A lot of water has flown under the bridge since the "light touch" banking regulation was the master, when the dominant thought was that few rules could be trusted by delegating all the rest to self-regulation. Waking up from that dream was the nightmare of 2008-09. Since then, international regulators have been scrambling to write new rules in a Verdi-esque crescendo. Not being able to go into detail, just look at the figure that plastically shows the growing piles of new rules.
But are these rules achieving the goal of ensuring banking stability? Or do they build molochs who answer to no one, talk to each other little, make the intermediation mechanism dysfunctional and risk compromising economic sustainability by reverberating on the banks themselves?
The case of Italy is quite paradigmatic. Between 2006 and 2014, in relation to the Eurozone, the Italian GDP decreased from 17,4 to 16% but the share of investments decreased even more, from 17,4 to 15,6%. Therefore, in a continent that has certainly not shone in recent years, our economy has shrunk. And the fall of about a quarter of industrial production will become a lasting impoverishment for us if investments are not restarted soon, expanding production capacity and generating jobs.
Obviously, it is the companies that must find the "animal spirits" to invest but as soon as they do so they will have to face the difficulty of the banks in giving them the necessary credit. It should in fact be remembered that in Italy the weight of bank debts on the total financial debts of companies is maximum: 64%, against 46 in the Eurozone, 29 in the United Kingdom and the USA (Bank of Italy data on 2013). It is desirable that our companies also go more to the financial markets, but the adjustment can only be gradual.
Meanwhile, if some way is not devised to oil it - for example a large plan of public guarantees - the banking system will be unable to adequately support the revival of investments, tied by regulatory ties like Gulliver to Lilliput. Is this the way, by permanently impoverishing ourselves, that we will be able to make our banks more solid? The doubts seem legitimate.
The results of the Asset Quality Review plus stress test of a year ago, by the ECB and EBA, have given us less than exciting results. There is a widespread impression that finance-oriented banks have been treated with velvet while those that do more credit, like ours, have come out at a disadvantage. Since then there have been restrictive interpretations of the legislation by those authorities and some are now asking that credits towards states no longer be computable at zero risk, a measure that would be disastrous for Italy.
The recent application of the "bail-in" logic to four medium-sized banks has made Italian savers aware of the implications of a regulation that seemed esoteric to many. The "bail-in" - not to say to the Genoese - is one of the latest creations of a regulation which, even with excellent intentions, risks not solving the problems for which it was born and creating more serious ones. Unlike the "bail-out" - public rescue - the "bail-in" aims to save the banks in difficulty by involving investors and savers in the first place.
It is a sacrosanct principle when applied to shareholders and holders of bonds in any way convertible. Instead, it was decided to apply it, in brief, to all the bank's liabilities except for deposits of up to 100.000 euros. Since, due to lower taxation, over a third of bank deposits from customers are made up of bonds, there are many "unsuspecting" savers who risk suffering losses having deposited funds in shaky banks.
Not for nothing, the Italian government immediately announced that an ad hoc fund will be set up, but it will be necessary to see if this will be acceptable in Europe. In any case, what is the main problem of the "bail-in"? It's the same problem that gave birth to deposit insurance after the widespread bank failures of the XNUMXs. If we ask depositors to be the ones to supervise that banks do not take excessive risks, we run into the problem of information asymmetry between bank and depositor.
That is to say, no one knows better than the bank itself the value of the loans it has granted. If, for whatever reason, negative rumors about bank A spread, its depositors (eg bondholders) fearing losses on their own skin will rush to withdraw their funds and transfer them to another bank deemed more sound. If it is a widespread reaction, Bank A may not have enough liquidity to meet withdrawals.
If not supported enough by the Central Bank, it would risk entering a vortex of illiquidity which would lead it to sell off loans at a price below cost, thus turning an illiquidity crisis into an insolvency. Anticipating this possible event, Bank A will be very cautious about granting loans that are not readily liquidated without incurring losses. The result is that there will be less credit available to the economy, and what there is will likely cost more.
Therefore, reconnecting to the above, it is evident how these regulatory transformations will make the intermediation mechanism dysfunctional. It is a puzzle that someone will one day have to explain why the regulatory developments of the post-crisis years largely ignore the constraints imposed on intermediaries by the existence of insurmountable information asymmetries. In general terms, the logic followed is instead that of reducing the risks for banks by plastering them with capital, subjecting them to the monitoring of subjects (such as depositors with the "bail-in") who do not know enough.
Many years ago, Milton Friedman already described where this process was leading: to banks with 100% equity. This is cited in academic textbooks as a school case where the banks are perfectly stable but the economy gets no credit for it. We have to ask ourselves: aren't we inside a regulatory bubble? And, if so, who will get involved?
