Small countries attached to large banks
Financial regulation is a political and institutional matter as well as an economic one. Though this might sound obvious, a lot of discourse in the last 30 years has attempted to take out the first two. This is the view of Mark Thatcher, professor at the London School of Economics. In his speech at the summit on Financial Innovation in Luxembourg, he spoke about the pressure for change European regulation is facing.
The latest financial crisis has shown us that a lot of things have changed in financial regulation in Europe. 20 years ago, regulation was mainly national, central banks were strong in terms of power and in terms of reputation and change was slow. “But this belongs to the past”, says Mark Thatcher, who enumerates the reasons why there is pressure for change.
One reason is the sheer size of the financial sector, which has expanded enormously. “Iceland was a classical example, but it was not the only one. Ireland, Britain, the United States; all have financial sectors that are bigger than their GDP. For some countries you have the impression that they are small countries attached to large banks.” Other reasons for change in financial regulation are the internationalisation of customers and suppliers and the development of more complex markets and products.
Along with the financial crisis and the string of scandals, political and institutional pressure for change has mounted against a financial sector that is quite unpopular. “In Britain we have the phrase “banker bashing”. It always amazes me; when I look at the salaries for bankers being bashed, I’m not sure it is so tough.” Professor Thatcher thinks that this pressure will increase with EU-bodies like the European Commission, which are working persistently for more regulation.
Coming back with a vengeance
In financial regulation there have also been a lot of changes at a national level. The dispersion of powers is one of them. “The United States is a soup of different bodies. There are so many acronyms that I can’t keep up. So we have a whole lot of bodies with different powers, different mandates and of course their own institutional interests to defend.”
In this context, Mark Thatcher praises the return of Central Banks. “ They seemed to be the losers in the 1990’s and early 2000’s. At the moment, they are the only policy makers who seem to have any credibility at all. It is the case in Britain with the Central Bank and at a European level the ECB seems to be expanding its role.” According to him, we moved from government by bankers to government by central banks.
For Mark Thatcher, the European Central Bank is a classic example for the complex linkage between political and economic matters. Hence, the formal independence of the ECB is in difficulties. “ Today, the ECB is deeply involved in fiscal policy. So they have detailed a set of aggregates for some countries - what they have to do - and if they don’t do it, the ECB will stop buying their bonds.”
The structure of financial regulation has become enormously complex. Policy makers are now busy trying to coordinate multiple bodies and also trying to get round the formal set of rules. Mark Thatcher concluded by saying that financial regulation would be difficult to manage: “You have a set of divisions that work on paper but not in practice and multiple bodies, which you have to coordinate to make the system work effectively.” CW