The ECB's Asset Quality Review is a work of art - minimalist art

A masterpiece of reverse engineering.

In creating what was a potentially vital part of the project to keep the Euro afloat, the European Central Bank had a mission. They were to design a bank asset quality review that was just tough enough to gain credibility, but not too tough, for fear of scaring the horses and inducing queues of depositors to form outside banks when the results come out.

What we got was a masterpiece of reverse engineering, aimed at achieving just what was required - just enough. It can't be denied there are some tough-sounding parts, some tidbits of rectitude - an examination of gross liquidity ratios, excessive LTRO usage, and rigorous scrutiny of off-balance sheet exposures and the risk-weightings which banks choose to apply to their assets.

We are assured these matters will all receive diligent attention in the AQR, and may even lead to a subjective decision to raise the required capital ratio above the standard level of 7 per cent, (8 per cent for large, systemically important banks). Ok, sure, we'll wait and see what happens!

Very sensibly the AQR will take a Q4 2013 snapshot of balance sheets, so as to discourage banks from indulging in an unseemly fire sale of assets or reduction in customer loans by not giving them enough time to do so.

We even got some headmasterly rhetoric from Mario Draghi along the lines that we must have no fear, the AQR would be stringent enough so that some banks do actually fail, to ensure the process had credibility (preferably very small ones that have little chance of spreading contagion fear). He further insisted that governments must have a backstop in place. This was a thinly veiled tilt at Germany, who is in turn insisting that every cent is bled out of private bond and equity holders, of every possible description, first, before the European Stability Mechanism is tapped for bank re-capitalisation.

The trouble is, this AQR does very little to address the potentially lethal death embrace of banks and their governments that exists as a result of the banks' enormous holdings of sovereign bonds. This is to be expected: a proper risk-adjusted examination of the various hues of government bonds stuffed into banks' balance sheets, with realistic risk weightings, would be far too scary and if it ever saw the light of day, and might just bring the whole Tower of Babel crashing down.

So there were are, just enough to give the banks another year to de-leverage before the European Banking Authority stress tests and, with results not due for a year, just enough time for Germany to become satisfied with the ESM's rules of engagement.

Mario Draghi, president of the European Central Bank (ECB), earlier this year. Photograph: Getty Images.

Chairman of  Saxo Capital Markets Board

An Honours Graduate from Oxford University, Nick Beecroft has over 30 years of international trading experience within the financial industry, including senior Global Markets roles at Standard Chartered Bank, Deutsche Bank and Citibank. Nick was a member of the Bank of England's Foreign Exchange Joint Standing Committee.

More of his work can be found here.

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Air pollution: 5 steps to vanquishing an invisible killer

A new report looks at the economics of air pollution. 

110, 150, 520... These chilling statistics are the number of deaths attributable to particulate air pollution for the cities of Southampton, Nottingham and Birmingham in 2010 respectively. Or how about 40,000 - that is the total number of UK deaths per year that are attributable the combined effects of particulate matter (PM2.5) and Nitrogen Oxides (NOx).

This situation sucks, to say the very least. But while there are no dramatic images to stir up action, these deaths are preventable and we know their cause. Road traffic is the worst culprit. Traffic is responsible for 80 per cent of NOx on high pollution roads, with diesel engines contributing the bulk of the problem.

Now a new report by ResPublica has compiled a list of ways that city councils around the UK can help. The report argues that: “The onus is on cities to create plans that can meet the health and economic challenge within a short time-frame, and identify what they need from national government to do so.”

This is a diplomatic way of saying that current government action on the subject does not go far enough – and that cities must help prod them into gear. That includes poking holes in the government’s proposed plans for new “Clean Air Zones”.

Here are just five of the ways the report suggests letting the light in and the pollution out:

1. Clean up the draft Clean Air Zones framework

Last October, the government set out its draft plans for new Clean Air Zones in the UK’s five most polluted cities, Birmingham, Derby, Leeds, Nottingham and Southampton (excluding London - where other plans are afoot). These zones will charge “polluting” vehicles to enter and can be implemented with varying levels of intensity, with three options that include cars and one that does not.

But the report argues that there is still too much potential for polluters to play dirty with the rules. Car-charging zones must be mandatory for all cities that breach the current EU standards, the report argues (not just the suggested five). Otherwise national operators who own fleets of vehicles could simply relocate outdated buses or taxis to places where they don’t have to pay.  

Different vehicles should fall under the same rules, the report added. Otherwise, taking your car rather than the bus could suddenly seem like the cost-saving option.

2. Vouchers to vouch-safe the project’s success

The government is exploring a scrappage scheme for diesel cars, to help get the worst and oldest polluting vehicles off the road. But as the report points out, blanket scrappage could simply put a whole load of new fossil-fuel cars on the road.

Instead, ResPublica suggests using the revenue from the Clean Air Zone charges, plus hiked vehicle registration fees, to create “Pollution Reduction Vouchers”.

Low-income households with older cars, that would be liable to charging, could then use the vouchers to help secure alternative transport, buy a new and compliant car, or retrofit their existing vehicle with new technology.

3. Extend Vehicle Excise Duty

Vehicle Excise Duty is currently only tiered by how much CO2 pollution a car creates for the first year. After that it becomes a flat rate for all cars under £40,000. The report suggests changing this so that the most polluting vehicles for CO2, NOx and PM2.5 continue to pay higher rates throughout their life span.

For ClientEarth CEO James Thornton, changes to vehicle excise duty are key to moving people onto cleaner modes of transport: “We need a network of clean air zones to keep the most polluting diesel vehicles from the most polluted parts of our towns and cities and incentives such as a targeted scrappage scheme and changes to vehicle excise duty to move people onto cleaner modes of transport.”

4. Repurposed car parks

You would think city bosses would want less cars in the centre of town. But while less cars is good news for oxygen-breathers, it is bad news for city budgets reliant on parking charges. But using car parks to tap into new revenue from property development and joint ventures could help cities reverse this thinking.

5. Prioritise public awareness

Charge zones can be understandably unpopular. In 2008, a referendum in Manchester defeated the idea of congestion charging. So a big effort is needed to raise public awareness of the health crisis our roads have caused. Metro mayors should outline pollution plans in their manifestos, the report suggests. And cities can take advantage of their existing assets. For example in London there are plans to use electronics in the Underground to update travellers on the air pollution levels.

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Change is already in the air. Southampton has used money from the Local Sustainable Travel Fund to run a successful messaging campaign. And in 2011 Nottingham City Council became the first city to implement a Workplace Parking levy – a scheme which has raised £35.3m to help extend its tram system, upgrade the station and purchase electric buses.

But many more “air necessities” are needed before we can forget about pollution’s worry and its strife.  

 

India Bourke is an environment writer and editorial assistant at the New Statesman.