and more commerce-friendly laws in the European states would create more economic growth.
Here's an idea. Why don't strong foreign banks open offices in Greece that offer deposit accounts that are protected for euro-exit? If the euro-system stays intact, these deposits simply pay out euros as always. If Greece exits, the deposits pays out in euros or the market-value of drachmas per euro. Greeks will immediately move their deposits to this new bank (and its imitators) rather than risking keeping deposits in local banks that fail to offer this feature, or to banks located in Germany. The larger effect of this sort of scheme is that the bank run from Greece to Germany is stopped and Target2 imbalances cease to grow.
ReplyDelete"Why don't strong foreign banks open offices in Greece that offer deposit accounts that are protected for euro-exit?"
DeleteBecause part of Euro exit would almost certainly be forced conversion of debts whose "situs" is Greece from Euros to New Drachmas. Switching to a foreign bank would protect you from bank insolvency but not the forced conversion.
You are talking about common banking system/ regulation(?)
ReplyDeleteDo You count a common deposit insurance in?
I believe it would be a disaster and I don't think its any better than Eurobonds. If we keep moral hazard that is responsible for big part of this mess in the system, we are setting stage for a new problem! Thats why I agree with your "default-keep Euro" stance. Its not perfect because a lot of system embedded failures won't be solved (even though I think these are better this way, than putting most of the burden of so called firewalls on future taxpayers, while enabling politicians to continue with irresponsible conduct), but a default is a natural thing that has to happen, better now than later.