Euro Money as Euro Language

This is the first of a series of reflections on the social meaning of the Euro.

Investigations of the social character of money often feature an analogy to language. Like words, money forms intelligible signs. Money, like language, is a critical medium of social exchange. Money, like language, is constitutive of identity: the particular kind of money we use, in part, makes us who we are. And money, like language, is both stable and unstable over space and time.

The architects of the European Monetary System (EMS) anticipated that the Euro would serve as an institution around which a European consciousness could be built. The Euro (at least in its material forms) functions like the EU flag or the EU passport to construct a new identity that plays on commonplace nationalist expectations. That is, when we see flags or passports or money, we have been acculturated to expect national sponsorship. The European Union thus displaces the traditional state in presenting itself through these institutions; if not precisely declaring itself to be a state, the European Union is, at a minimum, asserting that it is like a state for various intents and purposes.

But notice the peculiarly assertive case of the Euro. The EU flag often flies alongside the traditional flags of the EU Member States. The EU passport is formally issued by the respective member states: while it prominently features “European Union” on its harmonized cover, it also bears the name of the relevant member state. The EU passport in fact overstates the EU nature of the document. A passport begs the admission of a members state’s nationals into another state’s territory; it is only secondarily evidence of nationality (and in the case of EU passports, evidence of the bearer’s status as an EU citizen). Through flags and passports, the EU and the relevant EU member state co-occupy a space in the EU citizen’s imagination that had been occupied by the state alone.

European Parliament Approves Implementation of Basel III

On April 16, the European Parliament approved the packet of legislation known as CRD IV, which largely implements the Basel III banking reforms. This completes the political phase of the European legislative process -- formal adoption of CRD IV by the Council of Ministers is expected to occur in June. Assuming the schedule is met, CRD IV will become law effective January 1, 2014. Consultations on the form of detailed regulations ('technical standards') have now been launched.

CRD IV implements Basel III -- and does more. The term 'CRD IV' signals that this is the fourth generation of the EU's Capital Requirements Directive. The name is no longer precise: CRD IV is comprised of a Regulation (law that is uniformly applied throughout Europe) and a Directive (which requires national implementation and admits a certain degree of variation).

CRD IV increases the quantity and quality of regulatory capital a financial institution must hold. In most cases, transitioning to CRD IV requirements will place pressure on European banks to retain earnings, raise additional equity capital, dispose of assets or change their respective asset mixes. Under the existing version of the Capital Requirements Directive (which were adopted immediately prior to the onset of the 2007/2008 financial crisis), many European banks reduced their capital to extremely low levels. Reportedly some European banks had leverage ratios of over 40 to 1 -- that is, maintaining less than 2 percent of effective capital. Many of these same banks remain in crisis now -- a problem that in turn has infected the balance sheets of several EU Member States. CRD IV acknowledges the insufficiency of bank capital during the financial crisis. The new requirements are complex -- and involve a stack of charges and buffers. A minimum of 8 percent capital will now be mandated, computed with regard to a bank's risk-adjusted assets. Left undetermined for the time being is the overall leverage cap -- it is this simple metric that may prove to be the most meaningful limit on a bank's level of debt.

Tarullo on Basel III and Short Term Wholesale Funding

The Federal Reserve's Dan Tarullo has been a key player in post-Crisis U.S. bank reform and in the negotiation of Basel III, the set of international banking rules that guides regulation in major financial centers. In a speech made last Friday (May 3, 2013) Tarullo expressed some satisfaction with the U.S. and Basel III reforms -- and identified a risk needing further regulatory attention: runs on short-term wholesale funding.

Short-term funding has always constituted a vulnerability to the banking system. The traditional magic of banking involves the transformation of maturities -- banks borrow on a short-term basis and lend for the medium- or long-term. In ordinary times this works out splendidly -- as the short-term rates banks pay tend to be lower (over the long term) than the long-term rates they earn. And in ordinary times, short-term funding is quite stable.

The dominant form of short-term funding was traditionally bank deposits. Deposits are essentially loans made to a bank by its depositors. Deposits are legally short-term, but practically rest in the hands of banks for substantial periods. Short-term funding becomes problematic, of course, when depositors systematically demand repayment: this is the old-style bank run. Post-Depression era deposit insurance has largely eliminated bank runs, at least in the United States, and so the ordinary insured bank deposit is (from the perspective of the bank) a trusty source of short-term funding.

ECB's new role as eurozone bank regulator

Early Thursday morning (December 13) eurozone finance ministers agreed to take a first step toward establishment of a banking union. The agreement will grant supervisory powers to the European Central Bank (ECB) - at least with regard to the 200 or so largest banks headquartered in the eurozone. Large European banks located outside the eurozone (chiefly UK banks) will continue to answer to national authorities. With the accretion of these new powers and responsibilities, the ECB will come to resemble the Federal Reserve which functions as both as a monetary authority and as the chief regulator of large banks operating in the United States.

The political accord reflects a compromise between the competing visions of France and Germany. France had desired a complete transfer of bank supervision to the ECB, effectively extinguishing national regulation. Under this approach all banks located within the eurozone would become 'European' in character. Germany resisted; Germany has been desirous of sheltering its politically powerful regional banks from European control. A reported late-night compromise between France and Germany has resulted in a mixed system - with the eurozone's 200 largest banks falling under the authority of the ECB and the remaining 5,800 or so smaller banks (including virtually all of Germany's regional banks) continuing under the oversight of national regulators.

Still the eurozone finds itself a good distance away from a true banking union. As conventionally understood, a banking union involves three features: common and centralized supervision, a common deposit insurance scheme and a centralized mechanism for taking over insolvent banks. The current decision achieves at best only the first element. Moreover, the EU summit determined to postpone action on the remaining items - deposit insurance and insolvency scheme - for at least six months. These missing features involve politically touchy sharing of financial burdens.