Unfulfilled promises of financial regulation

Finance


With more bank failures and an urgent need for tighter regulation, society is no longer held hostage to finance.

finance, finance
Fading headlines: Since 2008, financial lobbies have been able to capitalize on dwindling public pressure to block tougher regulation (alexskopje/shutterstock.com)

How many more financial crises do we need? The failure of three banks in less than a week in March shows how fragile the system is even 15 years after the failure.

The new experience of bank bailouts and financial turmoil should serve as alarm bells. Imagine if a European Union bank failed. EU rules are no better than Swiss or US rules. We need to put ambitious reform back on the agenda.

In the wake of the global financial crisis, governments around the world have pledged to put in place clear rules for a stable system. The EU was considering an extensive set of proposals. There was a global consensus that public money would never save banks again. However, the promise was not fulfilled. Regulations adopted since 2008 are insufficient to ensure stability.

dilution or interference

As the crisis recedes far and public pressure on the government wanes, the financial lobby has been able to block or decisively undermine some of the major reform projects. Key legislative schemes such as adequate capital buffers for banks, the separation of retail and investment banking, and the financial transactions tax have been imperceptibly diluted or blocked altogether.


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For example, separating retail from investment banks ensures that investment banks cannot ask for risky high rents by relying on implicit public guarantees put in place to protect retail customers. Instead of being seen as “too big to fail,” it would force us to be more cautious and mitigate the threat to overall financial stability.

The European regulatory proposal was thoroughly prepared by a high-level expert group led by then-President of the Finnish Central Bank Erkki Likanen and members of the European Central Bank Council. However, this was overturned under pressure from the financial lobby, and since then there have been no efforts to rectify it.

Or use a private rating agency. Since 2008, there have been widespread concerns about the high concentration of the market. There was also a common understanding of structural conflicts of interest. Rating agencies are compensated by parties involved in the products they rate. However, the issue remains largely unchanged, with only “light touch” regulations.

Finally, consider your bank’s capital requirements. They may be right in arguing that he holds more stock than he did before 2008, but that’s because it was on a very low base. Before the crisis, large banks operated at around 2-3% equity. Today, it’s around 4-5%. So 95% is still debt-financed. Anyone who runs a business or takes out a mortgage will recognize that a very high percentage of debt financing is very dangerous.

new normal

In short, many enlightened reforms were blocked by industry as soon as the pressure subsided, to the detriment of the public good. And the recurring financial crisis has become the new normal.Germany rescued North German BundesbankIn fact, if we haven’t had another crisis as devastating as 2008, it’s largely because central banks have repeatedly intervened to stabilize financial markets.

In the four years before Silicon Valley Bank and Credit Suisse failed, there were three major crises. In October 2022, the Bank of England had to inject £65bn (about €75bn) to save the UK pension fund. Two years ago, on March 9, 2020, financial markets around the world were plunging in the early days of the pandemic. The Federal Reserve has set up a historic emergency program, providing a total of $2.3 trillion in loans to prop up the economy. In an unprecedented move, the ECB simultaneously set up a €750 billion pandemic emergency purchase program, which he later expanded to €1.85 trillion. And let’s not forget that the short-term refinancing market crisis on September 17, 2019 forced the Fed to spend more than $700 billion to prevent the collapse of the international financial system.

Banking supervisors and central bank officials act as mere firefighters. European Union institutions, on the other hand, are architects responsible for ensuring that the entire financial institution adheres to appropriate security standards. They must urgently and fully implement the internationally agreed prudential and settlement rules (Basel III) and bring any deviations from these into the ongoing negotiations on the EU banking package.

The time has come to put ambitious financial reforms on the agenda for next year’s European Parliament elections. Advancing tough regulation requires broad support from civil society. The lesson of 2008 and beyond is that financial market issues should never be left to experts and financial lobbyists. We need to keep them in the spotlight so that citizens never again have to bear the bills of a banking system that holds society hostage.


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Benoît Lallmann 1

Benoît Lallemand is Executive Director of Finance Watch. Previously, he spent over 10 years in the financial industry, primarily in clearing and settlement (market infrastructure).

photograph

Gerhard Schick has a PhD in Economics, Congress participated in citizen movements Finanzwendehe is the CEO.



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