Buiter in call for a robust Euro-wide regulator
Investment banks must be split to avoid Lehman repeat
Friday November 06 2009
THE big investment banks must be split up to prevent another collapse similar to Lehman Brothers, which came close to bringing down the world's financial system last year, a top economist told the International Financial Services Summit 2009 in Dublin yesterday.
Professor Willem Buiter of the London School of Economics also called for a European-wide regulator "with hairs on his chest" who can do "very brutal things" to banks which grow too big.
The former member of the Bank of England's Monetary Policy Committee praised some aspects of the National Asset Management Agency but said it "appears designed to maximise the cost to the taxpayer".
Another participant, 'Financial Times' economics commentator Martin Wolf, said central banks would have to be far more cautious when estimating fiscal positions in future.
Countries such as Ireland and Spain had seemingly enjoyed good fiscal positions before the downturn, but this had not been enough to protect these countries from severe recessions, Mr Wolf said.
The present bank bailouts had left the banking system more fragile than ever because all banks now believed they were too big to fail, he said. This meant regulators had to create a new financial infrastructure that ensured the collapse of any single bank did not destroy the entire system.
Mr Wolf, who said he didn't "envy" Ireland, called the present recession the "most remarkable sudden stop" which had effectively discredited all economic thought developed over the past 30 years and returned us to the theories of John Maynard Keynes, who died in 1946.
As for homegrown warnings, the entire financial system must be overhauled if we are to escape another, even more serious banking crisis within years, Finance Minister Brian Lenihan said.
He told the meeting that the current regulatory system had been "thrashed".
Anglo Irish Bank director and former Fine Gael Finance Minister Alan Dukes said innovation in financial products should be limited, a call that was echoed by Prof Buiter, who urged regulators to test innovations in much the same way health officials test and regulate pharmaceuticals.
Pessimistic
"That will slow down innovation but not stop it," Prof Buiter said. Mr Dukes was pessimistic about the prospects for reform, noting banks had immense power, and said it was "almost certain" there would be another crash within 20 years.
The concept of moral hazard was also discussed by Minister Lenihan who told the conference that "if you eliminate moral hazard, you have to have more regulation".
The calls for more rules were echoed by Nicholas Veron of the Bruegel Institute in Brussels who said the European Union's member states had some way to go before they created a system of regulation that would share the burden in the event of a banking failure.
- Thomas Molloy
Irish Independent
