Daily Archives: December 17, 2010

The ECB and Bank of England have announced a temporary liquidity swap agreement in which the UK central bank may provide up to GBP10bn to the ECB in exchange for euro. The agreement allows sterling to be made available to the Central Bank of Ireland as a precautionary measure.

A small sigh of relief from London today. Bank of England governor Mervyn King is to be the vice-chair of the newly launched European Systemic Risk Board, established yesterday and whose inaugural meeting takes place January 20, 2011. Relief, because the appointment suggests eurozone concerns won’t dominate the Board, and that the UK’s banking-driven economy will be represented.

Relief, however, will be limited in some quarters. There is a relative lack of bankers and technical experts, who really understand the tricks of the banking trade. Even if there are ex-bankers among the various levels of hierachy and sub-committees, it is not the same as plugging the institution directly into the banking sector. This is not an oversight but part of the Act: “No member of the General Board (whether voting or on-voting) shall have a function in the financial industry.”

There are two Advisory Committees because “the composition of the ESRB will be very high level …[and] it can happen that the ESRB needs to draw on more specific competences than the ones usually available at the ECB.” The Technical committee comprises representatives nominated by central bankers and regulators – there will be about 60 of them. The Scientific committee, which should have 15 independent experts – though suggested categories are academics, trade unions and small businesses. 

British banks should stop paying large cash bonuses and dividends in order to increase their ability to resist the threat of a wider and deeper eurozone crisis, the Bank of England demands on Friday in its latest Financial Stability Report.

Officials worry that although banks have improved their ability to absorb losses, the interconnectedness of the European banking system will amplify losses from peripheral economies, such as Greece, Ireland and Portugal. 

It jumped last but – not to be outdone – Moody’s has slashed five notches off its Ireland rating, taking it to Baa1 (which is equivalent to Fitch’s BBB+ and about three notches above junk). They’ve also slapped a negative outlook on it, meaning a further downgrade is likely in the next two years if there is no improvement. A multi-notch downgrade was likely – the ratings agency said so itself – though it has come relatively late in the game, after similar cuts by S&P and Fitch.

S&P now offers Ireland the highest rating at A, two notches above Fitch and Moody’s. Under the original ECB collateral requirements of A-, this would mean Ireland’s bonds could still be used – just – as collateral at the central bank. As it is, the “temporary” lowering of collateral requirements to BBB- is still in force, so Ireland need not worry. (As with Greece, the ECB would probably make an exception for Ireland even if its ratings were cut below this level.)