The European Council on Foreign Relations

Madrid view: Well done, man

Date: 23rd July 2012  |  Author: Jose Ignacio Torreblanca,

Categories: Madrid view,
Tags: banking, euro crisis, financial markets, regulation

That, and “I’m really, really proud of you,” is the breezy congratulation that the CEO of Barclays, Bob Diamond, sent to Paul Tucker, on Tucker’s promotion to deputy governor of the Bank of England in December 2008. The latter’s reply sets all the alarm bells ringing. “Thanks Bob, without you I could never have managed it.”

Now fast-forward to July 2012, when Bob Diamond is obliged to resign, having admitted responsibility for tampering with the most important of the interbank rates, the Libor, used as a benchmark for the setting of contracts whose total annual value amounts to some 100 trillion euros, or about 100 times Spain’s GDP. The affair, in which other major European banks are involved, has earned Barclays a fine of 360 million euros.

A doctoral thesis resulting from months of patient work could hardly have produced better empirical evidence than the above email of the extent to which the financial industry is capable of capturing the institutions and persons who are supposed to regulate it. Until not long ago Tucker was one of the top candidates in line to be the new governor of the Bank of England. Imagine the situation: the regulator in the hands of the regulated?

We have been talking so long of public finances, their excesses and disasters, that we tend to forget how this crisis arose from a concatenation of factors, chief of these being the prevailing lack of control in the financial sector — so influential politically, and so effective in preventing and deactivating attempts at regulation. In the US, another British bank, HSBC, faces a billiondollar fine after admitting its collaboration in laundering billions in drug money. Then comes ING, which is to pay a $619 million fine for helping to move Iranian and Cuban assets through the US financial system. And Capital One, which is to pay a $210 million fine for having included in its clients’ creditcard contracts an array of financial products, such as default insurance, which they had not requested or did not understand.

This brings us to the Spanish case, where the governor of the Bank of Spain has at last admitted that the institution acted with “indecision, insufficiently and inadequately” — though, faithful to the technocrat’s shyness of using language understandable to the general public, he skulks behind a double negative. “It would be absurd to deny that we have not been successful in supervision,” he has said. Which, translated from technocratic to democratic language, would read: “It would be logical to affirm that we have failed.”

The only good news is that now it is going to be harder to take seriously those who defend self-regulation in the financial markets. The crisis has made it clear that many financial institutions, rather than compete fairly for clients on an open, transparent market, prefer to capture the regulator and make easy money by bending the rules: much easier than the serious work of distinguishing good investments from bad.

Yet the fact that self-regulation has to be ruled out does not mean that effective regulation is easy to attain. One lesson we have to learn is that supervisors also have to be supervised, and very strictly.

Many supervisory institutions cherish a pretension that, in view of the specialized technical nature of their task and knowledge, they should be independent of democratic control; but this cannot be justified. In the US and the UK, we now see parliaments highly active in apportioning blame, both in the markets themselves and among the supervisors. The prescription is simple: a financial industry that fears the supervisors; supervisors that fear the parliaments, and parliaments that fear the citizens.

The article first appeared in El Pais.