Just a few days ago, Mr. Draghi, the ECB Chairman, sent a statement to the German newspaper the Zeit. In it he mentioned his agreement on a European Banking Authority. He said, “For financial policies, there need to be powers at the centre to limit excessive risk-taking by banks and regulatory capture by supervisors. This is the best way to protect euro area taxpayers. There also needs to be a framework for bank resolution that safeguards public finances, as we see in other federations. In the U.S., for example, on average about 90, mostly smaller, banks per year have been resolved since 2008 and this had no impact on the solvency of the sovereign.”
It is a statement that says to two things: centralizing supervision authority in banking is a good thing and federal systems (like in the US) have adopted good and necessary frameworks for avoiding costly bail outs.
Now, the US banking regulation system is not fully centralized. Quoting US Fed Chairman Ben Bernanke in a 2007 speech:
“The Federal Reserve shares the responsibility for regulating and supervising the U.S. financial system with a number of federal and state government agencies, including the other banking agencies, the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission. The Fed, along with state authorities, supervises state member banks (that is, state-chartered banks that are members of the Federal Reserve System). In addition, it supervises the U.S. operations of foreign banks and, in some cases, the foreign operations of U.S. banks.
The Federal Reserve also serves as the umbrella supervisor of all bank holding companies and financial holding companies, which gives the U.S. central bank broad oversight responsibilities for these banking organizations. However, the bank and nonbank subsidiaries of such holding companies are often supervised by agencies other than the Fed. Supervisory responsibility is determined by the type of charter held by the supervised company and by the principle of functional regulation, under which the identity of the primary supervisor depends on the nature of the financial activity being carried out. For example, the commercial banking activities of holding-company subsidiaries with national bank charters are supervised by the Office of the Comptroller of the Currency (OCC), whereas securities activities in nonbank subsidiaries are under the jurisdiction of the SEC. The Fed cooperates with the OCC, the SEC, and other supervisors in determining the financial condition of the consolidated organization.”
Nor can we consider the US experience as a successful federal scheme where bank resolutions have safeguarded public finances. In January 2007, one year before the Lehmann crisis occurred, Ben Bernanke in that same speech was quoted as saying that: “the Federal Reserve continues to work actively to prepare for the possibility of financial stress. For example, we have created cross-disciplinary teams of experts–including staff drawn from bank supervision–to monitor financial developments and to consider possible crisis scenarios and the appropriate policy responses. We have worked with other agencies both here and abroad to improve our abilities to communicate and coordinate in a crisis situation. We also continue to take measures to ensure that our communications, information systems, and policy processes will remain viable should critical infrastructure be disrupted“.
Lehman occurred nervertheless.
Having clarified this, what that speech of Bernanke however teaches us – for our specific European debate – is that central banks adore getting into the banking supervision business, extending their power beyond monetary policy and resenting that other independent agencies are instead in charge of supervision.
Dr. Draghi is in no way different from Prof. Bernanke on this one. The ECB badly wants the job of supervising alone (even more than in the US) the banking system.
Now, it is certainly true that Europe needs a centralized banking watch-dog to avoid the financial messes occurred since the launch of the euro. Banks are multinationals and national checks are weak and ineffective. But is the ECB the ideal candidate for the job?
On the one hand the somewhat disappointing conduct of the European Banking Authority (oh yes, that’s right, we do have already in place a central supervision agency in banking! and yes, we just created it!) in supporting the economy during a crisis that badly needed credit explains why we are discussing about a change in the governance of European banking regulation.
But the key question here is: what guarantees us that the ECB will do a better job than the EBA? Or aren’t there good chances it will do worse?
I have personally believed – and stated this in a testimony to the Italian Senate a couple of years ago – that EBA would be a recipe for disaster. I was right. I am now ready to state that the ECB will be one too. After all, EBA, which failed to see many recent banking crises coming, was governed by central banks: the ECB and all national banks are present in the board of EBA.
These are the 3 main reasons why I think that things will get worse rather than better by putting the ECB in control.
First, conflict of interest at the constitutional stage of the new authority will create the wrong checks and balances and inappropriate incentives for operating swiftly and properly.
Power attribution of regulatory authority cannot be decided in meetings and through proposals that involve, as they currently are, the presence and advice of the European Central Bank itself. Unless the ECB obviously is not considered a candidate for the central supervision. As we said, unfortunately it is. The conflict of interest is incredibly vast and sends a clear signal to every party involved that the accountability of any future European Financial Authority to be created will not be a main item in the agenda of the establishment of its critical constitutional features. The more so if these powers are determined not with the rank of Treaty changes ratified by each single country but by lower-level legislation.
Second, conflict of interest at the managerial and operational level will increase because of the dual mandate of the ECB.
Bernanke states “some writers have argued, for example, that a central bank with supervisory responsibilities might, at times, be hesitant to impose appropriate monetary restraint out of concern for possible adverse effects on banks“. I worry also of another conflict of interest. Counter-cyclical credit, the necessary feature of any functioning banking system, will be made hostage of the other goal of the ECB, mere price stability, inducing greater confusion in the decision-making process. If a recession comes and the ECB does not feel it needs to boost the economy, will it put the needed extra-pressure on banks to lend?
Third, conflict of interest at the reporting level will increase because of the natural secrecy of central banking.
Central banks are naturally reluctant to shed light on their activities, they call it ambiguity. The ECB has, in addition, a worrying record on transparency. It still denies access to the derivative contract signed between Goldman Sachs and the government of Greece that has rocked the Continent and put Europe on fire. The European Court trial is still going on between Bloomberg and the ECB and there is by now no reason to believe that the ECB will open its books to make fully accountable the responsible parties of this catastrophe. How can such an institution be in charge of such a delicate task as banking supervision?
Dr. Draghi says that “banks have to conform to the highest regulatory standards and focus on serving the real economy“. They are not likely to do that properly, as they haven’t in the recent past, if the ECB were to obtain the job.
An independent, accountable and non ECB European authority must be put in place for banking crises to have a chance of being avoided in the near future.
09/09/2012 @ 16:07
“It still denies access to the derivative contract signed between Goldman Sachs and the government of Greece”
“How can such an institution be in charge of such a delicate task as banking supervision?”
Ma è ovvio, no? E’ la mortifera eredità del ’68 e dell’Unione Sovietica, è da lì che è cominciato il crollo dell’ autorità.
P.S.: A proposito di Goldman Sachs e Grecia, qualcuno si ricorda cosa voleva dire “SIM” negli anni ’70?
No, non erano le “Società di Intermediazione Mobiliare”, era un’altra cosa, era singolare maschile.
Fa abbastanza impressione leggere le stesse cose dette da un economista molto ascoltato.
Ecco in un certo senso ha ragione Luca, questa è se vogliamo una delle eredità degli anni ’70, solo che lui non sa quale.
A proposito di come siamo arrivati alla situazione di oggi volete leggere una saggio interessante di Samuel Huntington e Michel Crozier sugli intellettuali e la democrazia, illuminante per comprendere la genesi della situazione attuale (si parla anche dell’attacco all’autorità…)?
Il link originale è questo sotto ma qui nel pdf non si riesce a cercare le parole, in quello sopra sì:
Leggete per brevità solo i paragrafi “The upsetting of the intellectual world” di Crozier e “Towards a democratic balance” di Huntington.
Un paio di perle?
“Al Smith once remarked that “the only cure for the evils
of democracy is more democracy.” Our analysis suggests that
applying that cure at the present time could well be adding
fuel to the flames.”
“democracy is only one way of constituting
“The vulnerability of democratic government in the United
States thus comes not primarily from external threats,
though such threats are real, nor from internal subversion from the left or the right, -[LUCA...NOR FROM INTERNAL SUBVERSION e scrive nel 1975!!!]-
although both possibilities could
exist, but rather from the internal dynamics of democracy
itself in a highly educated, mobilized, and participant society.”
Prego notare che la “highly educated, mobilized, and participant society” è il vero rischio per lui (e io che credevo che fosse l’ auspicabile obiettivo) non il’68 né l’URSS e lo dice esplicitamente…andateglielo a spiegare a Pino e Luca…