Policymakers and financial actors in Europe have been at loggerheads over how to ensure that the financial crisis does not happen again and if it does, that taxpayers do not bear the burden.
The EU has agreed to raise capital requirements for banks in a move aimed at preventing further bankruptcies among financial institutions after the collapse of Fortis in 2008.
Capital buffers formed part of the Basel II Accords espoused by the central bank governors from ten countries in 2005. The accords gained even more traction at this year's G20, which saw leaders agree to force banks to raise more capital from the world's stock markets (EurActiv 28/09/09).
But while higher capital should theoretically create a level playing field for banks on the international scene, it also diminishes their ability to lend at a time when the economy is in dire need of cheap funding, warned Marc Stocker, chief economist at BusinessEurope.
"Higher capital requirements at banks will have the net effect of reducing their capacity to lend," Stocker told EurActiv in an interview.
Stocker argued that capital cushions are not a bad idea but could force banks into a low-credit bind if Europe does not assess the impact of other regulatory measures being negotiated and their combined effect on the economy (EurActiv 03/09/09).
In a recession, small and medium-sized companies are the ones driving growth, he says. But in comparison to the US, the venture capital markets that back SMEs and drive innovation are underdeveloped in Europe, he explained.
Looking to the future, Stocker believes Europe's biggest challenge will be to lay down rules on how countries should spread the fiscal burden of collapsing financial institutions.
Europe's major financial players flagged the idea in September (EurActiv 22/09/09) but policymakers have largely danced around the issue since the collapse of Fortis last year, which saw the Belgo-Dutch banking and insurance group merge with French bank BNP Paribas.
Recent European Commission proposals and the EU's report on financial supervision, written by former IMF chief Jacques de Larosière, did not address the idea of burden-sharing because it is the most difficult issue in pan-European financial supervision, in Stocker's view.
Two new committees, the European Systemic Risk Board (ESRB) and the European System of Financial Supervisors (ESFS) have since been created to facilitate a European burden-sharing of sorts. But economists fear these institutions will not act in the European interest and become entrenched in protectionist decision-making.
"It has always been a challenge to ensure that information is flowing at the right time to make sure there is collaboration," says Stocker. The new system will, however, facilitate what he considers to be most important at a time of financial crisis: that "regulators have a forum to talk to each other immediately".