If in doubt, regulate…

13 Jun

Another idea that has gained traction in recent days is that of a European-wide banking union. This idea, as with Eurobonds, is not new but the most recent bail-out of the Spanish banking sector has put it back onto the agenda. Key figures – from the President of the European Commission to the head of the European Central Bank – have come out in favour of a banking union. The fact that the bank at the centre of Spain’s difficulties, Bankia, was for so long able to hide its problems, even to the point of being fêted as a success story until not very long ago, has made many doubt the ability of national regulators to properly keep a tab on what their banks are doing. Ergo, the turn towards a pan-European regulatory solution.

Exactly what a European banking union would look like or what powers it would have depends on who you ask. Maximalists tend to hover around the EU institutions as they believe such a union would further strengthen the EU. According to Commission President, Jose Manuel Barroso, a banking union could include an EU-wide deposit guarantee scheme, a rescue fund financed by banks themselves and the granting an EU authority the power to order losses on banks. Minimalists, from within national regulatory bodies, claim that only a small set of powers need be transferred to a Brussels-based body. They also stress that a European banking regulator already exists in the form of the London-based European Banking Authority. The EBA already has powers to make rules and to force banks to comply. It was behind this year’s stress tests of Europe’s biggest banks and the demand that they boost their capital ratios. Minimalists also say that only a small number of big banks should be supervised. What Merkel called the “systemically important banks”.

Over the weekend, two heavy-hitters (of a sort), Niall Ferguson and Nouriel Roubini, weighed into the debate. They noted that for two years now inter-bank lending in Europe has been replaced by a singular reliance on ECB financing. And some countries – Greece and Spain – are experiencing a steady rise in withdrawals from their banks. As well as a direct recapitalization of the European banking system, Ferguson and Roubini argue that an EU-wide system of deposit insurance needs to be established, alongside a European-wide system of banking supervision and regulation.

Some of the same criticisms made of Eurobonds can be made of the banking union idea. That the political conditions for its creation are absent is evident from the kind of discussions being had about how such a banking union would be set up. Cognizant as ever that national publics are unlikely to wave through any forward movements in integration, some suggest that instead of creating a banking union via an EU treaty change – a slow and complex process, fraught with opportunities for sabotage by recalcitrant domestic populations – it would be possible to simply give over the regulatory power to the ECB. And this could be done without a treaty change but just by a unanimous vote of the European Council. As Alex Barker on the FT Brussels blog writes, this “avoids the political headache of more treaties” and “is faithful to the unsaid rule of this crisis: central bankers should win more power, regardless of whether they deserve it”. That so much thought is given about how to push through such a banking union without going through democratic procedures of ratification suggests the solution itself lacks the public support it would need to be a success. Even short-term fixes such as providing banks directly with extra capital raise big questions about how the money being provided will actually be used. There is always a balance to strike between politics and expertise and giving new institutions the powers to make decisions based on expert judgement is not necessarily anti-democratic. But when the democratic authorization is entirely absent, or when new institutions are created in ways that explicitly avoid any wider public debate about their merits, we can be confident that the stick has been bent too far in the direction of expertise.

Another problem is that – in line with another unsaid rule of the present crisis – the banking union seems to represent a case of “if in doubt, regulate”. As already mentioned, a European Banking Authority already exists. But critically, a more muscled Brussels-based variant wouldn’t necessarily address any of the more fundamental questions about the financialisation of Europe’s economy and the way this financialisation has interacted with some of the structural features of the Eurozone. More regulation can simply mean refusing to look more closely at the root of the problem. It is unsurprising that the EU’s kneejerk reaction to a problem is to try to create new regulation. We should resist the temptation to regulate and think instead about the fundamental causes of the present crisis.

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One Response to “If in doubt, regulate…”

Trackbacks/Pingbacks

  1. Krisenkommentar | Heinos Netzblog - June 27, 2012

    [...] Europäisches Bankensystem. das wird von Leuten ins Feld geführt, die dem Fiskalpakt und dem Rettungsschirm nicht trauen, und glauben, man solle die Banken direkt stützen. Auch hier Liberalismus first. Wer genaueres dazu lesen will hier. [...]

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