I am writing this blog because I am a member of a House of Lords select committee that has recently published a report on the Future of European Union Financial Regulation and Supervision. We are debating this report tomorrow, TUESDAY, and it brings up some serious questions.
After the financial crisis of the last year, the European Union Commission clearly feels that it should have a say in the Regulation of banks in the 27 countries that are now members of the European Union. They would aim to supervise the limits and terms on which these banks lend their customers money.
I have always been a strong supporter of our membership of the EU. Without it we would, in international affairs, become like a dog that barks but has no teeth.
But I am worried by the EU Commission’s apparent belief that they have the knowledge and experience to stave off further financial crises. I doubt that this is so. Certainly, any measures they take must fit in with initiatives being taken globally, and particularly in the USA and China.
I would like to hear the views of others on this important but difficult subject. It is not a problem that will go away quickly.
Tim Renton
Lord Renton,
I would imagine that your Lordship is aware that people die everyday and others thrive based on financial and fiscal decsions. Not all leaders are people of conscience but those that are see real lives in the balance when money is made weaker or stronger. China, OPEC, NAFTA, OAS, and nations are playing a game that represents high personal stakes for millions. That makes it hard to see international accords resolving everything. I know your Lordship (I won’t be addressing you as Tim) did not suggest that they would but perhaps may have seemed to suggest this.
I think leadership and expansion are the two sides of a coin which pay for the legitimacy of a regime over the long term. In our era that means space and oceanic policies vastly more serious than anyone has accepted. Otherwise, politley asking one’s neighbors to die so one can live comfortably is what any accord comes to and it is not always going to be well received.
The European Union is composed of societies with vast resources, potential and expertise but also with some common weaknesses which (if they are not counterbalanced) blind the EU especialy to some of the basic parameters of human experience. England and the UK are tied to many kinds of feedback that are remote from the EU. Below are some links to my blog posts relating to the shape of a future which is not about signing a mutual suicide agreement as I see it.
http://franksummers3ba.wordpress.com/2009/08/19/novus-ordo-seclorum/
http://franksummers3ba.wordpress.com/2009/10/13/waiting-on-water-on-the-moon/
http://franksummers3ba.wordpress.com/2009/10/09/lcross-we-slam-the-moon-looking-for-water/
http://franksummers3ba.wordpress.com/2009/08/24/a-personal-and-objective-take-on-outer-space/
This government doesn’t have the experience. Lets face it the regulation in force was none existant.
In reality the regulation actually made things worse. A consequence of any regulation is that people will work out a way round it, usually at a cost because governments try and prevent people from doing things they want to do.
ie. You are just adding costs, and creating more failure.
The only areas where there needs central control is 50K’s worth of guarantee for deposits and forcing banks to publish their credit risk figures for other banks to use.
Wolfgang
Without having too much substantial to say about this subject I feel it is about time to take measures preventing a crisis like this for the future. Even if these measures might not be foolproof – I could not stand the thought of government standing idly by while the world goes to pieces.
A brave post as I can guess on some of the replies you will get.
I fear this regulation will be a classic case of generals (bureaucrats) fighting the last war. At the last major recession no one was predicting the next one would be (largely/partly) caused by collateralised debt obligations. I see no reason why we should assume we have any better idea what new financial instruments or trends may be the cause of the next and it is hubris in the extreme to do so. The market moves too fast for the political and administrative process to get ahead of the curve.
I don’t see that this issue is going to be settled on the basis of the best interests in perpetuating a healthy financial sector; most of the business is based in only a few Eu member states – principally the UK – so for the majority of countries ‘draconian’ legislation will do them no direct harm, might protect them from some ills and will look to their voters like they’re tackling the ‘problem’. I expect the middle eastern and Asian financial centres are busy readying themselves for expansion as their freer markets are bound to benefit from Europe tying itself in inflexible rules that may well be out of date before they are ever implemented.
I’m not even going to start on the idea of a ‘Tobin tax’ 🙄
This is a vast subject and certainly a difficult one to cover.
First off, the crisis, the noble Lord states of the last year, is far from finished. The average working man is perhaps feeling it worse than ever, especially as Christmas nears.
I am no great lover of the EU, handing over law making to a centralised European power seems somewhat un-British.
Banking is very much a game of poker, degrees of both skill and luck are needed to be succussful. However when, as history has proved, large scale banks decide to make things difficult for the smaller players lots of people lose. If the EU believes it has the skill and knowledge to stave off further crises why was it not done at this point ?
Banking is global concern and one must take care to consider other players in the game. If the US or China considers that the EU may threaten it`s trading and position they could make it extremely awkward and indeed costly to participant Countries economies.
Banking is about competition, banks are about making money and since money is to all purposes finite there will be winners and losers. Such is the nature of the beast. That said, one has to ask should Governments be there to bail out bad competitors ? Or should the rules be changed as the EU seems to suggest to suppress gambling at the risk that some ventures may longer be funded at all. Christopher Columbus may well have been out of luck if Queen Isabella had been under suffererance of EU restrictions.
Terms and limits of loans has to stay with the Banks themselves not only to benefit competition but also because centralised restriction will only result in the suppression of innovation.
I’m afraid I don’t agree with the idea that the United Kingdom will lose influence in international affairs without the EU. We have our own seat on the UN and the World Bank – better than the 1/27th of a seat.
The only “dog with no teeth” where matters EU are concerned is Westminster.
I also share Boris Johnson’s fear that the EU Alternative Investment Fund Management directive has the very serious potential to destroy the City of London as a world finance centre. Financiers may not be very popular at the moment, but any attempt by the EU to castrate the City is, at best opportunistic, and at worst spiteful.
Lord Renton,
You say:
What evidence do you have for this? The EU has been involved in banking regulation for a long period, so it should be pretty clear whether they have the skills or not.
More important surely is the failure of some of the local regulators who seem to have taken their eye off the ball.
Its disappointing how it was left to the EU to defend free trade in the wake of the credit crisis, but it was good to see, and now seeing its competition commissioner take on banks where national governments are failing to do so is also both heartening and disappointing.
@ Chris K; the EU isn’t out to get the City, this is a pan europe directive, not aimed at us personally. I think that is just fund-managers trying to whip-up nationalism to stop the directive. It could be bad legislation, but ‘france and germany are out to get us’ is not enought of a reason to stop it.
Also, we have those seats because we were powerful 50-60 years ago, but if those instutions were set-up today, where would we be?
The Basle Committee on Banking Supervision has been going for sometime and though unable to legislate it`s standards HAVE BEEN taken up by the banks. Even though these standards were taken up it failed to stop the current crisis. New standards have been made by Basle but it`s alway`s the unforseen that causes a crisis.
Legislating these standards, which are voluntarily being taken up will serve no purpose except to create more EU posts. As a note most working class already consider as possibly corrupt many positions in the EU.
I share Croft’s concerns. As long as I can remember the UK has been a world leader in banking and insurance. We have arguably more at stake in this matter than any other European nation.
Yet to be philosophical, if the EU took no action in terms of the current situation insofar as future preventative measures are concerned, we would surely condemn it.
The question is whether we can produce a sufficiently flexible solution to accommodate nimble but appropriate change when market conditions call for it, or, conversely, achieve global harmony so that everyone is effectively hampered by bureaucracy which is, at least, equal.
I have to say that both outcomes seem to me unlikely.
But if we have to ride with the European herd, as it were, we had best be galloping up there at the head rather than our usual approach of one foot in the stirrup and the other on the ground.
No man is an island, and this island isn’t a continent, even if it did once theoretically control some two-fifths (was it?) of the earth’s surface.
Financial Stability Board
http://www.guardian.co.uk/world/2009/apr/04/financial-stability-board-g20
The FSB is also run from Basel, unlike the Basel Committee on Banking Supervision it does have teeth and is already up and running. Do we need further ?
There are however doubts about possible collusion and information sharing within the FSB.
http://www.webofdebt.com/articles/big_brother_basel.php
Lord Renton: “But I am worried by the EU Commission’s apparent belief that they have the knowledge and experience to stave off further financial crises.”
I don’t believe it is a question of knowledge or experience but simply to ask the right questions. I’m sure you use an electronic calculator on occasion to add or subtract numbers out of laziness. You are comfortable with this because you can always verify the result in your head.
However, can a younger adult do this? I suspect not, instead they rely entirely on what the calculator tells them or in other words they rely upon technology, its magic really because the individual does not need to have any basic maths skills at all.
It’s the same scenario behind the math that underpinned the real estate markets. A young Horatio Boedihardjo linked below explains this in an excellent article. Lucid though he is he too misses the fundamental reason why it all failed.
The math, which is still sound, relied upon the track record of giving ‘good’ credit over the long term. However, the market for such credit had flattened off leaving lack lustre growth and earnings prospects.
The problem was how to produce growth in a saturated market. On an imperceptibly small scale some started to sell products to ‘bad’ risk individuals. Nothing bad happened at first because of the inertia in the system but it did produce profits for those doing it. The rest is history.
The challenge for regulators now is to ensure that we return to ‘good’ credit risk management when a culture of ‘bad’ credit risk management is endemic internationally. The down side is that we return to flat or slower growth.
Property or assets are underpinning national currencies via GDP and there is no will or mechanisms to manage it. For me the political challenge is to somehow reduce costs at an individual level by whatever means in order to make us competitive as a nation, to stop gilding the lily so to speak. The problem is will ‘the children of plenty’ understand the need to do this or even allow it to happen?
Ref: Horatio Boedihardjo: How Maths Killed Lehman Brothers
http://plus.maths.org/issue51/features/boedihardjo/index.html
That a peer of the Realm would not bemoan membership of this undemocratic Superstate is almost argument enough for throwing out some of the flunkies that these days populate the House of Lords and replacing them with real pro-British peers, the ones Tony Blair beckoned to get on their bikes 10 years ago might be a good start.