The EU has been busy. Whatever they may say – and they say plenty of risky and unhelpful things as well – they are worried about further banking losses, asset write downs, and sovereign debt problems. On 16 December they announced the establishment of the European Systemic Risk Board to undertake “macro-prudential oversight of the financial system within the Union”. Note it is within the Union, not the Euro area. It includes the Governor of the Bank of England as Vice Chairman. Clearly they intend to call the shots over banking activities, along with the Euro regulators.
On 17th December the Bank of England granted a temporary liquidity facility to the European Central Bank . The Bank of England may provide £10 billion in exchange for Euros to the ECB. On 29th December the subscribed capital of the ECB will go up by Euro 5 billion to Euro 10.76 billion. At the same time the ECB will increase its provisions by the full amount of the new subscribed capital. The UK’s subscribed capital will rise from Euro 836 million to Euro 1562 million, but as a non Euro member the amount we actually have to pay up on December 29th will be very small.
Professor Tim Congdon has recently pointed out that the ECB has been cutting back on the amount of special assistance it offers to banks with Euroland, cutting it by around Euro 150 billion this year. However, he also points out that most recently after the Irish crisis the amount of special assistance seems to have gone up. He suspects there has been a large increase this year in the proportion of the total going to distressed banks in stretched countries.
It was, it appears, ECB worries about the amount they were lending to Irish banks that led to the Irish loan. The UK was engaged not in saving Ireland but in helping refinance risks the ECB had entered into. Now we learnt that’s not all we are doing to help the European Central Bank.
The UK government needs to make clear what limits it does intend to pose on help we offer the Eurozone. After all, the Eurozone contains several large rich countries who should be capable of sorting out their own affairs. One of the benefits those of us who helped keep the UK out of the Euro thought we were winning was limiting the UK’s risk to what was obviously a very risky single currency project. We need to take sensible action to avoid getting dragged into any next phase to the crisis, be it sovereign debt led or commercial banking led.
The Bank of England seems keen to involve us rather more in the Euro area. It says we need “a comprehensive, rather than a country -by- country solution ” and more EU stress tests for banks. It points out that UK exposure to Spanish banks is larger than to Irish ones. They do not portray a happy new year ahead when you read about all the risks they see us running.