Mojmír Hampl, Vice-Governor, CNB
Speech to Central and South East European Financial Forum
Bucharest, 19th – 22nd May 2009
Ladies and gentlemen,
let me first express my gratitude to organisers for inviting me. It is a big pleasure for me to be here at this interesting conference.
According to organisers, this session should deal with the following issues: i) regulation and supervision in the financial universe, ii) the role of the central banks, iii) emerging economies, iv) recovery from the crisis and v) the euro. Excellent topics, each of them would require a specific – and rather long – speech or presentation. So I ask you for some generosity, I’m going to touch briefly just some them.
First of all I would like to repeat one of my favourite mantras. Let’s describe the financial crisis as a fire. And I think that to put on a fire is one thing, but to change the fire regulations is quite another. To put on a fire, in other words how to get out of the crisis quickly is really a different task than to change fire regulations, that is to say how to change the rules to prevent such a crisis from repeating in the future. Putting on a fire means acting quickly and decisively to minimise the damage in the short-run, there’s no time for deep contemplation and extensive analysis.
But to change fire regulations - for instance the structure of supervision, general regulatory framework, definitions of what should be allowed and what should not be allowed in the industry - this requires a completely different approach. First there must be a convincing, detailed and widely-shared analysis of the causes of the fire, some “key lessons” and then the fire regulation might start changing.
These are really two different disciplines and, unfortunately, they are very often being mixed up together in the current debate.
It is rather frustrating for me to see that numerous policy makers in various countries and international institutions are already now hastily drafting strategic documents on what needs to be urgently changed, preferably tomorrow, especially in the area of financial regulation and supervision, while the fire is still burning. These policy recommendations are often based on first-moment guesses rather than on the detailed analysis of which elements of the global economic system played a key role in helping to rock the boat.
Of course, many of us, including me, have some guesses on these issues already now. But such guesses are often strongly influenced by what the media say (and the media are very pro-cyclical by definition) or what various interest groups trumpet into the world. Such are not good substitutes for a careful study of the data, for detailed case studies and for cool-headed analytical insight of the experts after the dust settles.
For instance, at least in European debates on the causes of the crisis and on prevention of future crises, one important issue has received much less attention than it deserves: to what extent macroeconomic policies, i.e. monetary and fiscal policies might have increased the vulnerability of the financial sector and thus helped the fire to start burning that extensively. Look at the data and you will see that fiscal policies in the majority of the EU countries were deeply pro-cyclical prior to the crises. Use simple rules like that of Professor Taylor and you will see that monetary policies even in Europe were rather pro-cyclical. There’s almost no discussion about better fiscal rules and there enforcement in the future in the EU. There’s almost no discussion about the future role of the monetary policy. Should it also try to stabilise prices of some classes of assets, should there be more demand on monetary policies to minimise imbalances on many other fronts than in the area of CPI? Important questions for the debate about the future, but they are overshadowed by sometimes even absurd issues like tax havens or dangerous pressures to politicize the accounting standards (– really are there any reasons to believe that tax havens caused the crisis?).
Apart from how early these considerations have occurred, what is especially disturbing for me is the general direction in which many of these suggestions point: many of the proposals seem to assume implicitly that modern-day financial services are inevitably some sort of a public good whose provision should be delegated to the state. This goes hand in hand with the view that both sides of the contract in the financial industry should be more protected and less responsible for what they do. Strangely enough, even many representatives of the industry itself now seem to endorse this view.
Now an example of some shortcomings of the current debate is now the well-known De Larosiére Report. I put aside the fact that the report, although signed by a group of distinguished and prominent economists and practitioners, sometimes looks like it has been written more by the European Commission. I also put aside the fact that the report itself is rather analytically weak.
I do support some of its minor proposals, such as to eliminate national discretions where appropriate. Also, it is certainly a good idea to harmonise reporting formats across Europe, for instance. In the same way, I applaud to the proposal to reduce the use of ratings for regulatory purposes that extensively as in the past.
But I cannot endorse many other suggestions made by the de Larosiére report and his group, especially the institutional ones that are of the highest importance. They seem to be half-baked and I don’t believe the setting proposed by the report might really work better than the current status quo.
The first institutional idea is to create a pan-European regulatory and supervisory network called European System of Financial Supervisors. De Larosiére says that on the national level everything will basically stay as it is, so fragmented national supervision will remain and a new supra-national level of supervision will be attached to the current system. But this means that the whole system will be even more complicated than now. The decision-making will be more complicated, the transmission of information to a relevant decision-maker will be more complicated and longer. The proposal does not take into account the simple fact that we have got an integrated financial market, but when it comes to money - to taxpayers money - it is not European, but national (French, German, British, Czech). It aims shifts the balance of powers and responsibilities in an unpleasant way – more power goes to those who do not bear the ultimate responsibility for the stability of the financial system and the responsibility will remain in the hands of those who will have less powers. The incentive structure for regulators and supervisors is worse than the status quo.
To put it bluntly, what crises has showed is that in the European Union we have too many institutions dealing with supervision and regulation, not too few. Just to add a couple of new institutions into the current setting will simply not make things easier, rather the other way round.
Similar reservations could be raised against the model of the European Systemic Risk Council. Simply, it is a big difference to deliver quickly something and to deliver something that might work.
Based on the experience that the Czech National Bank has, a much more urgent, and helpful step would be to start first with the consolidation of regulation and supervision at the national level of each EU member state first. Such consolidation creates conditions for effective exchange of truly relevant data, data integration and consolidation of analytical work. Also, the financial sector is then provided with a single communication point. From the international point of view, consolidated national regulation and supervision respects the subsidiarity principle, complies with the requirement of legislative justification and creates better conditions for cross-border coordination of supervisors’ actions.
Again, based on our experience, we recommend integration of regulation and supervision in an independent national central bank. In that case, the institution can better assess systemic risk and enjoy information-sharing synergies. Moreover, the central bank is typically independent and apolitical.
I have also doubts also about the de Larosiére Report’s push for a broader scope of regulation. In my view, the range of supervised entities should not be broadened extensively. After all, the crisis was born within the banking sector heavily regulated even now. In many countries, this seems to have been caused by sectoral fragmentation of national-level supervision, leading to supervisory “blind spots”.
Ladies and gentleman,
the problem of the growing scope of regulation leads me to my final, more general comment: Some people seem to dream of a world where we regulate all financial services and all steps of all their providers - a world where those who buy the services have no responsibility to check the quality and credibility of the services. Is such a world possible? And even if it were: is it desirable? I don’t think so. Such a world would require huge regulatory bodies and endless regulatory legislation, while it would destroy most financial innovation and the quality of the services. In my view, a better way to prevent or at least postpone the next financial crisis is to equip the users of financial services with enough information and enough financial literacy so that they themselves can tell what risks a given service entails and whether that level of risk is still acceptable for them. Informed, cautious and risk-averse consumers in a functioning market are the best supervisors.
Thank you for your attention.