4 December 2008
Support to SMEs: CDP rates to banks down a further 10 bp
CDP (Deposits and Loans Fund) has again cut the interest rates applied to loans to the banking system addressed to supporting small and medium enterprises (SME), by reducing the spreads on the 6-month by 10 basis points. The two new spread brackets are therefore 50 and 70 bp. Full text >>
3 December 2008
President Faissola on the ongoing financial crisis
Mr. President, what do you think of the ongoing financial crisis?
Approximately 15 months after the start of the financial crisis, the implications related thereto are clear: this is not just any setback but the worst crisis since the 1930’s. It is the result of an accumulation of grave abnormalities in the business model (originate to distribute), moreover not merit less (distribution of risk, market growth, lower capital absorption and therefore making it less expensive to get credit which in turn led to more access to credit).
What in your opinion are the original causes of this crisis?
The financial crisis that we are going through has a structural and global character: unfortunately there is not just one culprit since it resulted from a financial innovation cycle involving various players. There are many market participants to blame including not only the banks and financial institutions (regulated and non-regulated) that originated the credit and securitized the loans which today are referred to as “toxic”, but also credit rating agencies that ranked the bonds deriving from the original credit, standard setters that were in charge of examining the correct accounting methods as well as oversight and supervisory authorities. This was true, above all, in the countries where the phenomenon started.
How is the crisis affecting the EU?
The effects on the European economy became evident and suddenly worsened at the beginning of last September, in the wake of important decisions taken by the FED and US government as they tried to contain a crisis that risked degenerating further.
On 29 September, the epicenter moved to Europe. After two days of the markets plunging, the governments of Belgium, Holland and Luxembourg saved the financial group Fortis, while the British government nationalized Bradford & Bingley, the second national financial group specializing in “buy to let” mortgages.
For what regards Italy, what is your opinion of the current state of Italian banks?
For what concerns Italian banks, I’d like to repeat and underline that the original causes of the financial market crisis appear to be external to the national banking market and that Italian banks are sheltered from the factors triggering the financial crisis: easy credit, depreciation of structured financial instruments and the crisis of off-balance sheet vehicles. I believe I’m in a position to maintain that the Italian banking system is the soundest system in the world at the moment.
Can you be a little more precise?
There are many differences between the Italian banking market and that of the other countries.
For what concerns the composition of assets, it must be noted that the majority of Italian bank assets are constituted in funding to customers residing in the Euro Area, which accounts for almost 50% of total assets, higher than the average Euro Area (36.2%) and the average of Germany, France, Spain and Holland: 43.1%. Only Spain is higher (exceeding 60%).
Just as remarkable are the differences in the composition of liabilities. With respect to the Italian banking market as well as for that of Germany, Spain and Holland, we note a percentage exceeding 50% on the total liabilities of direct deposits (resident deposits and bonds). Italian and German banks are those that resort to issuing bonds more often in an amount approximately equal to 20% (15.2% is the average in the Euro Area, scarcely 14% in France and Holland).
Since the ongoing crisis is a deep crisis, we have reason to wonder about its real effects on the global economy. Is there any reason to fear a credit crunch?
I think not. Naturally, the banking industry has given due consideration to the recent concerns regarding a possible reduction in credit flows and a consequent increase in the cost of credit.
Actually, the aggregate data in our possession leads us to believe that currently there are no indications of tightening neither with respect to the amount of funding nor the prices related thereto.
According to recent official data in Italy, in the trimester May to September 2008, the long-term growth rate of lending rates to firms was on average approximately 11.3%, a slight reduction with respect to the highs (+14.5%) recorded at the end of 2007, but notably higher than that recorded in the period January 2004 – July 2008 (+8.8%).
Is there a solution?
The real effects on the global economy are potentially serious; to minimize them, a combination of instruments are necessary: fiscal and monetary policies, structural and regulatory reforms.
There are many risks brought on by this crisis but there are also opportunities that the crisis has exposed. We need to minimize the former and seize the latter.
I’d like to highlight the strengths of the Italian banking sector and the national economic system: i) absence of subprime investments; ii) traditional model of retail banking; iii) low level of financial leveraging; iv)low debt load of Italian consumers; v) sub-penetration of banking products; vi) relatively healthy real-estate market; vii) good quality assets.
2 December 2008
Interview with Alessandro Profumo, the new president of the EBF
Mr. Profumo, you were elected Chairman of the European Banking Federation (EBF) in the midst of a global financial crisis, which many observers consider as being the worst crisis since World War II. What are in this context the priorities for the European banking system?The banking business is essentially based on a unique asset called ‘trust’. Therefore, our first challenge is to restore trust, which in the current environment is at a particularly low level. I mean trust between banks and trust placed by savers and markets in financial institutions.
How can we restore trust in the markets and among individuals?
We can do it through some real and perceivable changes. Each party must to do their share. Banks need to move simultaneously in two directions – nurturing their relationship with customers, savers and companies on one hand, and with the financial institutions on the other hand.. If banks do not have trust in each other and if the inter-bank market does not start to function normally again, any action taken risks to have only limited effects. The EBF can play a key role in restoring a climate of trust among European banks. The crisis has spread so dramatically that bankers and financial institutions need to return to doing business with each other in a competitive environment if we don’t want to run the risk of seeing governments and national authorities take uncoordinated measures and impose further restrictions on credit activities, thus changing the rules of the game in Europe. This doesn’t mean that governments and supervisory authorities will not be asked to play their role as well.
The catch phrase coming out of international summits attended by world leaders is the need to look for a new global financial order, some kind of a new Bretton Woods. What would you suggest, as chairman of the EBF?
A new financial order should set out rules to avoid the excesses and the mistakes that have led to the ongoing crisis. With regard to the agenda set out by the G8 and the G20, the EBF should actively participate in the debate by proposing new measures and initiatives. Banks operating in the EU should endorse the considerations made by the European Commission, where it states that “Europe’s strength lay within the solidarity among its members and the ability to act together”.
According to today’s common wisdom, the world hasn’t just entered a new phase; it is rather at a turning point, where market economy is not sufficient any longer. Do government interventions in the US and Europe really mean the end of an era?
In my view, the key question we need to address is the following: is the government a player or a regulator? I believe that the government’s regulatory function should be broader and more effective than it has been so far. But I don’t think the government should be involved in running companies, unless urgent intervention is needed and provided that any involvement in is temporary.
How will you define the environment in which you expect to work in the next two years, as chairman of the EBF?
Certainly I expect an environment characterized by a number of risks but also opportunities. On the risk side, I would mention an unfavorable global economic scenario; a growing aversion to financial innovation and to globalization; and a danger of government intervention destined to alter the markets’ competitive framework, as well as a danger of markets’ overregulation.
What about the opportunities?
They lay in my view in the growing awareness that to get out of the crisis we need to overcome all legal, regulatory and fiscal obstacles that hinder the development of a European single financial market. I can also see a favorable environment for an increased cooperation amongst international supervisory authorities in charge of monitoring financial markets. Finally, I note that the debate concerning the new EU financial supervision framework has gained considerable momentum.
How could this debate unfold and what would be the shape of any new framework?
The financial crisis has highlighted the need for a more effective management of cross-border banking groups as well as the urgency of a better coordination between supervisory bodies, by enhancing the European dimension of both national authorities and colleges of supervisors. However, we have to take into account that those countries whose banking system is mostly based on foreign owned groups do oppose the development of a more integrated supervision framework at the EU level; this is due to the fact that these countries fear that they could be left out of the process and in a way sidelined. And that’s the reason why the European Commission appears to be increasingly oriented towards a two-tier financial supervisory system: a national system for local banks and a federal system for European financial groups.
The possible coupling of a credit crunch and a recession is currently one of the major concerns in Italy and Europe. Is there such a risk? And what can banks do to avoid that risk?
The ongoing crisis has an international dimension, which requires a collective effort and a shared purpose from all of us - European banks, the European Commission, the European Central Bank as well as Governments and national Authorities. We all have to take our part of responsibility and help to provide additional sources of liquidity and to support lending in the economy. What is important in my view is to adopt coordinated measures and to ensure that markets and competition are not harmed by decisions taken at national level, which bear the risk of widening the discrepancies between the terms and conditions applied to lending in the various countries. Let me add that such national oriented decisions would not only distort markets and competition in Europe, but equally they would fail to effectively support the European economy as a whole.