STUDIES, PRESENTATIONS AND COMMENTS
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Since 2007 I have been intensively involved in both public and behind the scene work on analyzing and partly managing the policy response to the European banking crisis, first its mortgage finance leg and then its sovereign finance leg.
Pls visit the new blog of my mentor and friend Klaus Engelen, Banking Union Watch. Klaus is the top senior financial journalist of Germany, a long-term contributor to Handelsblatt and co-editor of The International Economy and the Global Risk Regulator. I cannot fathom how much I owe him for his insights and contacts within the international public finance community.
My understanding of financial sector issues has been profoundly enhanced in these crisis years through regular interaction with my revered former University of Bonn professor Martin Hellwig. His breadth and depth of banking sector and institutional analysis is unrivalled globally.
October 2015 The German savings bank system (Sparkassen) is a political leviathan that in combination with their apex institutions (Landesbanken) has had command over huge volumes of public subsidies during the crisis (to absorb losses from US subprime to global shipbuilding), because of a de-facto guaranteed existence has major governance isssues (as exemplified by excessive board staffing and remuneration as well as politization), and in combination paralyzes any meaningful discussion about German financial sector reforms. A team of young journalists that uses crowd information gathering techniques has started to look into the governance issues, and a recent drastic case of mismanagement in Northrhine-Westphalia on which I commented.
May 2015: Comment on the potential destabilizing impact that a deepening Bund rout could have on German banks (German). Due to regulatory failure, in particular German regional banks hardly use long-term swaps or bonds to match fund their mortgage portfolios, and in addition hold high levels of long-term bonds. Mortgage originations in the German market due to the dual impact of 'interest binding shopping' by consumers, which has extended the non-callable periods all the way to 15 years on average by May 2015, and the declining rate levels bound for such long periods, show strongly increasing durations. As old 10 year binding periods expire and new non-callable periods get longer, the overall portfolio swiftly gains in duration. Ballooning durations of loans at low interest rates for a long time helped to explain why German house prices were rising while the outstanding mortgage debt level was hardly moving. Just consider that a 2% amortizing 15 year fixed rate bond has a McCauley duration of 12%, i.e. a 1% rate increase would wipe out 4 times the capital that a bank has to hold for that mortgage. Unless .. it is match-funded.
2013 and 2014: these two years have been characterized by intensive work programs on European bank recovery and resolution. I had called already in 2008 in an article for The International Economy for a European FDIC, and later doubled down on this call in my 2013 studies that described the disastrous failures of European bank recovery and resolution policies here and here.
The setup of the Single Resolution Board that has been established in 2014 and is being staffed during 2015 falls short of the benchmark FDIC. Nevertheless, having a competent resolution authority around is an important first step, and managers there will shortly find out that the pivotal secondary regulator function that FDIC is vested with will be essential for them to performing even on their currently rather limited job description. It is also clear that additional steps - buzzword European deposit insurance system - will require greater integration of fiscal policy, which takes time to materialize. Expect this to become the great policy debate between 2015 and 2020. A quite bizarre one though, since we de-facto already have exempted <100K deposits from bail-in...
October 2014: comment on the severe open banking union problems remaining with the introduction of the SSM in November 2014. These are in particular: an insufficient specification of the early intervention capacity of the SRM, which like FDIC in the US appears as the only guardian of depositor interests in the system against inflated central bank lending and insider creditor rotation; a politics-driven configuration of the banking fee system; and the far too high minimum deposit insurance protection level of EUR 100K which is inconsistent with the fact that the SRM will not enjoy a full faith and credit fiscal backup (just like the FDIC is technically not backed up by the FFC of the United States, whatever the FDIC website says). Kommentar auf Deutsch.
Can only publish this now. Through May/June 2014 I dug into Depfa Bank plc's historic fate from German taxpayer perspective (Deutsch) for a private sector client, after the German MoF finally decided to wind the bank down rather than selling it. It turns out that in October 2011 Germany wasted another EUR 2 billion by not restructuring / resolving the bank and haircutting hybrids and subordinated debt in the process under the new Irish Special Resolution Regime. This innovative resolution regime had been spearheaded aptly by an Irish government frustrated by high bailout cost. The German finance minister apparently was not frustrated then as much, and simply applied the same bad bank bailouts agreed on for the Landesbanken (left/right pocked for public investors) under Para 6 Finanzmarkt- stabilisierungsfondsgesetz to federal bad banks exchanging assets with private banks under Para 8 of the same law. The Commission almost went mad over the deal, but here in Germany very few seem to care.
2014 I received lots of media requests on performance and restructuring issues of Austrian banks, in particular Hypo Alpe Adria (where the Austrian government found a legal lever to void the Carinthian state guarantees for subordinated debt issued by the bank) and the large Austrian banks Erste Bank and Raiffeisen with their significant CEE exposure. See also my work for EBRD on the CEE mortgage sector, which has been a major generator of problems for Western banks. In an economically and politically fragmented region we need more concertation of investment and lending strategies between public and private banks.
March/April 2014: presentations on creditor participation in European bank restructuring at Bruegel Institute (Finance Breakfast), upon invitation of Nicolas Veron, and CDU Wirtschafsrat, Bundesfachkommission Banken. PPTs as per below entries.
March 2014: publication of a study on Central/Eastern European mortgage and covered bond markets (Realkredit- und Pfandbriefmaerkte in Mittel- und Osteuropa) financed in 2012 by a German covered bond software provider (German). The study benefited from the earlier EBRD study available for download below. Covers also commercial real estate markets and additional countries.
February 2014: brief e-mail comment on the misinterpretations of the German bad bank experience that prevail at the Austrian central bank, re the hefty dispute with the Austrian finance ministry on the method of unwinding the Carinthian Landesbank Hypo Alpe Adria (in German). Or should I say the dispute is between Raiffeisen Bank International and Erste Bank?
February 2014 Paper for the National Bank of Poland on mortgage finance regulation issues in transition countries, summarizes my 2012 EBRD study.
January 2014: Presentation given at DG Competition of the European Commission on creditor participation in European bank restructurings. Slight changes vs. the IFO (and December 2013 Cyprus Price Waterhouse conference) versions, e.g. additional material on Slovenia. Presenting at DG COMP on this subject means of course carrying owls to Athens, so I probably learned more from them than they from me.
December 2013: interview with Gold Magazine on the background of the Cyprus creditor bail-in decisions taken in March 2013. I spent a couple of days on the island and came to conclude that the shortcuts taken in March during the purchase and assumption operations (transfer of Greek operations of Laiki and Bank of Cyprus to Piraeus Bank, transfer of Laiki good assets to Bank of Cyprus) and regarding the transfer of legacy ECB debt ('dark matter', which ominously made it from Laiki in Greece to Bank of Cyprus in Cyprus) have produced serious distortions of the outcomes for bank creditors.
I can only hope that with the de-facto establishment of a European FDIC in the form of the SRM, a move that I asked for in the studies of spring and summer below, this degree of operational deficits will become a thing of the past.
November 2013: presentation given at IFO Institute in Munich on Nov 11 ('Muenchener Seminare') on bank creditor participation in Europe.
October 2013: Study launch "Eight Case Studies on Current Bank Restructurings in Europe", a companion piece to the July 2013 financed by the Center for Financial Studies at the University of Frankfurt (Prof. Jan-Pieter Krahnen). The study widens the country angle from 3 (Greece, Spain, Cyprus) to 8 (in addition Germany, France, Denmark, Netherlands, Ireland) and looks into some of the spectacular cases of this crisis, e.g. Anglo Irish and Dexia. For those of you who are curious why your local bank bailout has become so expensive, learn about at the strangely protective behavior of our governments to even junior bond investors in so many cases and ask yourself how serious Europe will really be in changing her deep bailout policies.
Our press release highlights that it is essentially the small jurisdictions, first and foremost the Netherlands and Denmark, who have adopted clear strategies to increase creditor participation. Ireland was kept from acting. In European bank restructuring policy, small is truly beautiful. I see good reason to demand that European bank supervision and resolution authorities should be headed by representatives from smaller countries, those that have proven that they can do it and are committed to do it.
August 2013: Comment in Handelsblatt on the lack of creditor participation in the Greek bank restructuring program, which has driven up fiscal cost for Greece and increased the risk of future additional sovereign bond haircuts (Deutsch). Back on the envelope I estimate that holders of junior bonds in the four big Greek banks (all distributed via the Channel Islands) will be handed out cash at the tune of EUR 2 billion from the Greek sovereign. Note that once the government is invested in shares with large amounts, as in the Greek case, junior bond holders may lean back and wait for par cash payment. And in the case of dated subordinated securities they will receive coupon payments on top.
Addendum to the July 2013 study publication: In February and March 2013 I was retained by a political party in Bundestag to assess various Cyprus bank restructuring options. A paper was finished in April, available in German language here. It is a precursor exercise to the June/July study covering also Greece and Spain.
July 2013: Study on Creditor Participation in Eurozone Bank Restructurings. This effort has been sponsored by the Green Party in Bundestag and European Parliament. A companion piece is financed by the Center of Financial Studies in Frankfurt and will appear shortly. Neither myself nor certainly the CFS have political party affiliations. But it is good to see that there is interest in such exercises in our parliaments, which have to vote on multi-billion Euro support programs. Yet, high political barriers towards transparency in Europe over banking program cost and their incidence still have to be overcome. So this can only be the starting point of more in-depth empirical reviews.
Some media response: article in der Standard and Sueddeutsche Zeitung on the occasion of the publication of the study (German), and a post in FTs Alphaville blog.
Here is also a presentation that I gave at the Peterson Institute and the IMF's Crisis Management Department on the empirical substance of the bank restructuring study in early June. We had a good time esp over at the IMF, where denial over the excessive cost of the Greek banking program sat deep with top management.
January 2013: Comment for IFO Institute on the Eurozone's bank bondholder bailout policies and how they drove sovereign credit into subordination and even default. Use the term 'bond' as economically equivalent with large uninsured deposits, both at the time were legally pari passu in insolvency (only recently attempts to clarify ranks have been made). The deeper you analyze the actual bailout outcomes - I looked at the time, when nobody else did, briefly into Ireland, Spain and Greece in the piece - the more clearly you fathom the gap between the pitiful current practices that hit too few, and sometimes even the wrong investors, and the grand designs promised by Europe's financial policy elite. At the time I could not see a banking union coming out of this process that was more than a trivial fiscal transfer mechanism, i.e. not one that truly is accepted by Europe's banks as a mutual risk management obligation. Publication in Ces-ifo forum 4/2012.
2013: my colleague Sebastian Schich of OECD has once again hit home on the subject of implicit guarantees for banking arising not just from too-big-to-fail systemic risk threat but also from the currently seen practices of bank resolution.
October 2012: Comment regarding why Germany rejected using direct bank recapitalization for Spanish banks (mostly ex-Cajas). I suggest that the German decision to claw back the results of the June eurozone summit come October must be seen in the context of information constraints over the Spanish banking system, of the way Germany's own bank resolution efforts were handled (lavish subsidies even for junior bond investors), and of the inconconsistency of direct recapitalization with the overall eurozone protection approach in banking and sovereign finance focusing on catastrophic risk protection.
Here is the preceding comment from June 2012 in Handelsblatt focusing on the (politically understandable) attempts of the Spanish government to minimize bail-in at former Cajas facing considerable losses at the expense of European taxpayers. Here is the original longer version, journalists tend to heavily cut back. I argued that direct bank recapitalizations through the ESM/Eurozone would have directly substituted esp. junior bond capital that Spanish regulators allowed to walk out of the door in the months and years prior to the de-facto insolvency of many banks/Cajas in 2012.
Most of you probably have never heard the name of Liberbank, a Spanish Caja merger result, a bank that essentially on Eurozone summit day in late June 2012 proposed to their hybrid capital owners a swap into 5 year deposits (i.e. several ranks upwards) without any haircuts. I demanded in reaction to this and many other abuses in Spain (known to and belatedly deplored by the Spanish rescue fund FROB) in Handelsblatt to proceed with Christian Barnier's bail-in proposals, scheduled by the Commission for 2018, for immediate implementation and for the Spanish sovereign to remain liable to losses vis-a-vis the ESM. Both happened in July, as far as Spain was concerned.
German finance minister Schaeuble in the Financial Times in August 2012 then 'conceded' starting bail-in in 2016 (i.e. permit bail-outs for another three and a half years). France and Belgium said 'merci' to both Barnier and Schaeuble and bailed out the subordinated debt creditors of Dexia as late as December 2012, i.e. months after the Spanish bail-in program had been implemented. See my 8 cases study, Dexia case. Only the August 1, 2013, Banking Communication issued by DG Competition of the EU Commission put an end to these delaying tactics - as far as junior bank debt is concerned.
In March 2012 a befriended London buy-side consulting firm invited me to present my perspective of the Spanish real estate market crisis and other policy issues to a group of fund managers visiting Berlin. While my comments are not public - after all I am not a member of the board of the ECB - I can leak as much as that I was highly critical of the official Spanish extend and pretend policies, both on the level of real estate asset valuations and the necessary liability management of Spanish banks and cajas that would follow serious writedowns. A few days after our conversation the Spanish sovereign bond market took its first well-deserved hit, to the surprise of the ECB, which had tried to stabilize the market through the LTRO.
As far as Spanish policy making was concerned, Quien engaña no gana.. as my favorite local (doing Flamenco fusion out of Barcelona) band Ojos de Brujo sings. I think from today's perspective that both banks and political system in Spain have not only learned their lessons, admittedly the hard way, but also that the quality of the discussion and review of its own failures in Spain has been much stronger than elsewhere in Europe. See exhibit A, Germany and the Landesbanken - a debate silenced until the present day. And markets in the Spanish case ultimately played their needed disciplining role, at least for some time. Vale.
Talking about Landesbanken & friends... why is Germany doing so much financial harm to itself? Please mail me if you have the answer..
Sept 2010: Comment on rescuing German hybrid (i.e. equity) capital owners of banks at immense fiscal costs, a first approximation (Deutsch)
April 2010: Book review of Leo Mueller's book 'Bankraeuber' regarding the causes and handling of the German banking crisis by government and regulators, for Sueddeutsche Zeitung (Deutsch)
March 2010: Comment on Germany's huge capital exports and financial market strategy (in German); key charts were posted on FT Alphaville (thanks to Tracy Alloway)
May 2009: Interview with Chris Whalen, Institutional Risk Analytics, on Landesbanken and their role in the German financial crisis
November 2009: Presentation at FDIC Conference on Regulatory Reform on German financial crisis issues, Washington
October 2009: Presentation at CEPS Working Group on Bank Resolution on German financial crisis issues, Brussels. Somebody should have taken pictures of Alexandre Lamfalussy during my talk..
May 2009: Paper for German Bundestag, Finanzausschuss, on the Specific German Causes of the German Banking Crisis (Deutsch).
BTW during one of these Finanzausschuss meetings of early 2009 I attacked the fact that the Landesbanken and other insolvent German banks still kept paying hybrid capital coupons, since these payments, as well as the possible capital write-downs, were rather frivolously tied to GAAP accounting. The black zeros that for instance a Landesbank like Westdeutsche was able to write under GAAP, and hence leave hybrid capital almost untouched, later became a running joke among banking experts. Anyhow, a call to the Commission in 2009 fixed at least the coupon issue for hybrids in the case of banks under state aid (many of them). Later colleagues at the New York Fed helped to blow some of the brazen grandfathering proposals esp for Landesbanken legacy hybrids out of the Basel III waters. To paraphrase John Cleese, Right So!
February 2009: Presentation on Global Financial Crisis Causes and Policy Responses (Deutsch)
December 2008: Article for The International Economy on the European banking sector crisis and call for the creation of a European Deposit Insurance System
November 2008: joint Global Financial Regulatory Reform discussion paper with Oliver Wyman aimed at pacifying a furious British FSA. I proposed delaying, matching with asset performance the bonus payments for bank execs (heated discussions). Loved one of my colleagues's suggestion to demand regular 'Music Minus 1' bank board meetings, i.e. meetings without the CEO (hello Dick Fuld..). (and ideally headed by the CRO).
November 2008: Tagesspiegel (Berlin) comment about the Ackermann-Steinbrueck dispute over the German leg of the financial crisis (Deutsch). You would think that both Deutsche (Ackermann) and the Landesbanken/German Fin Ministry (Steinbrueck) would have benefited from the occasional Music Minus 1 board meetings as per above.
May 2008: Handelsblatt comment on Landesbanken and US subprime losses (deutsch)
February 2008: Handelsblatt comment on the role of German banking supervision in the German leg of the financial crisis
2007 book publication on US mortgage lending standards and market crisis (Die Krise am Hypothekarkreditmarkt der USA Empirische Analyse und Überlegungen für Deutschland), ISBN 978-3-87169-545-2, IFS Schriftenreihe, Band 70, Domus-Verlag, Berlin (Deutsch). This work was commissioned by the German federation of private Bausparkassen as early as September 2006 and essentially completed in March 2007. All efforts to bring the results to the attention of German bank regulators and financial policy makers failed. Until July 2007...