What I like about America, finance edition

Or to be more precise, debate about the financial institutional framework edition.

How should banks be regulated? Ten years ago, this question would have only interested a few specialists. Discussions about bank supervision and the role of the central bank were way too boring for the general public1. Besides, bankers surely knew what they were doing?

The global financial crisis and its aftermath changed this complacent attitude. The existing rules did not prevent the worse financial crisis since the 1930s. Governments had to bail out banks at a moment’s notice. Politicians took drastic decisions during the panic of September 2008. While those actions were taken with little democratic oversight, national leaders2 were the only agents willing and able to stop the collapse.

The crisis spurred a thorough update of bank regulation. Both in the United States and in Europe, legislation was passed to make banks safer. Avoiding a repetition of ad-hoc bailouts became a priority. The U.S. got its Dodd-Frank Act. The European Union (EU) set up the European Banking Authority (EBA) and worked towards a banking union3. America and Europe implemented capital and liquidity standards based on the Basel III recommendations.

Central banking also evolved a lot since 2007. Under its quantitative easing (QE) programs, the Federal Reserve (Fed) bought assets worth trillions of dollars. The ECB later copied the Fed’s example. Due to central bank independence, elected representatives made a lot of noise about QE, but they failed to stop the asset purchases.

Obviously a lot has been done. But the question is now: is it enough? Are the new rules and authorities sufficient to keep banks healthy?

This brings me to the point of this post. Americans debate the governance of the banking system very openly. Interested observers have the opportunity to scrutinize the opinions of high-profile (former) officials. The clash of ideas can inspire economists and policy makers to come up with better proposals.

Contrast this with the situation in Europe. I am quite certain that insiders discuss the validity of Europe’s regulatory framework. But these discussions happen behind closed doors4. This lack of transparency does not help the image of ‘Brussels’ and its institutions.

Let me illustrate what I’m talking about. Timothy Geithner, the U.S. Secretary of the Treasury in the first Obama administration5, recently reflected on the stability of the American banking industry. In his article Are we safe yet?, Geithner argues that Dodd-Frank has made the financial system more resilient. At the same time, the Act may have taken away too much power from emergency authorities (the government and the central bank) to act effectively during a crisis.

Or take Ben Bernanke, who retired as Chairman of the Fed in 2014. Bernanke is now a fellow at the Brookings Institution. Everyone can read his blog posts about macroeconomic issues.

Geithner and Bernanke will not convince their haters. But they should be commended for using their experience to inform policy debates. In the U.S., a variety of Fed watchers, bank reformers, and think tanks offer a diverse range of views about what banks should or should not do.

On the other side of the Atlantic, there is mainly silence. Wouldn’t it be nice if a European minister of finance who managed the 2008 meltdown wrote an article about the strengths and weaknesses of the Single Resolution Mechanism? Surely there must be at least one (former) official with the technical expertise to do this? Now it looks as if the issue has been offloaded to ‘Europe’, and it’s nobody’s problem anymore6.

Has Jean-Claude Trichet – President of the ECB from 2003 to 2011 – analyzed his tenure at the central bank of the euro area? What is his opinion on the current actions of the ECB? Trichet is currently the Chairman of Bruegel, one of the few European economic think tanks. Bruegel is supposedly independent. But the interconnectedness with the ECB might restrain the commentary tolerated from its researchers.

Critique is not done in Europe. Officials try to be diplomatic at all costs7. The EU could learn a lot from America’s more open culture. Organizations like the International Monetary Fund (IMF) have also started to evaluate their own performance. How can Europe make progress if it doesn’t learn from its past mistakes because people are afraid to offend somebody? Do we suffer from intellectual eurosclerosis?

Update 29/03/2017: I found an article from last year which confirms that the ECB has a rigid culture: ECB “groupthink” raises risk of missing next crisis: staff reps

Key quote:

Two staff representatives at the European Central Bank complained […] of a work environment in which dissent is discouraged […]

This made me think about the lack of blogging at the ECB. The Federal Reserve and the Bank of England have blogs where researchers share results. As far as I can tell, the ECB has nothing similar. This is symptomatic of a top-down culture that fosters secrecy and conformity.

  1. “General public” will always be a very relative term when it comes to financial regulation.
  2. And to a lesser extent central bankers.
  3. I will cover the European regulatory structure in detail in future posts.
  4. I would happily be proven wrong. Yet even if there are public forums discussing such topics, they will need to work on their visibility.
  5. I.e., when Dodd-Frank was passed.
  6. To be fair, it could be that such assessments do exist, but they are published in a language I don’t read. After all, the press in Europe mostly focusses on national issues.
  7. OK, I’ll admit that Jeroen Dijsselbloem’s comment that southern Europe should waste less money on drinks and women was anything but diplomatic. But his statement hardly qualifies as an insightful criticism that can guide institutional reform.

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