Dysfunctionalism – the financial order

by | 28 Sep 2015

Banksy Charlie

So there I am sat in a room with central bankers, ex-central bankers, central bank lawyers, people from the IMF, Canadian Development Bank, Federal Reserves of a couple fo US states, and assorted financial academics, and I am clawing at my ears to make it all stop.  You see, it’s one thing to know it will all happen again – the crash that is – but it is still quite something to hear the chosen ones just throwing up their hands and admitting that the holy grail that is financial stability (ha ha!) is as meaningless as it is unattainable.

It is one of those meetings where everything is officially unattributable.  Oh the irony!

Here is a little illustration.  The EU for example has set up a bank recovery and resolution regime which is designed to be triggered when a bank does a Lehman Brothers and is about to fall over.  Said bank’s speculative investors will lose their investments in a bail in, the bank may be split into a good and bad bank, and some or all of the bank may be wound down.  The meeting noted the following ‘problems’:

  • assuming the resolution regime works, it is mostly in directive form which means that EU Member States are all implementing it differently, which defeats the object of having one resolution regime for banks which straddle jurisdictions.
  • One Member State has even changed its law to sabotage European Central Bank supervision.  The ECB has power to override national guidance (soft law) to banks.  So the Member State has just enacted its guidance as hard law.
  • no one knows if the resolution regime works.  They just made it up.  I mean it sounds sensible in parts, but it has never been done and everyone was very unsure it would work.
  • some people want to test the resolution regime to see if it works, but to do that you need a large bank to collapse, a bit like the only way to test the A-bomb was to blow one up in Nevada.  There was not much appetite for blowing up Deutsche Bank on the off-chance.  Greek banks were too small to provide useful data, but…
  • Theoretical testing was a joke.  A young man who works for a big British bank recounted how he’d organised the stress testing response in an 8 week turnaround period.  The test for this banking giant was one side of A4 paper – can you imagine?  They give that sort of thing to undergraduate law students.  He said he had spent five weeks trying to work out what the supervisors wanted and filling in the massive holes in their assumptions, and then three weeks crunching numbers.  All that meant was that every bank’s stress test was so over-interpreted that it was incomparable with anyone else’s.  As an aside, one British bank actually responded only on the basis of the one side of A4.  They were fined for calling into question the ideological rectitude of the stress-test process or something…
  • Even if resolution worked in principle, the plan was that resolution would occur over a weekend.  A weekend for multiple national central banks to coordinate the winding up of billions of assets with the ECB.  No one seriously believes this is possible.
  • Even if resolution would work, was implemented uniformly, and could be done in a weekend, it was difficult to find anyone who didn’t think Realpolitik would intervene as soon as a national flag-carrier bank hit the buffers.  Think about it: if Deutsche Bank or BNP Paribas hit the wall would the German or French governments stand back and let the ECB do its thing?  They didn’t last time and they won’t next time – banks like that are too intermeshed with ‘their’ governments.

And this was just one example.  Financial stability, the conclusion was, had less substance than the Holy Ghost.  There was no useful definition of it and no way of knowing either if you had it or how to attain it.  To tell a central bank to pursue financial stability was the equivalent of sending a new recruit to ask the staff sergeant for a ‘long weight’.

Inevitably, in the vacuum of meaning that is current banking regulation, those who seek to govern have pursued their own agendas.  Class warriors have used the purported certainties of the national balance sheet to pursue ‘austerity’ but their are other interests in play.  A representative of the ECB decried ‘sovereignists’ [sic] who dared to argue that there was any other law than the positive law that issued from Europe.  He had in mind no doubt those ‘dangerous radicals’ who had sought to plead human rights as a limit on the ECB’s policies against Greece and others.  But it was also clear at the meeting that any (small) state seeking to operate outwith the straightjacket of Fiscal Compact and Supervisory regime would be dealt with mercilessly.

It was conscious dysfunctionalism – a system that thrives and expands by its own absurdity; by forcing this absurdity on others and then moving in as the other system degrades, under the banner of stabilisation, recovery, and resolution.


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