In this post we highlight how concerns about regulation driven excessive pace of bank deleveraging can be reconciled with tackling the problem of too-big-to-fail institutions which is now worse than ever, particularly in the EU.
We suggest that a much more differentiated approach is needed wherein financial institutions classified as systemically significant at the Global, European, Domestic level face more stringent regulations proportionate to their systemic importance and smaller, less risky banks, particularly those that have a more direct connection to the real economy are given more leeway. This post is loosely based on the advice we have given to EU policymakers on this issue.
Note: This piece appeared as an Op-Ed in the Financial Times and was co-authored by Re-Define MD Sony Kapoor & Advisory board member Charles Goodhart
Whether or not Greece has to leave the eurozone, and whether or not a growth compact is added to the fiscal treaty, there is likely to be a further call – or calls – on the International Monetary Fund for help with funding firewalls to protect the eurozone from meltdown. The IMF should take this opportunity to be more robust than it has been in the past in dealing with Europe’s problems.
Sony Kapoor, Director of Re-Define & Peter Bofinger, Member of the German Council of Economic Experts
Dated the 30th of January 2012
THE CONTRACTING PARTIES………….
CONSCIOUS of the need to tackle the unprecedented social, political, economic, employment and institutional challenges confronting the Union, and
RECOGNIZING that promoting growth is the best possible way of rising up to these challenges, thus
DESIRING to kick-start growth in short-term and construct structures and implement policies that put the Union on a path of higher growth in the long-term, especially as only growth will create the economic and political space to enact the serious structural reforms the Union needs, and
This appeared as an opinion piece in the Danish newspaper Börsen on 13/1/2012
The EU’s response to the most serious crisis of our lifetimes is failing. The austerity-only path we have embarked upon is a road to recession with deeper unemployment, welfare losses and increasing social frictions.
When excessive levels of Greek debt were first revealed at the end of 2009, it was shocking how quickly the narrative of the crisis changed from one of a financial crisis to that of a fiscal crisis. This change was driven by politics and ideology where leaders in some countries found it easier to blame ‘lazy Greeks’ for the crisis rather than address endemic problems in their banking system. The weakness of the financial sector was pushed out of sight and Europe is now paying the price. Despite enjoying unprecedented public support, the EU banking system remains broken and is failing in its job of supporting the real economy.
This appeared as a Comment piece in the Observer (Guardian) on 11th December
EU leaders promised to stop Europe’s spiral into economic oblivion. They needed to immediately restore confidence in the solvency of Spain and Italy, urgently take steps to kick start growth and credibly commit to changes addressing the institutional weaknesses of the Euro area. They failed on all three fronts and are now almost out of time.
Given the inability of EU leaders to tackle the problems of Greece, a small economy, investors have been losing faith in their ability to support the much larger economies of Spain and Italy that faced economic problems. This has driven up the borrowing costs to unsustainable levels. Unless policy makers can demonstrate how troubled EU economies could meet their borrowing needs at non-penal interest rates, the crisis would continue to deepen.