Lax regulation only played a “permissive role” in contributing to global financial instability, according to a paper recently published by the Centre for European Policy Studies (CEPS) and prepared by members of Italian business association Assonime.
The business representatives argue that there is no need to “fundamentally change” the regulatory architecture, because banking is already covered by “prudential regulation”. They also advise against extending prudential regulation beyond the banking system.
The paper advocates scrapping the Basel II rules on capital requirements and replacing these with a “flat capital requirement,” calculated by referring to total assets.
The authors lay the blame for the current bleak economic outlook squarely at the feet of “unstable macroeconomic policies” followed by the governments and central banks of the “major economies and currency areas of the world”.
The paper is critical of the euro zone for lacking the necessary “arsenal of crisis management tools” to fight the economic turmoil.
It argues that because the European Central Bank lacks “the backing of a fiscal authority,” it faces avoidable challenges in stimulating the economy. They call for the creation of a “European fund”, which would issue ‘Eurobonds’ to give European institutions the necessary fiscal muscle to turn the tide on the recession.
The paper also calls for “new monetary arrangements” at a global level to allow for the correction of “external payment imbalances”. This change would require the main emerging economies to take “their proper place” alongside industrialised countries in the world’s governance institutions.
In Europe, the authors call for a drastic simplification of the regulatory structure in order to concentrate not only on rule-making, but implementation too.