“This is an important step towards tackling the distortions of public subsidies and moral hazard in the banking sector”, said Thierry Philipponnat, Secretary General of Finance Watch.
Moral hazard refers to the ability of banks to benefit from subsidised funding thanks to the implicit or explicit state-backing of their retail banking arms. It encourages banks to develop highly leveraged and risky trades while being assured of public support in case of a major loss. We have seen this regularly since 2008, at a huge cost for taxpayers.
“Like all subsidies, moral hazard distorts the market. It is in the interests of all businesses – large and small – that the EU address this economic distortion through proper structural reform”, said Mr Philipponnat.
We have seen the effect of this distortion in the lack of competition in the banking sector and in the excessive allocation of bank resources to real estate and trading activities, while real businesses and exporters cry out for credit.
“The Liikanen proposals are not just another regulatory initiative; they are the heart of the matter. Problems linked to bank structure, activities and size have been profoundly negative for the EU’s economy. Structural reform is an essential first step to putting that right”, said Mr Philipponnat.
The Liikanen Report’s success in addressing moral hazard will also be a condition for the success of the proposed Banking Union and Resolution Framework and should be considered simultaneously with those and other bank reforms.
“With Banking Union now on the negotiating table, the EU must lose no time in bringing moral hazard under control”, said Mr Philipponnat.
Finance Watch therefore welcomes the Commission’s initiative and looks forward to studying the Liikanen Group’s recommendations in more detail in the coming days, paying particular attention to their implementation, feasibility and ability to complement the other pieces of banking legislation currently being discussed in the EU.
For further information, please contact Greg Ford on email@example.com or +44 (0) 7703 219 222
Read Finance Watch’s evidence to the Liikanen Group:
29 March 2012 – evidence at Liikanen hearing