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#Banks: European Banking Authority says low profitability and high levels of non-performing loans remain a concern for EU banks

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161001eba2The European Banking Authority (EBA) published its periodic report on the main risks and vulnerabilities in the banking sector (30 September). The update shows an increase in EU banks' capital ratios, but also show that European banks are suffering from low profitability and high level of non-performing loans (NPLs) remain a concern.

When addressing the European Parliament (26 September), EBA Chairman Andrea Enria, said: “In ten member states the ratio (of NPLs) is higher than 12%. High NPLs are a drag on already weak bank profitability, have an adverse impact on the availability of new lending for households and corporates, and may eventually generate detriment to distressed borrowers.”“

In Q2 2016, EU banks' ratio of common equity tier 1 (CET1) increased by 10bps to 13.5%, driven by a rise of capital and a slight decline of RWAs (ratios are weighted average). The ratio of non-performing loans (NPL) was 5.5%, 10bps below Q1 2016. While there has been an improvement in credit quality, legacy assets remain a concern. Overall, the coverage ratio for NPLs improved by 10bps to 43.9% (compared to the previous quarter), but with wide dispersion among countries.

The average return on equity (RoE) was 5.7%, unchanged compared to the past quarter and around one percentage point (p.p.) below the second quarter of the last year. The cost-to-income ratio stopped its increasing trend of the four preceding quarters and decreased when compared to year end 2015 (62.8% per year end 2015, 66.0% in Q1 2016 and 62.7% in Q2 2016).

Capital requirements

The EBA are closely following the discussions at the Basel Committee on Banking Supervision (BCBS) to refine the capital requirements and reduce the variability of risk-weighted assets. The EBA’s analysis confirms that the regulatory framework needs to be adjusted to enhance the reliability and comparability of the outcomes of bank internal models. Enria, has said that it is essential that the proposed changes do not excessively reduce the risk sensitivity of the regulatory framework and does not generate ‘unjustified’ increases in capital requirements. The EBA is also making efforts to support a coordinated position of European representatives at international discussions.

Background

The figures  are presented in the form of a ‘Risk Dashboard’ they are based on a sample of 156 banks, covering more than 80% of the EU banking sector (by total assets), at the highest level of consolidation, while country aggregates may also include large subsidiaries.

The Risk Dashboard is part of the regular risk assessment conducted by the EBA and complements the Risk Assessment Report.

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We can’t afford tax havens in the age of #Coronavirus

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UK Chancellor Rishi Sunak, appointed to the job just over a month ago, announced the most significant set of British policy measures since the Second World War on Friday, 20 March.  The sweeping package—which includes a £30 billion tax holiday for corporations and a government commitment to pay part of citizens’ wages for the first time in British history—would have been unthinkable for a Conservative administration only weeks ago. The unprecedented nature of the measures, as well as the gravitas with which Sunak announced them, drove home the reality of the economic tsunami which the coronavirus pandemic has unleashed.

The global economy, as one commentator noted, is going into cardiac arrest. Central banks from Tokyo to Zurich have slashed interest rates—but this can only do so much to alleviate the pain from millions of workers staying home, assembly lines grinding to a halt, and stock markets going into freefall.

It’s almost impossible to predict the full scale of economic damage while most of the world is still fighting to contain the virus’s exponential spread, and while so much remains uncertain. Will the virus, for example, fade thanks to a combination of strict quarantine measures and warmer weather—only to return with a vengeance in the fall, causing a devastating double dip in economic activity?

What’s almost certain is that Europe is tipping into a fresh financial crisis. “Extraordinary times require extraordinary measures,” admitted ECB chief Christine Lagarde, underscoring that “there are no limits to our commitment to the euro.” The bloc’s major economies, some of which were flirting with recession even before the pandemic, are sure to blow past 3% deficit limits. They are likely to play fast and loose with EU state aid rules, too, as hard-hit firms—particularly major airlines, including Air France and Lufthansa—may need to be nationalised to keep them from folding.

As policymakers try and keep their economies afloat during—and after—this acute phase of the pandemic, they will need every scrap of revenue. It’s outrageous, then, that some $7 trillion in private wealth is hidden away in secrecy jurisdictions, while corporate tax avoidance via offshore tax havens drains as much as $600 billion a year from government coffers. New research indicated that 40% of multinational firms’ profits are squirreled away offshore.

The Tax Justice Network has identified an “axis of avoidance”—the UK, the Netherlands, Switzerland and Luxembourg—which together account for fully half of the world’s tax evasion. The UK bears a particular responsibility for failing to crack down on the widespread financial malfeasance occurring in its overseas territories.  While NHS staff on the frontlines of the coronavirus epidemic have expressed concerns that they are being treated as “cannon fodder” amidst a gross shortage of protective equipment, the world’s three most notorious offshore hideaways are British overseas territories.

The most famous is probably the Cayman Islands, which the EU placed on its tax haven blacklist earlier this year. For decades, ill-fated firms from Enron to Lehman Brothers stashed their problematic assets in the idyllic islands, while firms like mining giant Glencore allegedly funnelled bribe funds through the British Overseas Territory.

The Caymans have made a recent attempt to shed this reputation as a fiscal Wild West, pledging to reveal corporate owners by 2023—a move which would bring the island nation in line with EU directives. In the meantime, however, stories continue to emerge illustrating how unscrupulous companies are taking advantage of the Caymans’ lax regulation.

Just a few months ago, the Gulf Investment Corporation (GIC)—a fund owned jointly by the six Gulf countries—asked courts in both the Caymans and the United States to look into the “hundreds of millions of dollars” which have apparently disappeared from the Port Fund, a Caymans-based financial vehicle.

According to court filings, the Port Fund’s sponsor, KGL Investment Company, may have been involved in siphoning off proceeds from the sale of Port Fund assets in the Philippines. The GIC maintains that the Port Fund sold a Filipino infrastructure project for roughly $1 billion—but only disclosed $496 million in proceeds and disbursed a mere $305 million to the fund’s investors.

The “missing” $700 million didn’t just evaporate into the ether, of course. It seems highly plausible that the discrepancy has gone at least partly towards the costly lobbying effort which the Port Fund has mounted to spring its former executives, Marsha Lazareva and Saeed Dashti, from prison in Kuwait, where they’ve been locked up after being convicted of misappropriating public funds. The high-powered lobbying campaign has run up a tab of millions of dollars and roped in everyone from Louis Freeh, the head of the FBI from 1993 to 2001, to Cherie Blair, the wife of former British PM Tony Blair.

The sordid saga is the perfect illustration of how cunning companies can exploit the lack of regulatory oversight in fiscal paradises like the Caymans to keep cash out of public coffers. There are countless such examples. Netflix reportedly shifts money through three different Dutch companies to keep its global tax bill low. Until mere months ago, tech titan Google took advantage of a tax loophole dubbed the “Double Irish, Dutch sandwich”, channelling huge sums through Ireland to “ghost companies” in tax havens including Bermuda and Jersey, both British dependencies.

European leaders can no longer afford inaction on stamping out these financial black holes. Ibrahim Mayaki, the co-chair of a recently-created UN panel on illicit financial flows, remarked that “the money that is being hidden in offshore tax havens, laundered through shell companies and outright stolen from public coffers should be put towards ending poverty, educating every child, and building infrastructure that will create jobs and end our dependence on fossil fuels.”

Right now, it should be put towards retrofitting critical care beds, ensuring that Italian doctors treating coronavirus patients have the gloves that could save their own lives, and providing support to Europe’s small businesses so that they don’t go belly up.

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'We need to create a real single market for savings'

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Only a fraction of Europeans invest in stocks, while American consumers are a lot more likely to get involved in financial markets. The European Union could make strategic regulatory changes to change this for the better, writes Bill Wirtz.

With historically low interest rates, Europeans look at their savings accounts with warranted frustration. Investments in commodities are traditionally popular, particularly in times of economic uncertainty, but there is only so much that the purchase of a few ounces of gold can do for European consumers. Comparatively, stocks don't' have widespread appeal with consumers. The reasons for that are not cultural.

Less than 15% of Europeans (often merely 1% in Central and Eastern Europe, 15% in Germany, up to 40% in the Netherlands invest directly or indirectly in stocks. By contrast, up to half of American households have purchased stocks directly or equity through funds, most of the time as a long-term saving commitment. One reason is that while working with financial services across state lines is seemingless in the United States (think the federal 401k retirement accounts scheme), Europe is on a higher level of complication. The S&P 500 Index had an average annual growth performance of 8%. Most Europeans can only dream of such annual yields that double ones investment every nine years. The compound effects of this are even more significant. If a 29-year-old invests €40,000 at such an annual performance rate in stocks, she has €640,000 at age 65 and that does not even include additional cash injections into her investment account. For comparison the average wealth of adults in Western Europe is around €250,000 (with a much lower median wealth).

But when we think of “investors” or buying and trading stocks in Europe, we picture wealthy individuals and large corporations. But in fact, lower middle-class consumers can have their share in the world economy, and guarantee themselves long-term growth, if we ease the burdens on them purchasing stocks. Instead of propagating fear, legislators and regulators should embrace small-scale private investments, and provide consumers with information. For too long, we have seen investors painted with a broad brush. Only in popular shows such as Shark Tank and Dragon’s Den have investors anywhere near the necessary appeal towards the broader public, while in parliaments across Europe, the mere word is side-eyed with suspicion.

The Markets in Financial Instruments Directive (MiFID) of the European Union is looking at an upcoming overhaul. Private investment should be facilitated, not made harder through regulatory changes. Legislators should create a real single market for stock and fund investments and lower the barriers for companies offering stocks and exchange traded funds (ETF) directly to consumers.

Historically stock markets have outperformed and other kinds of saving schemes. Right now only a small faction of Europeans benefits from high single digit growth of their retirement savings. European policy makers should endorse a shareholder culture through smart regulation and stop bashing capital markets as these can deliver wealth for a broad share of European savers.

Bill Wirtz is a senior policy analyst for the Consumer Choice Center. Twitter: @wirtzbill

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Hi-tech cooperation between #China and #EU has huge potential

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China’s Belt and Road Initiative (BRI), sometimes referred to as the New Silk Road, is one of the most ambitious infrastructure projects ever conceived. Launched in 2013 by President Xi Jinping, the vast collection of development and investment initiatives would stretch from East Asia to Europe, significantly expanding China’s economic and political influence – writes Colin Stevens.

BRI seeks to revive the ancient Silk Road trade routes to link China with other countries in Asia, Africa and Europe through building a trade and infrastructure network.

The vision includes creating a vast network of railways, energy pipelines, highways, and streamlined border crossings, both westward—through the mountainous former Soviet republics—and southward, to Pakistan, India, and the rest of Southeast Asia.

China’s colossal infrastructure investments promise to usher in a new era of trade and growth for economies in Asia and beyond.

Increasing Chinese influence in Europe has been a growing source of anxiety in Brussels in recent years.

So, what are the implications of China’s growing influence as a global actor for the EU and its neighbours? We asked a range of experts for their views.

Sir Graham Watson, a former senior UK MEP, is among those who support the exciting initiative while at the same time warning that the EU needs to be closely involved.

Sir Graham, formerly a Liberal deputy, said, “The EU should embrace an initiative which will improve transport links across the Eurasian landmass and not allow China to own it entirely. To realise its full potential, this initiative must be a two-way street.

"Rather than allow the PRC to buy up and monopolise infrastructure such as the Port of Piraeus we should be investing in it together. Only that way can we tame China’s expansionist ambitions and tie it down into co-operation.”

Similar comments are voiced by Fraser Cameron, Director of the EU-Asia Centre in Brussels who said that China had “learned some important lessons from the first two-three years of the BRI, especially on financial and environmental sustainability.”

He adds, “This means that the EU, with its own connectivity strategy, could now consider partnering with China, as well as Japan and other Asian partners, to develop infrastructure projects of benefit to both continents.”

Paul Rubig, until recently a veteran EPP MEP from Austria, told this site that the “whole world, including the EU, needs to be part” of the BRI.

He added, “The scheme connects people through infrastructure, education and research and stands to benefit European people greatly

“The EU should be investing in the BRI because it will be a win win for both sides, the EU and China,” said Rubig who is closely involved with SME Europe

Similar comments were aired by the vastly experienced Dick Roche, a former Europe Minister in Ireland, who said, “BRI and the EU’s involvement in it makes perfect sense. It will help re-establish our historic connections with China. Yes, there are some differences between the two sides but BRI is in the mutual interests of the EU and China. Europe can play an active role in the initiative by maintaining dialogue with China.

"That is the best way forward and not by following the U.S approach to BRI. The U.S stance is a backward step and will achieve nothing.”

Roche, now a Dublin-based consultant, added, “If you look at what is happening in China now compared with 50 years ago the progress that is being made, including benefits brought about by BRI, are incredible.”

BRI investment began to slow in late 2018. Yet by the end of 2019, BRI contracts again saw a big uptick.

The U.S has voiced opposition, but several countries have sought to balance their concerns about China’s ambitions against the BRI’s potential benefits. Several countries in Central and Eastern Europe have accepted BRI financing, and Western European states such as Italy Luxembourg, and Portugal have signed provisional agreements to cooperate on BRI projects. Their leaders frame cooperation to invite Chinese investment and potentially improve the quality of competitive construction bids from European and U.S. firms.

Moscow has become one of the BRI’s most enthusiastic partners.

Further reflection comes from Virginie Battu-Henriksson, EU spokesperson for Foreign Affairs and Security Policy, who said, “The starting point for the EU’s approach to any connectivity initiative is whether it is compatible with our own approach, values and interests. This means that connectivity needs to respect the principles of sustainability and a level playing field.

“When it comes to China’s Belt and Road Initiative, the European Union and China should share an interest in making sure that all investments in connectivity projects meet these objectives. The European Union will continue to engage with China bilaterally and in multilateral fora to find commonalities wherever possible and push our ambitions even higher when it comes to climate change issues. If China fulfils its declared aim of making the BRI an open platform that is transparent and based on market rules and international norms, it would complement what the EU is working for - sustainable connectivity with benefits for all involved.”

Elsewhere, a senior source at the EU foreign affairs directorate noted that the Belt and Road Initiative “is an opportunity for Europe and the world, but one that must not only benefit China.”

The source said, “EU unity and coherence are key: in cooperating with China, all Member States, individually and within sub-regional cooperation frameworks have a responsibility to ensure consistency with EU law, rules and policies. These principles also apply in terms of engagement with China's Belt and Road Initiative.

“At the EU level, cooperation with China on its Belt and Road Initiative takes place on the basis of China fulfilling its declared aim of making the BRI an open platform and adhering to its commitment to promoting transparency and a level playing field based on market rules and international norms, and complements EU policies and projects, in order to deliver sustainable connectivity and benefits for all parties concerned and in all the countries along the planned routes.”

At last year’s EU-China Summit in Brussels,  the two sides’ leaders discussed what they called the “huge” potential to further connect Europe and Asia in a sustainable manner and based on market principles and looked at ways to create synergies between the EU's approach to connectivity.

Noah Barkin, a Berlin-based journalist and a visiting fellow at the Mercator Institute for China Studies, noted that when Wang Yi, China’s top diplomat, visited Brussels in December, he delivered a key message to Europe.

"We are partners, not rivals," he told his audience at the European Policy Centre think tank, calling on the EU and Beijing to draw up an "ambitious blueprint" for cooperation.

Such cooperation is happening right now - thanks to BRI.

Business Europe’s “China Strategy”, recently published, points out that the EU is China’s most important trading partner, while China is the EU’s second most important trading partner. Total bilateral trade flows in goods grew to EUR 604.7 billion in 2018, while total trade in services amounted to almost EUR 80 billion in 2017.

And, says Business Europe, "here is still plenty of untapped economic potential for both sides."

The strategy notes that the EU is China’s most important trading partner, while China is the EU’s second most important trading partner. Total bilateral trade flows in goods grew to EUR 604.7 billion in 2018, while total trade in services amounted to almost EUR 80 billion in 2017. And there is still plenty of untapped economic potential for both sides.

The Chinese and European economies have benefitted tremendously from China’s accession to the WTO in 2001.

It says, “The Chinese and European economies have benefitted tremendously from China’s accession to the WTO in 2001.The EU should continue to engage China.”

Many new opportunities have already emerged as a result of new infrastructure that has been completed along the Belt Road route.

For example, Italy and China have worked to strengthen their relations and cooperation on the digital economy via a “digital” silk road and tourism.

A digital silk road is seen as a significant part of BRI. China, with the largest number of internet users and mobile phone users in the world, stands at the world’s largest e-commerce market and is widely recognized one of the top players in big data.

It is this huge market that seasoned observers like Watson, Rubig and Roche believe the EU should now try to tap in to, including via BRI.

The European Institute for Asian Studies cites the Budapest-Belgrade railway link refurbishment as a “great” case study to gain a better understanding of the BRI.

The project is part of the 17+1 Cooperation and the Belt and Road Initiative (BRI). It had been announced in 2013 but was stalled on the Hungarian side until 2019 due to EU tender regulations. The project has progressed differently on the Hungarian side than it did on the Serbian side as a non-EU member, due to the EU’s intervention, says the EIAS report.

“A digital silk road is a significant part of BRI. China, with the largest number of internet users and mobile phone users in the world, stands at the world’s largest e-commerce market and is widely recognized one of the top players in big data.

But, clearly, there is more to do to realise its full potential.

The European Union Chamber of Commerce in China (European Chamber), compiled its own study, The Road Less Travelled: European Involvement in China’s Belt and Road Initiative (BRI). Based on a member survey and extensive interviews, the report highlights the “peripheral” role currently played by European business in the BRI.

Even so, hi-tech cooperation between China and EU has huge potentials, and dialogues and mutual trust are keys to forming closer digital ties between the two sides, Luigi Gambardella, the president of the China EU business association, said.

China. by way of further example, successfully launched the twin Beidou-3 satellite last September, contributing to the digital Silk Road initiated by China in 2015, which involves helping other countries to build digital infrastructure and develop internet security.

Commenting on the digital Silk Road, Gambardella said it has the potential to be a "smart" player in the Belt and Road Initiative, making the BRI initiative more efficient and environment friendly. The digital links will also connect China, the world's largest e-commerce market, to other countries involved in the initiative.

Andrew Chatzky, of the Council on Foreign Relations, says, "China’s overall ambition for the BRI is staggering. To date, more than sixty countries—accounting for two-thirds of the world’s population—have signed on to projects or indicated an interest in doing so."

"Analysts estimate the largest so far to be the $68 billion China-Pakistan Economic Corridor, a collection of projects connecting China to Pakistan’s Gwadar Port on the Arabian Sea. In total, China has already spent an estimated $200 billion on such efforts. Morgan Stanley has predicted China’s overall expenses over the life of the BRI could reach $1.2-1.3 trillion by 2027, though estimates on total investments vary," he said.

The original Silk Road arose during the westward expansion of China’s Han Dynasty (206 BCE–220 CE), which forged trade networks throughout what are today the Central Asian countries. Those routes extended more than four thousand miles to Europe.

Today, BRI promises to, once again, put China and Central Asia - and maybe the EU - at the epicentre of a new wave of globalisation.

 

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