Oct. 30, 2008 The current credit crisis has intensified politicians’ interest in the goings-on in the financial sector. Research has shown that quick and decisive action on their part is needed to avoid serious economic consequences of the current banking crisis.
Economist Thorsten Beck will issue words of caution about the wave of nationalization of banks in Europe in his inaugural lecture at Tilburg University that he will deliver on 7 November.
Beck sees the current crisis more as the result of the failure of government rather than the market. Central bankers and bank supervisors, especially in the United States, reassured investors time and again that they would intervene with monetary and financial policies if circumstances so dictated. These assurances gave bankers the leeway, even incentives, to take aggressive and imprudent risks. Beck suggests that in the future financial institutions be required to be more transparent and to take on more responsibility for their own risks. This approach is more fruitful than prohibiting certain activities, which will prevent society reaping the benefits of thriving financial markets.
Beck also argues that the nationalization of banks may currently be necessary, but that this process will not help by itself the sector regain health and independence in the long term. Bureaucrats are poor bankers, according to Beck, and nationalization should not be the first solution attempted. Private-market players must get involved in the resolution of these banks as quickly as possible in order to help the sector get back on its feet.
Establishment of a European financial institute
The national approach to the European banking crisis has proven to be ineffective, says Beck. A large part of the European banking system and its related transactions take place across national borders, whereas supervision and deposit insurance coverage are still on the level of individual member states. This leads to serious problems in times of crisis, as demonstrated in the case of the Icelandic banks or even the Benelux bank Fortis. Resolution of large European banks can only take place at the European level, while bank nationalizations will eventually lead to renewed fragmentation in the European financial system.
This is why Beck advocates establishing an institute at European level to monitor large financial institutions that operate across borders. An institution of this kind must have sufficient fiscal resources available, provided by the banks in question. This approach will help avoid European internal political conflicts at the time of crisis.
Thorsten Beck recently joined Tilburg University in the Netherlands from the World Bank in Washington, D.C. He is chairman of the European Banking Center, a research institute in Tilburg. His research has focused on two main questions: What is the relationship between financial development and economic development? What are the ingredients of an efficient and stable financial system? He holds a master degree from Germany and a Ph.D. from the University of Virginia. During his time at the World Bank, Beck has accumulated significant experience in financial sector policy work across Africa and Latin America, but also in Russia and China.
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