sábado, julho 28, 2012

Stress testing European financial regulators

As with everything else in life, this crisis  will separate the good financial regulators from ....the others.   Beyond being subjected to on-going stress tests of unforeseen proportions,  European and national prudential regulators may be judged harshly by history if they stand by while the Single Currency and the Euro banking system erode, threatenning the life savings of millions of European depositors and savers. 

This is why it is more than disappointing to learn of the opposition of some regulators to the creation of a robust European Deposit Insurance Scheme, as in the case of the recent interview of the head of  BaFin, a German national prudential regulator,  published in der Spiegel.  (see  

This opposition appears to be based on a rather belated  concern with cross-border contagion, a phenomenon which  really had its origin in the excessive cross-border lending to irresponsible borrowers by overleveraged, overextended and equally irresponsible creditors over the last decade. A lot of this irresponsible credit exposure was hidden from view, for example the Goldman Sachs swap loan to Greece,   but most was accumulated under  the (un)vigilant eye of the (im)prudent regulators.   As the unabated crisis moves into an ever  more critical phase,  this national indifference to the need for Europe-wide protective measures indicates a distressing lack of appreciation for the new “convertibility and redenomination risk” in the Eurozone and for the disastrous impact of capital flight on the European banking system  as a whole, in a context of the three NOs, NO devaluation, NO capital controls and NO independent monetary policy. 

The failure to stem capital flight by  protecting local savers also contributes to the continuing failure to stabilize the European banking system,  which  is threatenning to disagregate before our very eyes and no longer performs adequately its essential function of financial intermediation between net savers and net borrowers.  As  might be expected, this debacle has more severe consequeces for the more fragile member countries,  which have been steam-rolled by the flooding-in and flooding-out phases of the huge  tsunamis of “hot money” financial flows.
 Unlike the traditonal national regulators, whose views  may be more or less  one-sided and short-sided, we may look to the European Systemic Risk Board  to step foward now  since (1) it was established precisely as a response to the crash phase of this credit bubble-to-crash financial crisis, and (2) it it   has an Europe and Eurozone-wide, rather than merely national,  mandate. 

Thus,   it would be  important to know the position and recommendations of  the ESRB regarding   policy measures to be taken to stabilize the Euro banking and financial systems, specifically the  insurance for local retail deposits. However, this information so important to the European financial consumers as Stakeholders is not visible in the ESRB website.

Futher, it would also be important to know what  specific mechanisms the ESRB has in place to ensure that it takes account of needs of  ALL  the European  financial consumers, the local depositors and savers, especially those in distressed and fragile economies on the periphery of the Eurozone such as Portugal.

The mandate of the  Liikanen Group named in early 2012 by the European Commission to make recommendations on restructuring the EU banking sector should be equally broad.  

Mariana Abrantes de Sousa 
PPP Lusofonia 

See more periphery views on the crisis from a former money center banker in the blog PPP Lusofonia