Banks must not threaten their countries

14.11.2012
“Large banks dictate to their governments what to do, and banks in turn are too strictly steered by regulators, who want to influence banking products, but are not interested in the systemic risk generated by these banks. Functions are confused,” says Józef Wancer, a banker with many years’ experience, currently an advisor to the Board of an advisory company Deloitte. “Europe should follow the US example more closely.”, he adds.
Jozef Wancer

Jozef Wancer

Jozef Wancer

FinancialObserver.eu: Does it make much difference to the American economy whether it was Barack Obama or Mitt Romney that won the presidential election?

Józef Wancer: The gap between declarations made during the campaign and the actual actions later on is huge. Undoubtedly, both candidates had similarly noble intentions, but extremely different approaches. They were both after faster economic growth and lower unemployment. Romney said that to that end Obama’s current policy would have to be turned 180 degrees. Such claims had never appeared during US presidential elections before. I doubt if the US Senate or the House of Representatives could have agreed. So in practice, the vast majority opted for stability and faith that the American economy was heading for the better, even without the impressive new opening which Romney referred to (admittedly without giving any details).

Will a Democratic president and the House of Representatives still dominated by Republicans push the US off a fiscal cliff? This is the name given to simultaneous expiry of tax reliefs and reduced spending starting from 1 January 2013.

Push into the abyss of recession? I hope not. Without doubt, the threat of automatic actions (a tax raise, a cut in spending by USD 600 billion and expiry of a number of tax reliefs) is serious and theoretically a threat. But these are the current regulations that the Congress may still modify. A part of the problem is also the 2013 budget – there are concerns that the situation from last year might repeat itself, when both parties wanted to push their own particular agendas in negotiations in return for consenting to increase in the debt ceiling. Still, at present nobody expects drastic changes so postulates on both sides will not be as radical. I trust that American politicians will find a suitable solution to those problems and not allow any drama unfolding.

Deloitte has just published its Global Economic Outlook. It says that America’s major problem is not unemployment, but the euro area crisis.

Indeed, many people say that the United States’ major problem is the European Union, particularly its inability to recover from the crisis. Between February and April this year, the growth rate of American exports to Europe decreased to 18.4%. The last time we saw such as bad result was autumn 2008, during the first crisis wave. We are usually not aware how close the links between the US and Europe are, not only in politics, but also in terms of trade and finance. Banks of systemic importance in Europe immediately influence banks of systemic importance in the US, and vice versa. It is an interconnected system. A healthier Europe is also a stimulus for investment growth in the US, which in turn reduces unemployment in the US.

What is the reason behind the deadlock in Europe and America’s irritation?

In the US, the scale of economic slowdown is smaller than in Europe, and crucial decisions are made much faster. It is because the European Union is not a fiscal or political union. We are not a federation. We do not speak the same political language and we have no overriding agenda followed by the 27 countries. The United States respond quickly and effectively. They do not understand why Europe is unable to have pulled itself together by now. On the other side of the Atlantic, they cannot understand why politicians are unable to make decisions during a two-day EU summit, particularly as the FED can act over a weekend. The worst part is that Europe’s impotence weakens the US economic growth, which has a direct effect on US-EU trade (25% of US exports).

US Treasury Secretary Timothy Gartner called ECB heads Trichet and Draghi 58 times in 30 months. Does it mean that in the opinion of the US only the ECB is able to handle the crisis in Europe?

You hit the nail on the head. Americans always think whom to call in Europe and it seems that this is the right number. The European Central Bank holds considerable power now, although we do not know if it will last. But rumour has it that it will – that the ECB would be strengthened rather than weakened. Even the Germans opt for the idea. Yet, there may be barriers, such as European regulations or extreme opposition on part of the United Kingdom that may result in weakening the ECB.

Is it because of problems in Europe that US companies are hoarding cash thus pushing the country towards a liquidity trap and forcing the FED to print dollars? The trend is also mentioned by the Deloitte report.

I am not an economist, but in my opinion the US does not face problems related to liquidity, but to the development of the economy. The FED incessantly laments that the economy fails to rally on the back of its programmes and gain momentum from the increased activity of the printing press. US companies do not invest, employ or spend because they face uncertain times. In their opinion the outlook for immediate future is grim and the government has no clue how to recover from the economic crisis. But if companies do not make use of the money they have, the economy will not grow as expected. It resembles a Catch 22 situation. If they spent and made investments, financial performance would improve, while unemployment and uncertainty would decrease.

Is the condition of US banks no longer a threat to the entire economy?

Surely to a much lower extent than in Europe. The majority of banks have already repaid the loans taken out from the FED. Some did it early to get rid of the control from regulators and the financial burden. The state even made a profit, as they repaid the money with interest. Still, the basic problem with banks of systemic importance has not been solved.

What is it?

Both the US and Europe should not tolerate “banks too large to go bankrupt.” It is amazing that banks may threaten their countries. In business, we say that “nobody is indispensable”, which means that nobody can be so important as to threaten a company, not even the CEO. And we are facing a situation where one or several banks in a country virtually dictate to the government what to do because they know that their bankruptcy would result in the bankruptcy of the state, at the expense of taxpayers.

Surely, regulators all over the world should focus more on preventing large banks from being threats to their countries, and less on regulating individual banking products or services. We are reaching a point where regulators become almost bank managers. What we see is a complete confusion of functions. The pendulum swings too far to the other side. Regulations such as the Dodd-Frank Act in the US paralyse the financial system. Through bureaucracy and an obsessively vast body of printed materials (almost 3,000 pages), they offset the benefits that should result from such regulations.

So is there a guarantee that there will be no other bankruptcy like that of Lehman Brothers?

No, there is not. Today, the crucial factor at play is that governments have drawn their conclusions from that story and would not allow a bankruptcy of any large bank, at the expense of taxpayers of course. I think it is a serious mistake, as we all tend to forget the role of bankruptcy in capitalism: it is beneficial because one company is replaced by other, better companies. The weakness of our markets is that the rule does not pertain to banks. It is also a weakness of banks as they are aware that whatever they do, they will be given a hand. In this way we smother competition, which is the main stimulus of economic growth. What has become of a sense of responsibility for company operations?

Of course, regulations are necessary, but within the limits of reason and pragmatism. Regulations should not hamper creative financial engineering, as it is supposed to support economic growth that is based on market innovation. Let us remember that the financial crisis is not exclusively the fault of banks. The fault lies primarily with misconceptions and bad decisions of politicians and regulators. They are the ones who are to ensure adequate and sound criteria and parameters for the financial sector to avoid another bankruptcy like that of Lehman Brothers.

Would the banking union, which is planned in Europe, allow to get rid of the “too large to go bankrupt” syndrome?

I cannot see such outcome materialising on the basis of the proposals tabled to-date. They are rather intended to define the way in which the central regulator, or the ECB, will regulate local regulators and banks. The most serious problem will be that authority is central, while responsibility for individual stages of the plan’s implementation rests with local regulators. In addition, mass-scale centralisation of functions is rather inefficient and ineffective in the long run. It generates bureaucracy and allows negligence too easily.

Therefore, I am an enthusiast of the American political system where individual states have the right to self-government, with due respect for the role of federal authorities. The closer to the client, the easier it gets to render adequate services. It is a matter of responsibility and accountability of decision-makers for the effects of their work. Still, I think that sooner or later Europe will appreciate the ideas presented by Sir John Vickers’ Commission that assume dividing universal banks into retail and investment banks.

Józef Wancer – advisor to Deloitte Board. He served as Vice President of Citibank of New York and held managerial positions at the bank’s branches in Japan, Austria, Great Britain and France for 25 years. Between 1995 and 2000, he was the Vice President and President of Raiffeisen Centrobank in Warsaw. Between 2000 and 2010, he was the President of Bank BPH.


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