07 March 2013

Stewart Fleming: Coming in from the shadows

Politicians and officials have been burning the midnight oil trying to reshape the architecture of crisis prevention and crisis management for Europe's financial sector. Apart from the sidelined (and limited) Liikanen report, however, precious little effort has been devoted to the question of whether or not the structure of Europe's financial market is fit for purpose...

Defenders of shadow banking have argued that they had nothing to do with the financial crisis – and that therefore they do not warrant the stricter regulation for which the European Commission has been pressing. A report published recently by the Commission's department for economic and financial affairs, “Non-bank financial institutions”, shows that such arguments are spurious and self-serving. But the aim of the report's authors – it was commissioned from independent consultants London Economics – is not to condemn shadow banking outright. Graham Bishop, one of the authors of the report, says: “It is time to stop demonising so-called shadow banks"...

New institutions and financing structures are needed. “Expanding Europe's corporate bond and securitisation markets to the same level of those in the United States could free-up more than $300 billion in Tier 1 capital for European banks”, the G30 says, so strengthening the banks. A changed, flexible regulatory/supervisory framework to oversee but not inhibit financial innovation will of course be needed. The IMF, in a recent report, suggests that targeted tax changes could help. Competition policy might have a role to play too.

If a restructuring of Europe's financial system is to happen, however, politicians will first have to be convinced that those parts of the financial sector that have recently shown themselves to be reckless and irresponsible are now capable of a positive and responsible contribution to the common good.

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