Bank rules may cause loss of sovereignty, says expert
Trans-national business too big for EMU states to act alone
EMU governments may have to give up some national sovereignty in order to create a system of bank regulation which can deal with trans-national banks, the governor of the Swedish central bank said in Dublin yesterday.
Stefan Ingves, who played a key role in the Swedish banking crisis in the 1990s, said the crisis had been caused partly by a mismatch between financial activities and the framework of regulation and supervision.
"What makes this crisis different is that it is trans-national rather than national. We have not had that before on this scale, and most of the rules are still national," the Riksbank governor told a meeting of Institute for International and European Affairs.
He said the proposed EMU supervisory board, which will keep an overall eye on the activities of national banks and regulators, would come into force some time next year. It remained to be seen how its relationship with the European Central Bank would evolve over time, but it would have to be more than a talking shop.
"Relying on monetary policy (interest rates) alone is not good enough. We have got to have supervisory action, not just talk. The board should say clearly what it feels should be said, but then others should be ready to act -- changing the rules and making them binding if necessary."
He told the Institute that the only way out of a financial crisis is to restore trust and confidence in the banking system. "Banking is essentially telling a story; convincing creditors and customers that they can get their money back when they want it. But the story better be good, and it is difficult to tell when banks are low on equity."
Banks had to get more capital to restore confidence and that meant equity capital -- Tier One. "Losses are set off against Tier One Capital and that's when your realise that Tier Two Capital is really just for show."
But banks should not try, or be asked, to rebuild core capital too quickly because of the damage that would do to economic growth and the flow of credit.
However, losses had to be faced and recognised, even though banks were always reluctant to do so. "Losses normally don't go away. It is better to deal with them than sit on them. It doesn't matter that things may be better tomorrow if you cannot pay off your loans today," Mr Ingves said.
The losses were high. "The average is about 13pc of GDP, but it was 50pc in Indonesia and will probably be 100pc of GDP or more in Iceland. That represents redistribution -- the real cost is from negative or low growth for some years."