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Ajouter un commentaireOver the last two years, European banks have crashed one after another, needed help from governments to remain standing, and stopped lending money to firms and household, bringing the economy to a standstill. The financial meltdown has created enormous economic difficulties in many countries. Worse may still be to come if we consider the poor health of Irish and Spanish banks. How could a problem limited to some banks spread so quickly, and have such dramatic consequences ? A lack of understanding of the risks building up in the banking system had reduced the alertness of regulatory authorities that follow up and control bank actions in traditional ways. The impetus from an initially small crisis was therefore much stronger than expected. Then, as the crisis unfolded, the disruption to the banking business quickly affected all parts of the economy. Luckily, the response of central banks and governments has been vigorous, and has so far avoided a worse fate. However, the cost of resolving the crisis is enormous, with bank bailouts and rising unemployment pushing up public debt to record heights.
Why did regulators, who are specialised in financial hi-tech, not perceive these enormous risks in the financial system ? More prevention and a better recognition of the effects of the collapse of banks in international financial markets would have reduced the disastrous effects and the cost of the crisis. The increasing complexity of the financial system, with all those brand new products that were introduced over the last years, could hardly be foreseen to have such a dramatic consequences. The exclusive focus on the safety of single banks, who supposedly would not afflict damages onto other banks, made regulators ignore the safety of the entire financial system. And as banks have become increasingly international, regulators exclusively focus of the safety of their national banks, and fail to impose rules on international banking.
We can make the analogy with how a city organizes fire prevention and protection. Imagine a town that is divided in small districts. Each district decides its own rules for fire security. Each district also has its own fire brigade. This brigade is only allowed to watch out for fires within the own district, and of course, extinguish only those fires. It cannot help in other parts of town. That looks like a waste of resources, as you need many more fire men ready, and you cannot use the most modern machinery as you pay a lot of money to keep many fire brigades.
- « What to do if a big chemical plant explodes in one district ? The fire spreads quickly... »
source : flickr, bcmacsac1
Perhaps it is not the most efficient, but as long as there are just small innocent fires, one could tolerate it. But what to do if a big chemical plant explodes in one district ? The fire spreads quickly to other factories, threatens houses, and is starting also in some other districts. The small fire brigade, who did not bother much about security, has no more men to put out the fire. The reasonable thing is to ask help from other districts, even if it is not allowed, and to join forces. And this will be more urgent if the fire is spreading faster. But the response is slower and the fire may well have burnt the neighbourhood by then.
What happened in Europe, and worldwide, is very similar to what happens in this town. EU countries have kept the supervisory authorities, which control banks and other financial institutions, at national level. They did not want to merge the regulation of banks, nor foresee common rules of intervention. But this ignores that the Single Market, and the euro, have allowed for banks to grow across borders, and compete more effectively across Europe. The major part of the European banking system consists nowadays of just about 20 international banking groups. To take our fire brigade example, the town districts have become more crowded, buildings are much larger and some even stretch over several districts. However, the fire brigades only regulate the buildings on their own territory, and put out fire only on their own territory, even if they are each too small to tackle a really big fire. In fact, the financial crisis that hit Europe swamped many small countries that were not able to regulate, let alone, save the banks. Some banks owned much more capital than an average small EU country. Most banks are very closely related to each other, so that the fall of one creates a domino effect. That a banking crisis starting in the UK put other EU banks on fire too, did not come as a surprise. In the nineties, several reports had warned of the danger of not merging the control on banks already.
It seems the crisis has now turned policymakers to reason. Last June, the Commission asked a new report to reform the oversight of banks in Europe. The Larosière report suggested some reforms to ensure financial stability throughout the EU. The report recommended applying a similar set of rules, setting up a mechanism to identify risks in the banking system at an early stage ; and creating an effective emergency reaction by the supervisors of the banking system. In the words of a fireman, apply the same fire security, put an alarmbell, and get all fire brigades to rush out as fast as possible. How to do that in practice ?
- Source : flickr, HowardLake
The reform now under discussion creates a two tiered structure. First, there will be a European Systemic Risk Board (ESRB) that should monitor the entire banking system, and detect risks so as to issue early risk warnings to be rapidly acted on. The heads of the ECB, national central banks, the European Supervisory Authorities, and national supervisors, will participate in this ESRB. Second, it will also set up a European System of Financial Supervisors (ESFS), composed of the national supervisors and three new European Supervisory Authorities for the banking, securities and insurance and pensions sectors.
The discussions have been going on for the last months. But as the urgency of the crisis fades away, old habits come back. Governments of the EU countries are positioning against a too strong reform. The UK has been particularly hard to convince of more European supervision and regulation. On the one hand, it is the main financial center of Europe ; but on the other hand, the UK does not participate in the euro. This makes it more difficult for the UK to accept supervision from other countries on its banks. Much of the problems of this crisis have been aggravated, and made more costly, by a lack of agreement on reform. The next months will show how serious the intents to reform are. So far, there are few reasons to be optimistic, as the lack of agreement to finance the European Commission over the next years puts at risk the functioning of these new regulatory bodies.
Photo Source : flickr, Mike Poresky
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