EU banking union: Less may be more when devising financial regulation
THE Eurozone crisis and domestic banking issues have been enjoying a summer holiday, no doubt helped by the Olympics. But they will now move back to centre stage.
The European Commission’s proposals for an EU banking union are ambitious and, if accepted, would entail the biggest transfer of national powers since the start of the euro. Once this is understood, it is likely to raise political concerns in many national parliaments, and the proposals require the unanimous support of all member states. The debate is likely to be heated.
The supervision of German savings banks by the European Central Bank (ECB) will likely be resisted. Non-Eurozone countries will probably demand safeguards for the Single Market. Member states with problem banks will likely want to defer responsibility and mutualise risks to the ECB quicker than creditor countries. This all points to delay and, potentially, significant changes to the details.
The UK is not simply an interested bystander in this debate: it is Europe’s financial centre. We must ensure that the interests of non Eurozone countries are taken into account fully, and that the rules for the Eurozone are not discriminatory towards other EU states.
In developing a new regulatory framework, policymakers should draw on the most significant paper on banking regulation written since the financial crisis: Andrew Haldane’s wonderfully titled paper The Dog and the Frisbee.
Haldane, executive director for financial stability at the Bank of England and a member of te Financial Policy Committee, presents evidence from a range of real-world settings to demonstrate that decision-making in a complex environment can benefit from the use of simple rules of thumb. He argues that complexity often carries punitively high costs of information collection and processing.
Basel III, for example, may consume the time of 70,000 workers in the European banking industry.
Haldane’s analysis shows that simple rules, like the leverage ratio, outperform more complex riskweighted models in their ability to predict bank crises.
He suggests five policy lessons. They include more scepticism of the role and robustness of internal risk models in the regulatory framework and greater reliance on standardised approaches to measuring credit and market risk; placing leverage ratios on equal footing with capital ratios; a less rules-focused and more judgment-based approach to financial supervision; explicit regulatory charge on complexity; and greater reliance on the market mechanism to encourage banks to sell off assets and reduce complexity.
In Haldane’s concluding words, when it comes to financial regulation “less may be more”.
Policymakers have a huge task in developing new regulatory models. Taking Haldane’s advice should make that task easier and the outcome more effective.
Mark Boleat is policy chairman at Canada Corporation.