Mojmír Hampl, Vice-Governor, CNB
Opening remark
Prague, 20th February 2009
Ladies and getlemen,
let me first welcome you all here in Prague as warmly as I can. I must say it a great honour for me to open today’s session. In this opening remark I would like to touch briefly a couple of issues that have started occupying my mind recently and that are, of course, closely related to the current financial crises. I hope that I will stimulate and provoke a discussion at the end of this remark.
We are in the middle of what might well be the worst economic downturn since the Great Depression of the 1930s. The scope and the depth of this “twin crisis”, financial and economic, is quite unexpected for virtually everybody. Many commentators, policy-makers as well as practitioners have offered their solutions. The solutions often concern both issues of the day: first, how to get out of the current global crisis and, second, how to prevent such a crisis from occurring and repeating again in the future.
In my view, these are two completely different issues that need to be tackled in a very different way. As I repeatedly say at many occasions, to put on a fire is one thing, but to change general fire regulations is quite another. On the one hand, policy-makers rightly put in quick use all the tools they have to mitigate the current crisis, or to put on a fire. Of course, there is very little time for thorough academic discussion on the pros and cons of alternative courses of action.
On the other hand, we seem to have a bit more time to analyse and discuss the real causes of the current crisis and to determine what needs to be done to avoid similar crises in the future. We need to study carefully all the details of how the crisis has started and evolved in order to see which elements of the global financial and economic system played a key role in helping to rock the boat or, on the contrary, to stabilise it. Many of us may have some guesses on these issues already now. But such guesses are often strongly influenced by the current atmosphere – by what the media say or what various interest groups trumpet into the world. Such first-moment guesses are not good substitutes for a careful study of the data, for detailed and deep analyses and for cool-headed analytical insight of the experts after the dust settles.
It is therefore rather disturbing 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 changed in the area of long-term rules in the financial universe, without having strong analyses behind these documents.
Apart from how early these considerations have occurred, what is especially disturbing for me is the general direction in which they point: many of the proposals seem to assume implicitly or explicitly that modern-day financial services, the services of the financial industry are more or less a kind of a public good. Strangely enough, even many representatives of the industry itself now seem to endorse this view.
I think we should tread much more carefully here: before we decide to change a certain aspect of financial regulation for instance, we should make sure that the aspect in question really is in need of changing and that the new version that we are about to implement is really better, rather than worse, compared to status quo. Before acting, we should think twice about all the implications of the change. Otherwise, there is a risk of unintended consequences that might, one day, even bring about a crisis similar to the current one or even worse, only from a different direction. Then we would have bad times in the industry forever, not just from time to time.
Also, in the 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 (i.e. monetary and fiscal policies) might actually aggravate or even cause the economic cycle or financial cycle, rather than reducing it. But again, this is a complex question and the search for a reliable answer is going to take a lot of time. But this is a first-order question - changes of pay incentives or accounting rules are the questions of second-order. The first-order questions are being discussed much less and much less technically than second and third-order questions and this is also worrying. Let’s not forget that, at the end of the day, the key regulated price in the economy is the interest rate, and that the whole financial industry must accept this state regulated price as its benchmark. This has got its consequences.
From what I have said up to now, you may get the impression that as regards the debate on the prevention of future financial crises, I have nothing to offer at all. In fact, I do think that we have already accumulated some real-life experience in the Czech republic to allow us to make some specific suggestions in at least one specific area - this is the area of institutional setup for financial supervision and regulation.
We often hear suggestions for a pan-European regulator and supervisor and we expect this suggestion from the de Larosiére working group. Based on the experience that the Czech National Bank has, a much more urgent, effective and helpful step would be to start consolidating regulation and supervision of the financial industry at the national level of each EU member state. 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 and decision-making 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 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, strong technical and professional support, independent and non-political decision-making, etc.
Related to this national-level consolidation is a room for some measures in the sphere of international-level cooperation. Cross-border exchange of information among national supervisors should be enhanced. One way to tackle this need is to establish a hub which would be responsible for day-to-day consolidation of information.
As regards the Lamfalussy process, the activities of Level 3 committees should be more coordinated. If their opinions, advices and recommendations are harmonised across all segments of the financial market, they will gain greater reputation from everybody - regulators and market participants.
Another needed step is elimination of misplaced national discretions, be it in the area of Credit Requirement Directive or the Solvency II directive. Finally, much room exists for unification of reporting formats not only for banks, but for all major segments of the financial market.
The measures I have just listed may sound a bit technical and less glamorous than large-scale initiatives being discussed in most international fora these days. Well, as a central banker, I prefer steps that, although maybe not glamorous, are likely to bring actual likely improvement into the way financial markets work. Big ideas that will hardly work are especially now worse than smaller steps that might work.
Hopefully, I have already stimulated enough comments and questions on your side, so I will stop here.
Thank you for your kind attention.