Mojmír Hampl, Vice-Governor, CNB
The fifth Main Meeting of Official Monetary and Financial Institutions Forum (OMFIF)
Speaking points
Frankfurt am Main, 17th October 2014
Ladies and gentlemen,
Thank you for inviting me to attend this event and take part in this panel. I really appreciate it. I would also like to take this opportunity to thank David Marsh for the endless energy he puts into the OMFIF. His work is truly admirable and impressive and makes the OMFIF what it is. Having been given the privilege of opening this panel on regulatory developments, I hope you don’t mind if I take advantage of it to say something about the side-effects of our regulatory work.
From a bird’s-eye perspective it seems that regulatory policy is procyclical on average, as it has so often been in the past. In bad times we try to tighten the reins, and in good times we tend to leave them too loose. This is probably just human nature (monetary policy fortunately exhibits different behaviour), but it is good to be aware of it even if we don’t actually know how to avoid it.
I sometimes use the metaphor of a patient. Our patient – the financial intermediation sector – suffered a severe heart attack in 2008 and was close to cardiac arrest. We managed to bring him round, but since then we have frantically been stuffing him with various medicines, drugs and medications at the same time in an attempt to cure him of every known, apparent or even hypothetical disease all at once. Like doctors, though, we are entirely unable to predict the overall cumulative effects of all these drugs, pills and treatments. A single drug used in isolation may be effective, but we cannot know what effects our combination of treatments will have in the long run once the patient is back on his feet. At the very least, this should make us stop and think before administering any more new drugs. Bear in mind that CRD IV and CRR alone run to 400 pages of dense text. Many related technical standards and guidelines are being drawn up at EBA level. The new regulations were only recently recast – or are still being recast – into secondary legislation in EU countries. The EBA alone has received more than 2,400 unique queries on the application of specific provisions from supervisory authorities and market participants. And that is just one – albeit key – element of the new regulatory architecture in the EU. Sometimes it is good to be aware of the scale of the treatment.
At the same time, we know implicitly that regardless of our efforts, financial intermediation will always be inherently risky in our monetary system. It is hard to eliminate all its risks once and for all. Unfortunately, the financial sector suffers from a similar trilemma as the health sector. No health care system can ever be cheap, good and universally available all at the same time. Only two of these three conditions can be satisfied simultaneously. Likewise, no financial sector can be perfectly efficient, totally safe for depositors and investors, and simultaneously free of moral hazard and public support. Again, you can only ever satisfy two of these principles entirely. We are currently trying to go down the path of greater security (with banks more like post offices and less like hedge funds). As I said, though, it is hard to estimate the toll that will take in terms of moral hazard and the efficiency and smoothness of financial intermediation.
Let me give you one example of these side-effects in the Czech Republic. As you know, Europe has introduced a single deposit insurance scheme for credit institutions up to a national currency equivalent of €100,000. This insurance covers not only bank deposits, but also deposits in smaller credit institutions such as credit unions, which are subject to the same regulations. Until the deposit insurance legislation was harmonised, the Czech Republic had a system of coinsurance where savers would get no more than 90% of their deposits back. After harmonisation, which we had some concerns about, something interesting happened. The Czechs – like the Germans – are a nation of small savers. Households are net creditors and the loan-to-deposit ratio is under 100%. Consequently, the policy of low interest rates is unpopular and is motivating traditionally conservative Czech savers to seek alternatives to normal savings deposits. Czechs have worked out where they can make their savings work harder without losing the state guarantee. The introduction of 100% deposit insurance of up to €100,000 including accrued interest has led to a surge in interest in credit unions, which have an inherently riskier business model than banks and offer higher rates of return on deposits. All that savers are thinking about is the 100% deposit guarantee. The surge has at times been strong enough to cause the credit union business model to collapse, and we have been forced to close down several of these institutions. This, in turn, has had an impact on the funding sources of the deposit insurance fund.
I’m not trying to say that many of the trends in regulatory thinking are unworkable or wrong. I do believe, however, that we should move slowly away from creating more and more new regulations towards thinking about all the unintended cumulative effects of what we are doing. I have high expectations of the European Commission in this area.
Thank you for listening.