During the turmoil of the past two years, there has been no shortage of institutions fighting for survival. In the financial sector, undoubtedly the biggest casualty was Lehman Brothers, while several other major dealers in Europe and the US were either forced into mergers or to go cap in hand to their governments to keep them afloat.
And as our feature this month on the toxic asset situation afflicting smaller US banks reveals, the rate of bankruptcies for FDIC-insured institutions is at its highest level since the Savings & Loans crisis.
With no little irony, the latest group of institutions facing a fight for survival are financial regulators. The new coalition government in Germany has reportedly agreed on proposals that will hand ultimate responsibility for oversight of financial institutions and markets to the central bank, the Bundesbank, rather than being split between the Bundesbank and the other financial supervisory authority, BaFin.
This follows on from July’s announcement by the Conservative Party in the UK that it will shut down the Financial Services Authority and hand all regulatory powers back to the Bank of England should it, as most pundits and bookmakers expect, win the next General Election.
The logic behind both proposals is simple. The financial crisis exposed the room for gaps to occur in systems overseen by multiple regulators. To address this, central banks are more familiar with the daily operations of banks and are best placed to identify potential asset bubbles, excessive leverage and liquidity problems developing in the system. The Bank of England warned on numerous occasions leading up to the crisis that a sharp correction was coming, but in the bull years it lacked the necessary powers to rein the banks in.
All that seems set to change. Only time will tell whether an era of all-powerful regulators will prevent, or help minimise, the damage caused by future crises. But at the very least, we will know who the buck stops with.
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