The world has still not recovered from the most serious financial and economic crisis in recent history. This exposed several aspects of financial system dysfunction which not only increased the instability of the financial markets but also impeded their normal functioning as tools to allocate economic resources efficiently throughout the real economy. Policy maker response to this crisis remains very inadequate and will do little to correct the deep structural flaws exposed by the crisis.
In this new set of blog posts, we will serialize our 2009/2010 e-book "The Financial Crisis - Causes & Cures" which was written for both the layperson as well as policy-makers at the European Parliament, the European Commission and national finance ministries and regulators. The book may be a bit dated, but the issues are current.
Large uncertainties haunt the banking sector in the EU. A lack of clarity about the scope and timing of several pieces of financial sector legislation that are in the pipeline, the macroeconomic headwinds from the unresolved problems of the Eurocrisis and the prospect of a risky transition to a smaller, safer and better-regulated banking system are weighing on investor interest in the sector. Without a renewal of interest from investors in recapitalizing and funding banks, the sector will remain in limbo. In this piece, first published in the Quantum Magazine of the Qatar Financial Centre, Sony Kapoor highlights the key aspects of reforms underway.
The European Union’s initial legislative response to the global financial crisis was much slower than that of the United States, which moved rapidly to introduce the Dodd-Frank bill on financial reform. But, as the economic crisis in the EU deepens, new legislation on the functioning of the financial system continues apace and the Eurozone is now pressing ahead with plans to create a banking union.
The reforms which are in the pipeline will result in a radical transformation of the banking sector. There will be changes in the structure of banks, their capital and liquidity requirements and even a single supervisory authority. However, the speed at which these reforms are to be introduced is much less clear. The new structure will have to be approved by EU governments, balance the needs of Eurozone and non-Eurozone states and take into account the views of the banking sector, which itself remains divided on some of these reforms.
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.
The future of the Euro area banking system hangs in balance. It would not be an exaggeration to say that were it not for more than a trillion Euros of implicit and explicit public support in the form of capital injections and funding guarantees from Member States & liquidity support from the European Central Bank, the Euro area banking system could well collapse.
While some may think that, four years after Lehman’s collapse, the biggest problems of European banks are now over, that may not be true. All things considered, the biggest challenges for Euro area banks still lie ahead. In particular, the combination of largely unreformed banking models, large scale regulatory changes and uncertainties around their final shape as well as the worsening Eurocrisis mean that Euro area banks face very large, potentially insurmountable challenges.
Transcript of a Keynote Speech I delivered In Berlin on the 15th Sept 2010
The world has been rocked by the most major financial and economic crisis in recent history. This exposed several aspects of financial system dysfunction. These not only increased the instability of the financial markets but also impeded their normal functioning as tools to allocate economic resources efficiently throughout the real economy.
9 hours 15 min ago —
This is big...for #France :-) next English as second Lang :-) “@PlaceLuxEU: France approves English language classes http://t.co/MdAjgA8qSd
12 hours 16 min ago —
Enjoying a pint with @LorcanRK who I have finally had the pleasure of meeting face to face :-)
20 hours 8 min ago —
The #bankingunion is essentially a back door covert #fiscalunion
22 hours 4 min ago —
I thought those calling 4 a #Lehman like moment in #EU were idiots; I am starting 2 think I was an idiot 4 calling them names - complacency
1 day 8 hours ago —
Irony? “@moorehn: I assume UK will stop criticizing US gun laws after meat-cleaver street beheading? http://t.co/sb5mLVZ1Xj”
Large uncertainties haunt the banking sector in the EU. A lack of clarity about the scope and timing of several pieces of financial sector legislation that are in the pipeline, the macroeconomic headwinds from the unresolved problems of the Eurocrisis and the prospect of a risky transition to a smaller, safer and better-regulated banking system are weighing on investor interest in the sector. Without a renewal of interest from investors in recapitalizing and funding banks, the sector will remain in limbo. In this piece, first published in the 
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. 
The future of the Euro area banking system hangs in balance. It would not be an exaggeration to say that were it not for more than a trillion Euros of implicit and explicit public support in the form of capital injections and funding guarantees from Member States & liquidity support from the European Central Bank, the Euro area banking system could well collapse.
Transcript of a Keynote Speech I delivered In Berlin on the 15th Sept 2010