Monday 18 December 2017

Global financial system is still vulnerable to further disasters

Key speakers arrive yesterday for the Bank of Finland 200th Anniversary
Conference
Key speakers arrive yesterday for the Bank of Finland 200th Anniversary Conference

Laura Noonan in Helsinki

THE world's financial system remains ideally placed for "serious accidents" and policymakers' understanding of how best to offset a future crisis is still "at an early stage", two central bank governors warned yesterday.

The comments, which put the latest Irish bank rescue into sharp focus, came at a Helsinki conference where central bankers and experts also spoke of the need for global or Europe-wide regulation of the banks.

On the sidelines, one eurozone governor also dampened speculation that the ECB was taking a more relaxed view on inflation and not considering further hikes in interest rates, saying such speculation was an "over-interpretation".

Yesterday's gathering to celebrate the 200th anniversary of Finland's central bank came more than two years after the financial crisis hit, but several speakers warned that there was no room for complacency.

"The world economy has recovered strongly since 2009 . . . but the financial system, under the surface, is still fragile," said Nout Wellink, who heads up the Dutch Central Bank and chairs the Basel Committee on Banking Supervision.

"This is the ideal environment for making serious accidents and serious accidents we have witnessed," he stressed, pointing to shifts in power between countries, within the financial markets and within financial institutions.

The tone of his comments was echoed by Luxembourg central bank boss Yves Mersch, who warned that regulators' understanding on how best to strengthen the financial system "remains at an early stage".

Central banks are now being asked to deal with "tail risk" or future losses in their banks, which is "quite a different target" to their original goal of managing inflation, he said.

"We are far more advanced in assessing the likelihood of shocks than the impact of shocks," he pointed out, adding that there were still "no concrete proposals" on how to address the problem of "systemically important" financial institutions.



Compromise

The Governor of Sweden's Riksbank, Stefan Ingves, pointed out that policy makers had yet to devise new rules for dealing with central counter parties who process tens of billions worth of transactions or to cap banks' foreign exchange risks.

In a questions and answer session, Mr Mersch questioned the sustainability of continuing to have national financial regulation, saying "European integration cannot open up a whole market on one side and then keep regulation national."

"We need a certain compromise between the principle of proximity [national regulators being closer to their banks] and harmonisation at the highest level [the same regulatory standards]," he added.

National regulation has been a particularly hot topic in Ireland of late with several high-profile figures arguing that the ECB should have done more to curb the financial bubble and Frankfurt arguing that it possessed no regulatory powers.

Austria's Central Bank governor Ewald Nowotny told journalists that markets had "over- interpreted" Thursday's comments from ECB president Jean Claude Trichet about future interest rises.

Mr Trichet warned that there were inflationary risks but did not use the "strong vigilance" phrase which is typically rolled out a month before a rate rise. Markets took this to mean there would be no rate rise in June.

"What Trichet wanted to avoid was to give a clear signal of a rate hike in June, but that doesn't mean we don't take the inflation perspective seriously," Mr Nowotny said.

Irish Independent

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