|Report on the crisis – Brussels think tank calls for simple solutions rather than more difficult and potentially more pertinent solutions regarding sustainable financial services.
|Carmine Di Noia and Stefano Micossi have written a report for CEPS on the crisis. They see the emphasis on the macroeconomic instability and there is no mention of irresponsible credit practices as a contributing cause of the crisis. Although lax regulation of financial markets and excessive leverage is tackled in the report, according to them there is no need to fundamentally change the regulatory architecture to include non-banks (the grey shadow sector) and no need to separate commercial and investment banking.
Although restoring confidence in the banking system is seen as crucial, there is no suggestion of how to ensure lending can be made sustainable going forward. State intervention and a European rescue fund are no solution for this, and we would have preferred to hear about the need for criteria to be used as benchmarks for assessing lending practices (along the lines of the ECRC principles of responsible credit). The report “Keep it simple - Policy Responses to the Financial Crisis” by CEPS is available below.
This study finds that the global financial instability was mainly
determined by unstable macroeconomic policies in the major
economies and currency areas of the world, with lax regulation of
financial markets in general playing the role of a permissive factor.
The urgent task at this juncture is to stabilise financial markets and
halt the poisonous spiral of lower asset prices depressing economic activity,
which in turn is pushing asset prices even lower. The central question is
how to restore confidence in the banking system. To this end, the
deployment of government money into insolvent banks should be
accompanied by a straight takeover by the state, a restructuring phase and
resale to private investors as soon as possible.
The arsenal of crisis-management tools available to the European
Central Bank are narrower than that of other major central banks because,
unlike the Federal Reserve and the Bank of England, the European Central
Bank is not backed by a fiscal authority. One way to tackle this weakness
without undermining the ECB’s independence would be to create a
European Fund which would issue Eurobonds and make the proceeds
available to European institutions for their financial rescue operations.
Once the crisis subsides, the world will need new monetary
arrangements whereby external payment imbalances are corrected by
appropriate domestic policies and exchange rates can vary consistently
with the requirements of international adjustment. Agreement on restoring
external discipline on national policies of all countries will not come about
unless the main emerging economies can take their proper place alongside
the industrialised countries in the world’s governing institutions.
Lax financial market regulation has allowed leverage of financial
organisations to build up to unsustainable levels. In our view, there is no
need to fundamentally change the regulatory architecture whereby
prudential regulation basically concerns banking institutions. Non-bank
intermediaries, including private pools of capital, do not pose systemic
stability risks unless they are financed cheaply by banks with depositors’
money; to the extent that this is avoided, it is not necessary to extend
prudential regulation beyond the banking system. There is also no need to
return to a system of legal separation between commercial and investment
banking, provided there are sufficient disincentives and penalties for banks
to engage in capital market activities on their own account.
Our main advice on banking capital requirements is to scrap Basle II
rules and replace them with a flat capital requirement calculated with
reference to total assets, with no exemptions: the maximum permitted
leverage ratio should never again be allowed to exceed a ceiling of ten.
We also suggest a number of measures designed to strengthen risk
management within financial organisations as well as transparency of
information on all market participants and financial instruments.
Appropriate incentives should push OTC instruments to migrate to
organised clearing platforms.
In Europe, a drastic simplification of the regulatory structure is in
order to concentrate at EU level not only rule-making, which in the main
has already been accomplished, but also rule implementation, as was
argued by the de Larosière Group. More specifically, it is high time that
Level Three Committees be given legal powers in coordinating the
implementation of EU directives.
Created: 15/04/09. Last changed: 15/04/09.
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