Bank Supervision and Regulation with Focus on Europe PDF
Preview Bank Supervision and Regulation with Focus on Europe
Bank Supervision and Regulation with Focus on Europe Comments by Anat Admati Stanford University 200 Years to Dutch National Bank Conference Amsterdam, April 25, 2014 Happy 200th, De Nederlandsche Bank! Rationale for Bank Regulation • Deposits and other debt create strong force to ratchet leverage upward. • Depositors and other lenders don’t push back like “normal” unsecured creditors, thus leverage can become inefficiently excessive. • Banks’ distress or default imposes collateral damage on the system and the economy. • Guarantees enable and feed “addiction,” distort incentives, create more inefficiencies. Absent Effective Regulation • The banking system becomes reckless, fragile, bloated. • Innocent citizens suffer from inefficient cycles of booms, busts and crises. Why is European Banking a Mess? • Poorly designed regulation (Basel II). • Ineffective enforcement/supervision. • Politics of banking, in Germany, France, elsewhere. • Flawed political and fiscal union. • No workable resolution or deposit insurance institutions (yet). Euro Area Unemployment Rate Source: ECB 6 Key Observations • Payouts to shareholders are inappropriate. – Retained earnings are useful for lending. – Shareholders are entitled to (residual) profits. • Lack of profitability or Inability to raise equity at any price flag likely insolvency. – “Market stress test.” – Critical to recognize and deal; weak/zombie banks are dysfunctional and dangerous. Concerns re European Banking • National government have used weak banks to get access to ECB funding. • Banking union meant to break the nexus but may get ECB more involved, with responsibility but little real power to intervene. • Public debt is still high in many nations. – Eurozone nations lack monetary tools. – Sovereign debt held by domestic and other banks. • Fragmentation still significant (e.g., ring fencing). • Persistent weakness of banks still not addressed. Institutional Issues • Will future coordination effort work better than Stability and Growth Pact or No‐Bailout clause? • Funding for European Financial Stability Facility and European Stability Mechanism small relative to size of largest banks and the system. • Hard power still with national supervisors. • Single Supervisory Mechanism faces legal fragmentation in implementation. • Single Resolution Mechanism appears complicated and underfunded. Highly Alarming: Too Big to Fail Banks • “Fail” would involve multiple entry resolutions, raise cross‐border issues. • Who can guarantee €1 trillion short‐term debt? • Confusion around how “bailin tools” and “bailinnable debt” would work exactly. • Governments can subsidize weak banks for political reasons. • Deposit insurance is still fragmented; some governments cannot afford it.
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