gE Blog Series: Central Bank Regulation Part 2 - Western Europe

Despite the trade agreement disputes, political instability, and concerns about the United Kingdom’s withdrawal from the European Union, the European economies have continued to grow slowly and steadily. During the months of July through August in the third quarter, GDP rose 0.3%, consumer prices rose up to 0.5%, and economic growth as well as inflation occurred as predicted. Global economic growth is based on the productive potential of a country, and the Eurozone economy has, for the past few months, experienced a steady yet sluggish growth.

Economists are focused on how the slow inflation and growth of the economy will affect the actions of the European Central Bank (ECB), “which can have a profound effect on financial markets”. One of the main concerns is that the central bank will continue to purchase assets for longer periods of time in order to avoid deflation, contributing to the push for inflation leading to price instability. Along with the ECB, other European banks have been facing problems due to the Desutsche Bank turmoil from the "mis-selling" of mortgage securities, the resistance to push back regulations on banks, and Greece struggling with debt relief.

European bank reforms push to elevate capital shortfalls and pressure profitability “that under capitalized banks are already struggling with”. On top of that, political compromises have dampened the regulations imposed upon these banks. In order to counteract these issues, banks should accelerate asset disposals and liquidate assets to release funds, while shutting down banking unions. Since lending accounts for 70% of European bank credits, it is vital that the ECB has control over liquidating banking assets to regulate credit transmission improvement, in order to avoid even more massive bank failures.

Be sure to check back this week for the rest of our blog series!