Finance
Internet Capital Sourcing Model Gives Hope to Small Businesses
The controversial financial model ‘crowdfunding’ looks set to change the field for small business, social enterprise and even the arts
Merging Interests
Ambitious graduates hoping to enter into the complex world of high finance tend to aim for a few very prestigious roles depending on their characters
Occupy The Future
What should be the next step in the strive to bring democracy to the world financial system?
What is your prefered work model?
Education
Macroeducation: The Real Value of University
Students of the future will need to change their thinking when it comes to higher education. University is about much more than increasing earning potential
Copy/Paste Your Way Through College
Has the Internet made written assignments useless and is there a better way to assess understanding?
Main Content
The New Financial Order: the EU
New institutional and legislative set-up paves the European way out of the global financial crisis.
What went wrong with the current system?
The sub-prime crisis hit Europe some time after the USA, but its consequences were profoundly felt around the continent. The turmoil elicited a number of flaws in the financial order that the EU must address to become more resilient in the future.
Two types of system problems can be distinguished: holistic issues that impact every part of the market set-up and specific points relating to sectoral or thematic flaws. In terms of holistic issues, the interdependencies among different banks, sectors and countries constituted a systemic risk that was misevaluated. As regards specific flaws, credit rating agencies failed to live up to their early warning role. Furthermore, financial institutions such as hedge funds that operated outside of public control cumulated uncertainty over the extent of the crisis. To add, management bonus practices encouraged short-term profit and unhealthy speculation. Finally, low reserve levels damaged bank resilience and bail-outs created moral hazards.
To examine how the EU will address these challenges it is useful to look at recent speeches of Mr. Jean-Claude Trichet, President of the European Central Bank (ECB), Mr. Lorenzo Bini Smaghi, Member of the Executive Board of the ECB and Mr. Charlie McGreevy, European Commissioner for Internal Market and Services.
Addressing the holistic challenges
In relation to systemic risk, the spearheads of EU financial policy suggest to introduce macroprudential supervision through following the European Commission de Larosière report. The report sets up a new institution named the European Systemic Risk Board (ESRB). The ESRB is expected to identify and assess risks, ring the bell when they appear substantial and explain member states how to mitigate the danger. The 27 EU central bank Governors, the ECB President and Vice-President, a Commission member and the three Chairs of the new European Supervisory Authorities will sit on the board. ECB’s analytical, statistical, administrative and logistical resources combined with technical advice from the national central banks and supervisors will provide the ESRB with the necessary expertise.
Mr. Bini Smaghi, in particular, sees four distinct steps to ensure the new board will effectively resolve the problems on its agenda. First, a legislation that clearly defines the mandate of the ESRB and the support of the ECB must be introduced. Second, those responsible for risk evaluation should improve their research and analysis to a level where assessment and warning match the new financial reality. Third, the ESRB should be provided with more exhaustive data on non-regulated financial areas and more detailed information on interactions among vital financial institutions. Last, board decisions must turn into specific actions at the national level through an institutional mechanism, public recommendations or a peer review.