Today, I participated in a panel discussion at the Economist Bellwether Europe conference on ‘A Vision for Europe’, together with Estonian finance minister JÃ¼rgen Ligi, head of markets at the UK Financial Services Authority Alexander Justham, and the chief executive of the Association for Financial Markets in Europe, Simon Lewis. Below are my answers to the questions posed to the panel.
Q: Is there a coherent plan to define a new vision for European finance and is the region urgently in need of one?
A: I’m suspicious of ‘visions’ when it comes to finance, an industry notoriously prone to animal spirits. And when regulators speak of visions, I think of Alan Greenspan dropping Ayn Rand inflections into one of his Fed speeches, and the former EU commissioner Charlie McCreevy boosting the single financial market utopia. We know where these dreams ended up. Rather than a ‘vision’ for finance, Europe urgently needs a reality check.
Q: What would this look like and how should the industry work with regulators and governments to help build it?
A: Past experience of the run up to the crisis teaches us that when industry ‘works with’ regulators and governments to build a vision, then we should start getting scared. Banking is an industry with deep pockets and formidable lobbying power that has a track record of ‘capturing’ regulators. With no disrespect intended to Mr Justham or Mr Lewis, the record of the FSA and AFME’s predecessor institutions is a depressing case in point. Governments and regulators need to rein in the power of cross-border institutions, and make large banks less profitable and more stable.
Q: Has enough been done since 2008 to improve regulatory harmonisation and reduce systemic risk? Or is there a new set of unintended, and undesired, consequences?
A: In my view, not nearly enough has been done. Banks are still overleveraged, over-complex institutions whose balance sheets dwarf those of many EU countries. Shadow banking is still alive and well, and inadequately regulated. Structured products and over-the-counter derivatives still allow bankers to make outsized profits exploiting market opacity and behavioural blind spots among consumers and institutional clients. And the governance of the EU itself still leaves open many dangerous arbitrage incentives.
Q: What is the impact of so much change on the wider economy? And can Europe remain a competitive financial hub?
A: The myth that ‘competitiveness’ is a regulatory goal needs to be put to the sword. Despite the protests of bankers and lobbyists, the limited regulatory reform undertaken up to now is not hurting the wider economy. While the Eurozone crisis remains a threat, particularly if the core countries lose the will to fix difficult problems, the advantages of Europe as a financial hub are not going away. In fact, given recent political and market events, they are more evident now than ever: corporate governance and legal certainty still superior to emerging markets and arguably the US, and for the majority of EU nations, economic and political stability. Regulators should focus on stability and ignore calls to help ‘competitiveness’ which is a code-word for ‘light touch’.