In modern banking systems the prevailing orientation swings towards one or the other of the two liberal and restrictive regimes, which have alternated over the decades. Historical experience shows that with the passage of time each regime gradually weakens its advantages and accentuates its limitations. Thus the conditions are created for the transition to the other regime: from liberalization to constraints, from constraints to liberalization, and so on.
In the alternation of periods of liberalization and periods of regulation over the course of 100 years, from 1910 to 2010, it is very interesting to note the direct correspondence between the trends in the deregulation index and relative remuneration in the financial system compared to the rest of the economy . Periods of liberalization (high level of deregulation index) correspond to high remuneration. This means that the policy we have defined for open spaces develops an intense innovative process which requires the acquisition of high professionalism with corresponding high remuneration.
When the crises that put an end to the liberal regime erupt, the deregulation index drops because the restrictive regime takes over. The relative remuneration decreases in correspondence with the increase in the constraints. The objective of regulated stability puts a brake on innovations. As a result, the level of necessary professionalism decreases with a consequent reduction in remuneration. The lowest level was reached in the twenty years 1955-75, when the administrative constraints were very stringent. The banks were not enterprises, but controlled institutions with limited competition. The bankers were not entrepreneurs, they were mainly enforcers subject to regulations and authorizations. A gradual process of liberalization began in the 1995s, which accelerated strongly in the decade 2005-XNUMX. Banks have become businesses. Bankers have taken on the role of entrepreneurs and managers, called upon to make dimensional, locational and organizational decisions, and to evaluate and manage market risks. Compensation has soared, as has the pace of financial innovations. Until the new great crisis, which has reopened the problem of the return to regulation.
THE NETWORK OF INTEGRATED AND FLEXIBLE INTERVENTIONS
The current situation is objectively more difficult. Market globalization makes the scenario more complex. The risks of contagion are easier and more widespread thanks to networks of communication and interdependence. At the same time, the intervention networks that can be put in place are also more extensive and more solid. The essential thing is to treasure the lessons that can be drawn above all from periodic crises, large and small.
The lessons that we can summarize in points are:
• Financial crises cannot be avoided, except at the cost of abolishing the market economy. Exceeding in a protective sense increases distortions, deserts free initiative, increases moral hazard.
• Risks cannot be eliminated, because they are inherent in financial markets which involve intertemporal exchanges between the certain (today) and the uncertain (future). They must be identified and managed with the appropriate tools.
• A relationship of complementarity must be maintained between the objectives of stability and efficiency, albeit with a margin of flexibility dictated by situations. To this end, it is necessary to foster the widest interaction between efficient markets and vigilant monetary authorities, ready to intervene with a wide range of instruments.
• Resorting to simple solutions in the face of a complex reality is useless and misleading. You cannot use just one intervention tool. Each offers advantages, but also contraindications. Many may be necessary, none alone is sufficient.
• The probabilities of crises can be reduced with ex ante preventive systems, which act on the possible causes, and their effects can be limited with ex post intervention systems.
Preventive alarms. An early warning system requires several coordinated actions:
• Constant monitoring by the monetary authorities to have timely information.
• Identification of the sources of risk, which are many: credit, market, operational, interest rate, liquidity, reputational risks.
• Assessment and traces of systemic risks, also by carrying out simulations with stress tests, to identify the diffusion circuits and prevent the risk of contagion.
• Antitrust monitoring against banking and financial gigantism to contain the blackmail of too big to fail.
• Separation and simplification of the forms of intermediation, in particular between commercial banks, which combine the monetary function with the credit function, and intermediaries specialized in financial investments.
This system is necessary to prevent crises, but it may not be sufficient to avoid them. Above all in the strong innovative processes that characterize the most advanced financial systems, prudential regulation is quickly superseded and adjustment to new rules always comes ex post under the pressure of a crisis that has already begun. This observation first of all entails the need to have a flexible preventive system, readily adaptable to changing reference contexts. Secondly, it confirms the need to set up an articulated system of interventions to suppress the hotbeds of crisis and prevent them from spreading. To this end, it is necessary to act on two levels: one of prompt intervention, the other of final rescue.
We have already discussed bailouts by comparing central banks in the role of lender of last resort to firefighters. The importance of this function was fully reaffirmed in the 2007-10 crisis. The lesson that emerges is that it is an extraordinary intervention, which should be limited to situations of systemic risk. It cannot be used frequently, on pain of reducing its effectiveness and increasing contraindications. The greatest concern concerns a reputational problem for central banks, which cannot esscre the receptacle of "junk" securities, as instead they have been induced to do.
Therefore, another important lesson that can be drawn from the traumatic experience of the crisis born in 2007 concerns the need to try to involve the central banks as little as possible with buffer interventions that extreme their role as lender of last resort.
fire extinguishers. For this reason, the action of the post-crisis regulators, mainly the Financial Stability Board and the Basel Committee, has been directed towards expanding the endowment of emergency tools available to each bank. Returning to the comparison with fire outbreaks, banks must demonstrate that they have a good supply of fire extinguishers. The endowment of these tools has gradually expanded and includes:
1. the compulsory reserve;
2. compulsory deposit insurance;
3. property constraints;
4. constraints on the management of liquidity risks.
The established approach is the active involvement of banks in the ability to manage and recover liquidity in the markets in which they operate. The prevailing trend is in favor of a flexible use of fire extinguishers. The only exception is deposit insurance, which has a purely defensive purpose of guaranteeing the repayment of deposited values within an average level in the event of bank failure8. The other instruments lend themselves to active and flexible management by bank management. This principle applies to ROE, which is assigned different tasks compared to the traditional role of defensive shield to protect depositors. Traditional role from which we started at the beginning of this chapter and which has fueled a broad debate, up to the request for 100% coverage, as we have documented in the following pages. The expansion of the extinguishing tools makes it possible to lighten the weight of the ROE and offers the opportunity to mobilize the liquidity reserve for short-term interventions on the money markets.
A regulatory capital constraint established by the Basel Accords to respond to credit risks was progressively made more flexible from the first agreement of 1988 (Basel I), which provided for a single parameter, to the second of 2007 (Basel II) which differentiated the parameters depending on the type of credit, up to the preparation of the new scheme (Basel III). This scheme, driven by the severe financial crisis of 2007-10, is aimed at strengthening capital requirements not only on a quantitative level, but also on a qualitative level. The minimum requirement is Core Tier l, which includes share capital and retained earnings (therefore the so-called common equity) and is the qualitatively highest component of the assets. Finally, the most innovative aspect is the additional introduction of requirements for the management of liquidity risk, which require banks to demonstrate the resilience of the entire bank balance sheet, assets and liabilities, in the face of stress situations.
COMMENTS
Two comments can be anticipated here. One positive. The other worrying.
The positive aspect concerns the wide-ranging protective action that is required of banks, in which different markets and different stakeholders are involved:
1. Depositors, who must be reassured and loyal to reduce the risk of early withdrawals: not only with defensive measures such as ROB and deposit insurance, but also with the efficiency of payment services and sound management.
2. The borrowers, who must be selected and momtoratt to balance profitability and credit risks and to limit the financing of speculative bubbles.
3. The shareholders, who are called upon to provide capital solidity to face the risks of the banking activity. In turn, the banks are stimulated to managerial efficiency to remunerate the capital to be attracted through the stock market.
4. Last but not least, the local communities, to which banks must be able to offer contextual knowledge and attention to local development in order to obtain stable relationships of trust in exchange.
The worrying aspect is that, albeit in a flexible and market-oriented manner, the management constraints imposed on banks have increased. If, on the one hand, the constraint on the compulsory reserve held at the Central Bank has been contained, on the other hand the requests for capital constraints and to maintain liquidity reserves in the bank balance sheet have been added.
As always happens when the weight of the restrictive regime increases, the problem arises of evaluating how much the advantage obtained from the point of view of stability is obtained at the cost of the loss of efficiency and, above all, of the reduction of intermediated resources in favor of international credit. 'economy. A vicious circle can be triggered. Higher costs and lower efficiency penalize banks' profitability. Lower profitability reduces the attractiveness of savings towards bank shares. The greater difficulties in increasing one's share capital make the capital constraints that place a ceiling on the offer of credit more stringent. The resources that banks can allocate to credit the economy are reduced. This reduction is accentuated by the higher liquidity requirements that bank balance sheets must exhibit. This is an implicit portfolio constraint that is mainly satisfied with the acquisition of high-quality, low-risk short-term public securities. This reduces not only the time horizon of bank intermediation, but also the portfolio space left for banks to grant credit to the economy.
In conclusion, the recommendations made to banks after the crisis – greater capitalisation, greater liquidity, greater support for the economy and, in particular, greater credit to small and medium-sized enterprises – appear contradictory. Once again, the search for stability after a crisis does not seem compatible with economic efficiency and development.
