Several contributors want to hear more about the many ways in which the EU affects or controls our lives. There are all too many ways, following years of EU directives and regulations, based on the huge powers transferred in The Treaties of Rome, Nice, Amsterdam and Lisbon, to name but four that rarely get mentioned.
In recent years the EU has been granted large new powers to regulate banks and financial institutions. This week-end reports ciruclated that the EU is now considering imposing capital surcharges of as much as 10% of a bank’s assets on EU large banks on top of the minimum 7% capital ratio required already.
The aim is to stop EU banks getting into the mess they got into in the 2008-12 period. That is a worthy aim, but this remedy does not seem to be based on any sensible analysis of why various large EU banks got into difficulties in that period or what is needed to get us out of the mess. There is little recognition that Central Banks and regulators got it wrong as well as the commercial banks, producing a toxic mixture. It does not tackle the problem we have often discussed here, of weak banks lending money to overborrowed countries, which in turn undermines the value of the loans to those states made by the banks. The way the Regulators and the ECB have encouraged banks to hold more of their own government’s debt has caused problems for banks in countries like Greece and Portugal, instead of strengthening them.
Forcing banks that are weak to hold much more capital does not ease the problems we face. Rather it intensifies them. It will mean that banks are even less able to finance recovery in weak economies. It will help drive asset values down further, leading to more bankruptcies and further losses for the banks. If a weak bank is told to hold more capital relative to its lending, its easiest option to c0mply is to lend less. If banks in recession ridden economies lend less, asset values for things like property are likely to fall further. More firms go bust, and more assets return to the banks for fire sales. The banks lose more money, so they hold less capital. They then need to lend less again, to comply with the Regulator’s wishes. A country can get into a downward spiral.
This regulatory policy, alongside the policies demanding higher taxes and lower public spending, will reinforce any deflationary tendencies in these weakened economies. The EU does not need less growth. It needs more. We need counter cyclical regulation. This is the worst kind of regulation, which intensifies the cycle. It makes things worse.