This week marks the second anniversary of the failure of Lehman Brothers Holdings – the trigger for the near-collapse of the financial system. The response has been a flood of proposals for new rules and regulations to prevent any recurrence. Hardly a week goes by without the announcement of some further initiative designed to make banks safer and better.
The most recent examples include an international agreement last Sunday (12 September) on bank capital rules, a provisional deal between the European Parliament and Council of Ministers on new structures for financial supervision, and proposals yesterday from the European Commission to regulate trading in derivatives.
But progress in fixing EU banking is neither rapid nor smooth. The absence of an EU consensus on the role that banking should play in society repeatedly hampers agreement. Despite the energies being devoted to securing reform, the EU has not properly confronted its own internal contradictions about what reform should achieve.
The contrast in views is stark between, for instance, the UK and Germany. One has an economy heavily reliant on financial services, and encourages the creation of innovative financial products; in the other, policymakers traditionally view banking as an instrument to finance the ‘real’ economy, responding to strong promptings from the state.
Equally evident are the different approaches of distinct groups of member states. Countries with a tradition of public-service obligations find little sympathy for the view – found notably in the UK – that venture capital rather than pressured bank support is the right approach to promoting young enterprises. Similarly, member states with little indigenous banking industry tend to favour tough national controls over the foreign banks that dominate operations on their territory, while countries with strong banking sectors prefer to exercise central regulation themselves across subsidiaries abroad. The conflicting views on possible new bank taxes offer another reflection of deep-seated differences in national starting points.
Even within member states, inconsistencies and ambiguities abound. France is torn between its ambition for Paris to rival London as a financial centre and its desire to satisfy public anger about avaricious bankers and ‘Anglo-Saxon’ capitalism. Spanish regulation helped Banco Santander emerge from the crisis as a European powerhouse, but political sensitivities left the plethora of small savings banks hopelessly unreformed. The UK’s resistance to excessive regulation sits alongside its appetite for reforms that might promote a fuller single market for financial services
National perspectives are shifting too. Ireland views banking differently now, after the problems that banks posed to its national economy. The French government favours tight rules on trading in risky financial instruments, but is showing it is ready to seize the new economic benefits that would accrue if much of this trading were to be relocated to take place in France.
Against this confused background, it is unsurprising that the EU’s banking reform agenda has faced difficulties. Member states, focused on their own particular sensitivities and propensities, are ill-prepared to confront the urgent common issues that demand coherent common solutions. So far, the frantic pace of regulatory activity has created an illusion of effective action, and has made it possible to paper over some of the cracks. But to continue as if no cracks exist under the paper will ultimately affect the quality of the reforms that result, and leave the problems unresolved.
What is increasingly necessary is an open and no-holds-barred debate on the kind of banking sector that the EU wants – covering how far it should be bound by common EU rules, and how far it should be open to competition. Such a discussion was impossible at the height of the crisis. But it is more than ever needed now. This, more than any amount of legislative activity, would help reassure markets that the EU knew what it was doing, and might help the banking sector to meet the demands that the EU makes of it.
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