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ECB President says we need a ‘paradigm change’

One of my most hated words in business use is 'paradigm'.

I can't stand the word ever since 'paradigm shift' became the most
over-used phrase in bingo words, along with 'value-add', 'benchmark' and
'think outside the box'.

The very word 'paradigm' sends shivers down my spine.

"Paradigm: a model that forms the basis of something".

Then Jean-Claude Trichet, President of the European Central Bank, goes and uses this word as the core theme in his speech in Paris today.

The speech focuses upon the supervisory structures for banks in the future, with Mr. Trichet saying things like:

"Investment-banking business models typically featured high-leverage,
marking-to-market accounting, large maturity mismatches and relatively
limited liquidity and capital reserves. This model was efficient as
long as markets kept booming and functioned properly, but left those
banks with little or no shock-absorption capacity. We have seen the
result: investment banking, as we knew it, has disappeared."

and that he wants to highlight "three areas where change is particularly needed: 1) short-termism, 2) pro-cyclicality and 3) transparency."

On the first, the focus is to move trading incentives to be aligned with long-term objectives rather than annual bonuses.

On the second, the boom-bust banking cycle is the focal point to avoid by creating incentives to hoard capital during good times to cover the bad times.

Finally, transparency will be reduced by avoid over-leveraging through a Central Counterparty (CCP) for Over-the-Counter (OTC) Derivatives, plus more disclosure requirements.

He concludes by saying "a paradigm change, including the three notions of
medium and long-term sustainability,
resilience and a
holistic approach of the global financial
system, is now absolutely essential to correct the fragility of the
market economy which we are presently experiencing."

Maybe this is one of those rare occasions when 'paradigm' is a word that's appropriate for this context.

Paradigm shift: "a change in basic assumptions."

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • Tony Freeman

    Chris – the FT reported earlier this week on similar views expressed by a senior ECB official.
    I’ve pasted in below some key parts of the article. It feels like a coordinated plan to me.
    **
    Senior official seeks extra powers for ECB
    By Ralph Atkins in Frankfurt
    Published: January 5 2009 02:00 | Last updated: January 5 2009 02:00
    The European Central Bank could be given significant extra powers as part of measures to boost eurozone bank supervision, its vice-president has proposed, in the clearest signal that the ECB believes a rethink of regulation is urgent.
    Lucas Papademos said the ECB could take responsibility for policing large banks operating across borders in the 16-country eurozone, working in conjunction with national central banks.
    Europe has avoided a bank collapse on the scale of US firm Lehman Brothers, but policymakers fear the fragmented regulatory structure, based on national institutions, leaves the region dangerously exposed.
    Moves to strengthen the ECB’s role at the expense of domestic regulators would run into heavy opposition in national capitals. Some European Union policymakers would also prefer to keep eurozone bank regulation at arm’s length from the ECB’s responsibilities for setting interest rates and combating inflation. But there are signs Mr Papademos’s suggestions would command strong support in the ECB’s 22-strong governing council.
    Jean-Claude Trichet, ECB president, has stopped short of suggesting explicitly that the powers of the Frankfurt-based institution should be enhanced. But last month he told the FT it was “clear that we can improve the present framework”.
    Mr Trichet referred to suggestions by the European parliament “that the ECB would play a particular role in this domain for the coordination of surveillance for cross-border institutions – a little bit like in the US”. He also pointed to support from the private sector . In the EU, 45 cross-border institutions account for 70 per cent of total bank assets.
    Mr Papademos, who has responsibility for issues concerning financial stability, went significantly further in Wirtschaftswoche, the German business magazine. He said EU plans to strengthen co-operation within the existing institutional framework could “work over the medium term, but it is not likely to be the best solution in the long run”.
    He said the ECB and the “eurosystem” of national central banks “could become the supervisory authority for cross-border banking groups. I believe we . . . would perform this task effectively.”