The supervisor of the Finnish banking system is moving on and she recently gave an interview to the main media as she leaves for a similar posting in Frankfurt.
The banking supervisor here enforces the laws and regulations that set are set at the European level to ensure that banks are safe.
However this is an important matter that ordinary people and companies can and should question because the system does not work as intended. It has resulted in unintended consequences that do not prevent market failures and moral hazard.
Banking supervision has produced unintended consequences that do not really prevent market failures and moral hazard.
Let’s look at the banking landscape in Finland and elsewhere in Europe:
- We have seen a tremendous consolidation in banking – in Finland, just 3 banks have a market share of over 70% – a remarkable unintended consequence of where banks have monopoly power that results in more expensive banking services for consumers and companies!
- This market situation means that the barriers to competition are so high that foreign banks are leaving, or trying to, and few new banks or new FinnTech entrants enter the banking market.
- The banking lobby is so strong that for the last ten years, the banks have been able to stop most borrowers from taking advantage of negative short-term market interest rates. Banks were given permission to charge the full margin (on top of a zero interest rate without allowing for negative interest rates) from household borrowers, a policy that distorted open markets and increases costs for borrowers.
- The European Central Bank has handed out huge credit lines with negative interest rates to the banks – this is a subsidy to the banks which is another policy that distorts open markets.
- Banks have continued to pay huge salaries and bonuses to senior employees and directors when the above market-distorting subsidies have been paid from tax revenues!
- Banking regulations and risk reporting are so complex and demanding that banks are forced to use expensive lawyers and consultants to understand what they must do! The resulting costs are so high that consolidation has taken place since only large banks can afford these high costs. Naturally these costs are passed on to clients.
- This complex banking regulation, especially relating to capital adequacy and risk management, have led these banks to limit or completely stop supporting key parts of the economy like important export finance and the financing of SME’s – both key growth areas of our economy. Banks now concentrate on corporate real estate lending and private housing loans that are not major drivers of the economy. It is ludicrous that banks restrict their corporate lending to the biggest companies and public sector that have easy access to the bond and equity markets.
- The three big banks are so big that one must assume the existence of an implicit government guarantee which inevitably leads to moral hazard. The supervisors want us to believe that we are safe from a financial crisis so long as the banks are profitable, something that is supported by subsidies and monopoly conditions brought about by cheap loans from the ECB and consolidation. The question we must ask ourselves is why do the supervisors believe that consolidation and public support for banks is desirable or even needed? There is no reason to give taxpayers’ money or public guarantees to banks, or to any commercial or corporate activity – and we the taxpayers certainly have no reason to accept banking monopolies and these liabilities!
- Banks in Europe have enjoyed unprecedented profits fro the EBC – their bond buying program called QE, has produced huge trading profits for the banks that have been selling them bonds. This too is an indirect public support for the big banks here and elsewhere in Europe.
- The three large banks are heavily exposed to other banks in other countries – we all know that the banking markets in Italy, Germany, France and elsewhere many parts of Europe have major structural problems. Large banks proliferate and many of them have significant problems that have not been dealt with. As Draghi said, the European Central Bank will do “Whatever It Takes” to calm the markets, but we all know that it is the taxpayer that is on the hook, not the banks, their shareholders or the supervisors. When there are problems they jump to the next ship…
Thus the banking supervisors appear to be doing the opposite of what is needed here. Instead of open markets, we have effective banking monopolies in many national markets where there are significant barriers to competition. We, the clients, have limited or fewer banking services, high costs for banking products, and reduced support for the SME growth sectors in our economies.
At the same time, banks are making huge profits and paying their senior folk large salaries. We have created a system of casinos where the banks take all…
It appears that the supervisors just do not understand that we the taxpayers are main supports for this banking system and the ones that bear the costs of risks and losses. It appears from the above that they have the opposite of what is needed to deal with the next banking crisis. Banking is nothing special and certainly does not need public support or overly complex regulation to operate. We do not give such support for ordinary companies. Most people agree that risks and losses of banks should be borne by the banks and not by taxpayers.
Thus it appears that supervisors have failed in their duty of care since they have place the burden of risks and losses on ordinary taxpayers and not on the banks and their shareholders.