What’s going on?
The post-crisis politico-regulatory consensus is breaking down. There have been tensions over the past couple of years, but overall the illusion of harmony between governments, regulators and central bankers remained. As memories from the crisis fade, politicians facing elections are doing their best to undermine the very system they so vehemently used to support.
We already knew that Germans were complaining about the impact of the post-crisis regulatory framework in the small savings and cooperative banks of the country, and that this was reflected to an extent by the debate in the US over the slow disappearance of their small regional banks (while large banks kept growing). We also already knew that Trump could not be counted among the supporters of Dodd-Frank, the US-flavoured implementation of Basel 3. Elsewhere, dissensions had been relatively muted. Until now.
Italy could be about to undermine the whole European banking union concept by attempting to put in place a large bail out of many of its struggling banks. The whole post-EU regulatory framework was set up in order to prevent such discretionary actions and preserve the single market by forcing losses onto certain types of creditors and coming up with detailed bank resolution frameworks. And of course shield the taxpayer from paying the bill. But it was clearly naïve of EU regulators to underestimate political opportunism.
After years of experiencing growing discretionary powers – encouraged by politicians – the ECB is now complaining that the European Commission might restrict its power. They see ‘considerable problems’ with limitations on ‘supervisory flexibility’, according to Reuters. In other words rules are not acceptable, but discretionary power with limited accountability is. Then one wonders why governments don’t feel bound to rules either.
Meanwhile thirteen smaller EU states are rebelling against the new banking rules in the EU, which give less power and discretion to national regulators under the ‘banking union’ concept. In short, everyone wants a banking union and common rules but no one wants to follow those rules. Politics at its best.
And regulators keep making sense, by fining banks “for being late to explain why an announcement was late”, according to City AM.
It’s very unclear what the outcome of all those political changes will have on the international banking system but banks would probably like to avoid another extra decade of regulatory uncertainty.
PS: Due to a very busy schedule, I haven’t been very active recently, but do have a few posts in the pipeline, some based on recent interesting pieces of research. I’ll do my best to publish them as soon as I can.
This is a bit off topic, but you seem to have a clearer head than most, so I am interested in your opinion.
After the ’08 crisis I delved into Rothbard’s “America’s Great Depression” and got on the Austrian train. Obviously, there’s a ton of debate in that school about fractional reserve banking. Occasionally I see casual mentions towards the notion that replacing demand deposits with mutual funds would solve for x: a free non-inflationary sound-money banking system that still retains the flexibility to power the modern economy.
Based on your knowledge of the system, do you see any major advantages / disadvantages to this?
I’m only seeing two effects: 1) banks would have to enter additional transactions buying and selling fund shares in order to process deposits, withdrawals, and transfers, and 2) in the event of a crisis, the first-come-first-serve bank run (and the FDIC as a stop-gap) would be replaced by a fall in valuations shared across all investors.
This idea appeals to me, because it seems like a modern replacement to our current system which, by comparison feels like a Rube Goldberg device (i.e. the money multiplier, backed up by FDIC insurance, backed up further by central banks and myriad regulations), but I don’t know enough about how our banking system works to know if there are any major pitfalls I’m missing.