October 2014 newsletter – MMF panel at the Groupement de Recherche Européen

A special plenary panel session was organised and chaired by Andy Mullineux* on behalf of the UK's Monetary Macro, Finance Research Group (MMF) at the 31st International Symposium of the Groupement de Recherche Européen (GdRE) 'Monnaie, Banque et Finance' in Lyon on the 19th June 2014. This is Andy’s report.

The panel considered the question: ‘Have we made banking good?’ The panellists were Philip Davis (Brunel University and National Institute of Economic and Social Research, NIESR), Peter Sinclair (University of Birmingham and Bank of England), Karen Brown-Munzinger (Bank of England) and Laurent Clerc (Banque de France).

The double entendre implied by the chosen title was intended, so that it asked both whether the banking system had been repaired by regulatory initiatives initiated since the 2007-9 Global (or Great) Financial Crisis, or ‘GFC’, in the sense that the system had been rendered less likely to require further taxpayer financed bail-outs. The second meaning relates to the question of whether banks have become better at serving the social and economic, or common, good and less short term profit oriented.

This panel followed on from others organised by the MMF at GdRE conferences. Two years ago, in Nantes, the MMF panel focussed on the Eurozone crisis and considered how to break the ‘Doom Loop’ or debt spiral. After that conference ‘Super’ Mario Draghi, the President of the European and Central Bank (ECB) promised in July 2012 to do ‘whatever it takes’ to save the Eurozone.

The MMF panel at the 2013 GdRE conference in Poitiers discussed the problem of ‘Restoring the Bank Lending Channel’ in response to the ‘fragmentation’ of the money and capital markets in the Eurozone and SME funding problems in the UK.

In the UK HM Treasury and the Bank of England had jointly introduced a Funding for Lending Scheme (FLS) which provided cheap finance to banks that extended new mortgages (home loans) and SME loans. Meanwhile, the ECB was operating its Long Term Refinancing Operation (LTRO) which provided the banking system with cheap liquidity, much of which was re-deposited with the ECB or used to buy domestic government bonds, rather than lent to SMEs.

The UK’s FLS was subsequently adjusted to remove mortgage funding and concentrate on SME lending when the government's new 'Help to Buy' mortgage supply promotion scheme was introduced. SME lending did not pick up significantly, however, until the UK economy began to recover in spring 2013 and the SME focussed FLS scheme was extended in the UK government’s April 2014 budget.

In early June 2014, two weeks before the Lyon conference, ‘Super’ Mario announced a new ‘big bazooka’ initiative involving negative interest rates on deposits by banks with the ECB and Targeted LTROs (TLTROs), which consisted of a package of £400bn fixed rate (0.25 per cent re initially rising to 0.5 per cent) 4 year loans to banks that on-lend the borrowed money to SMEs. Full details were yet to be revealed and the package consisted of other stimulatory monetary policy measures, including removal of ‘sterilization’. The package aimed to address the problem of restoring the bank lending channel and to reduce the incentives for banks to re-deposit funds with the ECB and to purchase domestic government bonds; the banks holding of which had continued to increase subsequent to Poitiers conference 2 years previously using funds raised through the LTRO.

The overall conclusion of the Lyon panel’s discussions was that whilst regulatory reform was underway and broadly on track, the international consistency of implementation was far from assured and that the ‘too big to fail’ problem had not been resolved through structural reforms. Indeed post crisis consolidation had increased concentration in banking markets and an unintended consequence of crossing the regulatory threshold to become a systemically important financial institution (SIFI) might be to encourage SIFIs to accelerate their growth in order to spread their additional regulatory costs.

There was also a feeling that diversity in banking was beneficial and that mutual and community banking should be preserved and not allowed to be squeezed out by an evolving regulatory regime designed to protect taxpayers by controlling the systemic risks posed by large and complex shareholder-owned banks.


*Andy Mullineux is Professor of Financial Economics, University of Bournemouth