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European Cross-Border Cooperation to Safeguard Stability & Manage Crisis in the Financial Sector

European Cross-Border Cooperation to Safeguard Stability & Manage Crisis in the Financial Sector. *Presentation by Per Callesen, May 21, 2010. “ Global Financial Crisis: Lessons for the Stability of the Financial Sector” Conference, Warsaw. Organized by the BGF Guarantee Fund of Poland.

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European Cross-Border Cooperation to Safeguard Stability & Manage Crisis in the Financial Sector

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  1. European Cross-Border Cooperation to Safeguard Stability & Manage Crisis in the Financial Sector *Presentation by Per Callesen, May 21, 2010 “ Global Financial Crisis: Lessons for the Stability of the Financial Sector” Conference, Warsaw. Organized by the BGF Guarantee Fund of Poland *Views and assessments are made on a purely personal basis

  2. Overview • Policy implications of the sovereign debt crisis • 2008 crisis management benchmarked against the MoU and its principles • Revisiting controversial issues in preparing for the 2008 MoU • Broader remarks on stability in the financial system

  3. 1. Policy Implications of the Sovereign Debt Crisis • No financial stability with disorderly public finances. • Sustainable public finances are mainly a national interest and obligation. But much needs to be done at the European level as well: • Re-coupling fiscal policy and it’s underlying decisions. Stronger role of the ECOFIN. • Stronger differentiation of fiscal policy advice. • Take current account imbalances and inflation into account in fiscal surveillance. • Stronger political follow up with peer pressure, political and economic sanctions.

  4. 2. 2008 Crisis Management Benchmarked against the MoU & it’s Principles The crisis unfolded very differently from anticipated in the MoU, and so did intervention: • Case-by-case management given up early. Fairly good EU-cooperation on systemic approach, after a difficult start. • Protection went far beyond expectation. • Mixed experience of cooperation for intervention in specific institutions. • Competition rules important, but difficult. • Contagion became an overarching concern across the board.

  5. Benchmarking the 2008 Crisis Management Against the 9 Principles

  6. 3. Revisiting Contentious Issues from Preparing the 2008-MoU • Moral hazard. The discussion on whether to mention possible public intervention has been fully overtaken by events. But setting the conditions remains as difficult. • Preparing for burden sharing. The mood has shifted towards favoring comprehensive preparation. Possibly also to some degree towards ex ante arrangements. • More decisive approach towards cross-border stability groups

  7. 4. Broader Remarks on Stability in the Financial System • An effective financial sector is needed to spur private demand • But it has to become stable • Discretion has a limit. Look for automatic stabilizers, like provisioning. • Strong dilemma between need for stronger competition and preserving stability • Don’t forget that bad macroeconomic policies in good times played a major part • Macroeconomic policy mistakes are very costly

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