Vice-Governor M. Hampl for Europe's World
If there's no repeat of the financial crisis, says Czech central banker Mojmír Hampl, then the planned new pan-EU agencies to supervise banking, securities and insurance may work. But that's a very big ‘if’
At the close of last year, EU finance ministers gave their green light to a new supervisory architecture for the Union’s financial markets. Now it is up to the European Parliament to address this hypersensitive issue, the most controversial part which is, of course, the powers and responsibilities of the three new pan-European supervisory agencies for banking, securities and insurance. It will be a far-reaching decision that will affect European finance for many years to come, and although some complain that the finance ministers' December compromise doesn’t go far enough, there’s actually a case for saying the opposite is true.
The springboard for this fundamental policy shift was the report by former French central banker and IMF chief Jacques de Larosière. His spring 2009 report in the wake of the previous autumn’s financial meltdown surprisingly ignored many vital issues that in the main had also been largely overlooked in the whole financial overhaul debate, both before and after the release of de Larosière’s findings.
As the crisis has shown, the important thing is that there are too many rather than too few supervisory and regulatory institutions overseeing European financial markets – in the whole EU there are almost 70 of them. Jacques de Larosière and the political debate he has fostered completely gave up on simplifying and consolidating institutions at the national level first, and only then perhaps building something supranational on that foundation. Instead of that, we are starting directly with what will be entirely new Europe-wide institutions. This is a classic bureaucratic response: faced with a problem, create a new institution. What a mistake. If we merely add new institutions to EU countries’ already Byzantine arrangements, we will fail to address the effectiveness, flexibility and smoothness of information transfer through the EU-level supervisory system. Let’s recall the beginnings of the crisis: the case of Northern Rock, for instance, is now seen as a notorious example of how difficult communication and the sharing of information among just three national authorities can easily make things rather worse and not better. We need to start with national supervisors first (as Germany now wisely does) and then if necessary go higher to the European level, not the other way round.
The new regulatory model also fails to address a persistent weakness of the single European financial market – how to pay the costs (or “share the burden”) when a multinational bank fails. A systemic solution must precede, not follow, any setting-up of new European institutions.
We Europeans may proudly say that we have a single financial market, but it is configured for good times only. In bad times it is national taxpayers who pay for any financial sector trouble because there is no pan-European taxpayer. In the EU we have so far failed to agree on any plausible burden-sharing models, yet it will be difficult to move forward without one. Last June it was agreed at EU level that the decisions of the European institutions should not impinge on member states’ control of fiscal policy, but how this fits with pan-European regulation is hard to say. Many of the decisions to be taken by the new European institutions may bring about costs that will only emerge much later.
There is an interesting paradox here. Many day-to-day cross-border services ranging from freight transport to hairdressing face major barriers and restrictions. Yet if the provider of these services goes bankrupt or runs into difficulties, there is little likelihood that any national government would be called on to bail it out. How many “systemically important” hauliers are there? By contrast, banks and others can use European “passports” to provide financial services throughout the EU, which may have significant public finance implications. A nice idea, but half-baked: it fails to specify which taxpayers should cough up if something goes wrong and savers want their money back, as with the Icelandic banks in the UK, the Netherlands or even Switzerland.
With these crucial issues unresolved, we are creating a Europe-wide decision-making system that breaks the golden rule of any institutional set-up: Decisions should be made by those who bear responsibility and who ultimately would pay. With too many decision-making powers at European level, national authorities will be answerable to their citizens and foot the bill, yet will not make the decisions. Conversely, the European institutions will bear neither the costs nor the responsibility, but will have the power. This may ultimately create perverse incentives for both of them – all the more so if, as seems likely, there is a step-by-step increase in the power of the European institutions.
How disturbing then that the powers for these institutions that have been proposed by the European Commission and endorsed by EU finance ministers are far from negligible and may yet be increased. The three new agencies will not only enforce common technical standards that may eventually become binding throughout the EU if endorsed by the Commission (and “technical” should not be translated as “inessential”). They will also be allowed to settle disputes between national supervisors, and more important still, should the Council declare a state of financial emergency – such as, perhaps, the one we are living through right now – the EU agencies might exceptionally be given a pre-dominant position over national supervisory authorities. Needless to say, “disputes” and “emergencies” are exactly the future situations likely to matter most to national policymakers and their taxpayers.
All in all, an outcome where in good times decisions about systemically important national financial institutions are made at European level, while in bad times national taxpayers pick up the tab would be a loss for the whole EU. And it is hardly likely to prevent another crisis. In good times, we probably won’t be able to tell the difference, but the grim reality is that we should be preparing the system for bad times. Why is it that we in the EU are once again building the house from the roof down?