On April 1st, the European Commission announced their key work plans for 2010.
The plans are wide-ranging and imply a fundamental restructuring of the European banking markets.
If you don’t think it’s going that far, then think again as a wide range of strategic initiatives were announced including a new European supervision architecture and proposals in areas covering everything from derivatives markets, short selling and credit default swaps, deposit guarantee schemes, market abuse, crisis management tools and bank capital requirements. On this last point, they are even mooting a bank levy to generate €50 billion in case of future bailouts.
Alongside all of this, you have the hoo-ha of Paul Volcker’s proposals on getting rid of bank prop trading, which has now been shot down, and Gordon Brown’s Tobin Tax which may go by-the-by as a result of the UK general election.
Whichever way you look at it though, we have governments and regulators everywhere saying that things must change, and trying to work out how to change things.
Then you have all of the Committees, such as the UK’s Treasury Select Committee and the US congressionally chartered Financial Crisis Inquiry Commission, who are bank bashing on regular occasion to try to work out what things to change.
In the case of the latter, they’ve had regular visitations from bank leaders and other besmirched economists and thinkers, to find out what caused the financial car crash of 2008.
Of note in this parade of failed financial acolytes was the appearance of Alan Greenspan, the highly esteemed and now generally blamed former head of the US Federal Reserve.
Mr. Greenspan makes regular appearances blaming the crisis on everything from the fall of the Berlin Wall and China’s emergence through globalisation, to the banks leveraging of subprime and complex trade-off and packaging of such debt through complex financial instruments.
As the man at the helm during the build-up to the crisis, he rarely takes the blame or admits fault. For example, in his latest appearance before the Committee, he states: “In 2002, I expressed concerns to the FOMC, noting that ‘…our extraordinary housing boom…financed by very large increases in mortgage debt – cannot continue indefinitely.’”
He may have said this but he omits to mention that, in 2005, he concluded a speech to the American Bankers Association with the closing lines: “In summary, it is encouraging to find that, despite the rapid growth of mortgage debt, only a small fraction of households across the country have loan-to-value ratios greater than 90 percent. Thus, the vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices.”
In fact, about the only accurate thing he said recently is that: “Regulators who are required to forecast have had a woeful record of chronic failure. History tells us they cannot identify the timing of a crisis, or anticipate exactly where it will be located or how large the losses and spillovers will be … nor can they fully eliminate the possibility of future crises.”
Now I don’t want to make this a Greenspan bashing column, as that would be too easy, but I do want to pick up on that phrase: “a woeful record”, as it is very relevant to where we are today.
For example, as the European Commission considers its wide-ranging changes, I could pick up on many of their previous attempts to regulate the markets that have yet to succeed and would beg the question: why don’t you fix what you started whilst starting to work out what to fix?
After all, we have Basel III, UCITS IV, Solvency II and CRD IV all coming up.
Notice something about those? Yes, they are all updates of earlier regulations that did not work as expected.
We have the same with regulations that I write about regularly such as MiFID, the Markets in Financial Instruments Directive. In the 2010 workplan, the European Commission announced that they were going to be taking a review of MiFID to make legislative proposals that would include the “dark pools issue”. What this demonstrates is the law of unintended consequences, where MiFID has made everything electronified, fragmented and opaque. The opposite of some of its intentions, which were for transparency and a level playing field.
In summary, what worries me right now is: first, that the regulators and policymakers are scrabbling around not knowing what to do; second, that they have obviously got it wrong in the past; third, that they are woeful at working at the future; and finally, that their whole focus on shaking up the banking system will destroy it.
Not being too much of a scaremonger am I?