REPORT Financial Stability Conference 2017
16 November 2017
Source and Copyright: Financial Risk and Stability Network
Chief Editor Report and Supervisor Contributions:
Martin Aehling, Financial Risk and Stability Network
EU at Crossroads: How to respond to Misalignments in Bank Regulation and achieve a consistent Financial Framework
Organiser: Martin Aehling, Managing Director, Financial Risk and Stability Network
Scientific Co-Organisers: Bruegel, DIW Berlin, ESMT Berlin, Jacques Delors Institut Berlin
- The Changing Bias of international financial Order: A global and political Perspective
- The Logic of financial Regulation and Reality: Lost in Complexity and Competition Policy?
- Financial Stability in times of changing Central Bank Policy: How to address Trade-offs
- Banks in Distress and precautionary Recapitalisation Approach: Relief without Cleanup?
- Sectoral regulations and SIFIs interdependencies
- Looking forward: How to tackle unfinished Business in a new EU political Constellation?
Organisers & Motivation
Panel I – Impulse I
Panel I – Impulse II
Panel I – Discussion
Controversy I – Introduction
Controversy I – Discussion
Panel II – Discussion
Controversy II – Impulse I
Controversy II – Impulse II
Controversy II – Discussion
Panel III – Impulse
Panel III – Discussion
Contributions early-stage and PhD Researchers
The Financial Stability Conference 2017 was a great success in regard to its aim and motivation. An excellent line-up of speakers and panellists represented an exceptional mixture of different views and perspectives, while a large audience of more than 200 participants actively and controversial debated the agenda topics. It was the 5th conference I have been organising, and let me take this occasion to make some remarks on the conference and its reasoning.
I started developing the concept for the first conference in 2012. It was at the height of the sovereign debt crisis when the Euro area was at the brink of breaking up. A debt crisis which was triggered by the financial crisis and its tremendous costs: The crisis caused a massive decline in output and a most severe economic downturn with enormous losses that have been placed mostly on sovereigns and taxpayers. The International Monetary Fund estimated the costs of the crisis at about 2.3 trillion U.S. dollars. And according to the European Central Bank, government debt in the Euro area increased by 27 percent between 2008 and 2014 sharply narrowing the room for fiscal manoeuvre and public expenditures, forcing member states to adopt austerity measues.
The sheer magnitude of the impact on economies, jobs and households has to be remembered sometimes when discussing regualtory and financial stability frameworks ten years after, because it slides more and more into oblivion. For me, the crisis has been the motivation to launch a critical, open and independent platform for serious debate on regulatory reform and financial stability issues. Main activity is this conference, and the concept follows its motivation. It is not based on a business-driven event model and does not follow specific stakeholders‘ interests. I am confident that we do need a public and controversial discussion format on crucial issues of financial regulation frameworks at such level on an ongoing basis. We shall not leave the debate only to the industry and to closed shops of expert circles in authorities and central banks.
In this respect, this conference is indeed unique. Looking back, this is well appreciated and the very positive feedback gives me a strong motivation to move forward. The initiative will therefore be transformed into a non-profit organisation by beginning 2018 to move on and to develop further activities. I think, there is a strong relevance and reasoning for further debate. Paradigms change, and this also holds true for financial reforms. There is no reason for relaxation and complacency. A consistent common policy vision for a integrated regulatory financial system is not reached. With new rules in place and new designs of institutional regulatory and supervisory architecture established, the financial reform paradigm has lost its significance to policymakers and in public attention.
What we see are signs of regulatory fragmentation and surging national regulatory policy competition. Inconsistencies, which undoubtedly exist, are at the same time taken as an entry to engage against unwanted regulatory requirements. Overall, we see a shift away from the financial reform agenda, and a strong focus on the growth paradigm. The reiterated narrative is, that too strict regulation hinders growth. In my opinion there is no contradiction. In the contrary, tight regulation strenghtens the economy, for the long term.
At the Single Resolution Board Conference in September 2017 Klaas Knot, Governor of the Dutch Central Bank, called to not loose momentum, and that we should resist the pendulum swinging back, and not watering down regulatory rules. He said that roll backs to international standards are very troubling, and that he noticed symptoms of ‚cold feet‘.
This can also be observed as regards implementation and application of agreed standards and rules, which remain challenging tasks. And we are still far from having harmonisation and consistent application. Other considerations at national levels play an increasingly important role. This is not only reflected in international policy developments like Brexit and the U.S. elections giving rise to changes in policy attitudes vis-à-vis financial sector policies. It is also visible in amendments of financial regulation in the EU to make regulation more efficient.
Therefore, we took a foremost political perspective when setting the topics for this year‘s conference as there were international regulatory cooperation, the logic of current regulation, the policies of central banks, the implementation of rules in the EU and the future of the European financial system against the backdrop of changing political conditions. Each of these topics contains sufficient discussion and gives rise to a detailed analysis. The relevance of these topics is manifested primarily in the following three developments:
On the one hand, it is clear that important projects in the EU are not being pursued in an adequate way, and rules are not being implemented as required to the necessary extent. This applies, in particular, to the Banking Union, the stabilisation of the financial sector and the implementation of the BRRD. Italy’s handling of crisis banks and the somewhat allowing observer role of EU member states suggest that national political will stay a dominant factor. Moreover, there has been little progress with regard to the state-bank nexus and implicit guarantees for big banks. The now pretended certainty about financial stability seems disastrous, because problems still remain unresolved and national interests have moved in the foreground.
The second development originates, above all, from politics, but it also has implications for the financial system and financial stability. Brexit, the U.S. elections, and populist movements in the EU are bringing significant changes to the financial sector as well as to the international regulatory and supervisory architecture. One example is the lack of agreement in the Basel Committee regarding the conclusion of Basel III. At the same time, surging competition between financial centers and the tendency of softening regulatory standards are moving into the focus. Regulatory arbitrage and a race to the bottom may prove to be a serious danger with negative consequences. A number of statements by politicians make this danger seem realistic.
The third development is a tectonic shift in the role and function of central banks. The scientific based consensus on the foundations of monetary policy has reached its limits. This is clearly reflected in the behavior of the European Central Bank in recent years as the only credible actor in times of crisis. Added to this is the discussion about the extension of roles and mandates, particularly in the case of stability policy decisions. Central banks are no longer perceived as independent but as politically acting institutions. National one-dimensionality in the perception and explanation of monetary policy contains immense potential for conflict within the Monetary Union. The politicisation of central banks is also driven by governments and policy, namely as a tool to better achieve their economic policy ideas and promises. At the same time, there is a lack of transparency and democratic control in the face of the de facto extended scope of action by central banks.
These three developments are intertwined, not only in terms of time but probably also of mutual effects and interactions. When the EU places competition policy at the center of the argument about regulatory standards, this reflects the stalemate in international negotiations on new regulatory standards. National interests, failure to consolidate the banking sector, and the missing level playing field within the EU again place the ECB under pressure. The populist movements are partially on the rise because the financial crisis has caused financial burdens which have been placed on taxpayers to a large extend. Ongoing low interest rate policy by the ECB again is taken as an argument against the Monetary Union by political groups.
This is indeed a comprehensive discussion agenda for an event and a broad look beyond the horizon. In such times, however, it does not seem appropriate to dedicate to details and technical questions of single regulatory requirements. Rather, we found it more useful to face some more complex contexts and examine some broader correlations in view of the above-described developments. The scientific discussion and analysis of the called-up topics, their interdependencies and their impacts are essential when it comes to achieving a staible and resilient financial system that fulfills its crucial functions in serving the economy and society. This also involves a better coordination and cooperation at the relevant political levels in the EMU. Insofar, the focus is set on policy and policy choices, in addition to a focus on regulation – always related to financial stability and the question of how to achieve a sustainable financial order in the EU.
These questions are hardly asked anymore almost ten years after the onset of the financial crisis. However, in view of the cyclical history of regulation and deregulation, they are legitimate as ever. The debate is also relevant in view of the increasing (mis-)use of regulation as competition policy. It goes as well hand in hand with the issue of risk distribution in the Euro area and the future roles of the ECB. The narrow fiscal scope, low growth in EU southern countries, government debts and structural reforms are subject of massive conflicting political interests. And here, the fundamental political positions and options for action are to be debated seriously and responsibly along every single policy proposal. Otherwise the EU will not progress on these issues.
For this debate, the Financial Stability Conference presents a forum, providing a framework for discussion, and thus contributing to the exchange of views on possible solutions. The discussion of the agenda topics and the drafting of a more developed, possibly future policy framework for the EU-27 with regard to regulation and financial stability appears to be considerably interesting and attractive also from a scientific point of view. The event provides a wide range of suggestions and points of reference for policy-oriented, at the same time scientifically based analysis of causal relations and options for action. This year, I brought together a group of early-stage researchers from different institutions and with different backgrounds to prepare contributions on topics of the conference which you find at the end of this report and on our webpage.
We should move one with the debate. There is no permanent stability. And it is an illusion to believe that we can finetune the instruments such that they have exactly the effect we want them to have. Authorities as well as politics should be dedicated to stay on track and not letting the pendulum swinging back.
At this point, let me quote three observations from the participants feedbacks illustrating the relevance of the conference, first: ‚I recommend the event to all researchers who would like to come down from the ivory tower and join forces with politics, industry and NGOs to contribute to a more stable and sustainable financial system.‘ As the second: ‚The diversity of the audience and the openness regarding the possibility to be part of the event itself reveals the inclusive and transparent approach of the network and is a proof of its commitment towards fostering policy dialogue. The conference was a perfect chance to bridge academic and policymaking expertise, two crucial aspects that, unfortunately, are not usually taken into consideration in a comprehensive manner.‘ And the third: ‚The conference brings together senior policymakers, practitioners, academics and civil society for in-depth public discussions on a range of highly topical subjects, eschewing the usual focus on media coverage and industry sponsorships in favour of high-quality discourse and an unusual degree of freedom from political and industry bias.‘
I am convinced that bringing together different groups and stakeholders in an open, public discussion on the financial reform agenda is a very sensible thing to do. Generating this debate on critical issues is also necessary to continue building a more resilient financial system which fulfils its vital functions in serving the economy and society. I also believe that the financial sector should be interested in having such an open discussion format, and I would very much appreciate your feedback on this.
Good regulation and hence smooth functioning of the financial sector can only come from having an ongoing public debate on regulatory issues. And we also need to overcome national interests and to take action in a cooperative manner at all political levels. That is in my view what made the conference agenda relevant.