Posted by: Dirk | April 20, 2012

Why we need more women in top positions (and how to recapitalize European banks)

The following is an excerpt of the transcript of a Press Conference by International Monetary Fund Managing Director Christine Lagarde and First Deputy Managing Director David Lipton with Gerry Rice, Director, External Relations
from Thursday, April 19, 2012:

Question: I hope your knee is feeling better.

Ms. Lagarde: Well looked after by the George Washington University Hospital, thank you.

[...]

Question: Just as a journalist, we do care about your health as importantly as our questions, and you still look great even with your third leg.

Ms. Lagarde: It is a question of equilibrium.

Of course, we need more women in top positions not because they have more humor than men, or more wit than men, or actually more anything than men.

After driving this point home, let’s switch to recapitalization of European banks:

Question: [...] A question on Europe, if I could. The WEO and GFSR staffs’ recommendation that the European firewall mechanisms be expanded so they could intervene directly into the financial sector and I am wondering if you are tempted now to sort of take the next step. Given the tensions sort of converging around Spain, is it time for the Spanish government or Europe as a whole to consider a more quick, dramatic, direct intervention in the banks there to clear away the deadweight of the real estate sector and try to get the banking sector back on its feet in a clear way?

Ms. Lagarde: Well, thank you, Howard, for inquiring about my health, but I will make it through the meetings, no question.

First of all, I would like to observe that the Spanish authorities are taking the matter very seriously, and have announced actual measures and policies in relation to their banking sector, which is very good and very welcome.

Second, including in its present form and under its current status, both the EFSF and ESM can actually help in respect of recapitalization of banks anywhere in the Eurozone. It has to be channeled through loans to sovereigns, because that is the way it has been structured. So, it can be done. What we are advocating and what we have been advocating for awhile and will continue to advocate is that possibly this be done without the channeling through the sovereign, and we would see that as a move toward stronger and better integration, a stronger and better Europe.

It could be accompanied and should, if it were to happen, be accompanied with more global European supervision with an appropriate European backstop, with appropriate an European resolution system, same as bailing-in, particularly if it applies both at home and in the host country where quite a few of those banks have subsidiaries or branches.

So, banks under the current schemes can only be recapitalized through the sovereign. That would mean increasing government debt, I suppose. It does not matter that on the asset side something is happening, because the rules only deal with the liability side – government debt. (With hindsight it is clear that they should have focusses on private sector debt, too.)

I would think that it is politically difficult to recapitalize European banks through the sovereign, since it would appear that some nation is getting a “free ride”. I would therefore agree that it makes more sense that banks in general should be either bailed-out (or -in), never mind the country of residence. This only complicates things unnecessarily. The inefficient investment has already happened, now the balance sheets need to be cleaned. After all, the US did the same for mostly Texan banks after the savings&loans crisis. Inter-state politics would have stopped an efficient return to normal for the US.

Europe’s regulatory framework  is not working well, and one of the main issues is bank regulation. It is clear now that it was a mistake that in the beginning of the crisis the European Union decided to deal with (multinational) banks on a national basis. Time to rethink the regulation of the banking sector.

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