ECMI Commentaries

This is not the first international banking crisis the world has seen. The previous ones occurred without credit default swaps, special investment vehicles, or even credit ratings. If crises keep repeating themselves, it seems reasonable to argue that policy-makers need to carefully consider what they are doing and not just ‘double-up’ by superficially reacting to the specific features of today’s crisis.

The global financial crisis has put an end to the cosy environment in which the financial industry had operated up to now. In keeping with their G-20 commitment, the European Commission has published draft rules for hedge funds, which bring all non-harmonised funds under the EU’s regulatory umbrella, largely reproducing the rules of existing directives, and adding some new elements in response to the crisis.

Short selling is a technique that allows profiting from falling stock prices. In the autumn of 2008 several countries implemented a partial or complete ban on short selling. In this new commentary, Piero Cinquegrana, Associate Research Fellow at ECMI, reviews those decisions and attempts to answer three questions: (1) Is short selling legitimate? (2) What is the difference between covered and naked short selling? (3) Is short selling consistently defined across jurisdictions?

During the decade preceding the eruption of the financial crisis in August 2007, rating agencies and market participants, gripped by euphoria, systematically underestimated the risk inherent in a wide range of financial assets. Today the panic that has gripped them leads to an equally distorted view of the risks involved. Private debt is dumped in favour of government debt of just a few countries. How these countries are selected is unclear.

ECMI Secretary General Karel Lannoo looks at the large differences that remain in the risk management of European banks and in the way bank regulation is implemented. Drawing on comparisons between Spanish banks and their counterparts elsewhere in Europe, he concludes that more integrated European oversight, if it happens, will need to be elaborated very carefully and accurately. This means a watertight structure, an accountable management and a clear division of responsibilities.

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By Karel Lannoo

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By Piero Cinquegrana.

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by Karel Lannoo

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The unfolding crisis in Europe’s financial markets is presenting the EU’s
regulatory and supervisory set-up with its first big test, revealing worrying differences in responses to stress, flaws in the enforcement of rules and gaps in the supervisory framework. Although the evidence is limited so far, Karel Lannoo makes some clear-cut policy recommendations, which need to be urgently ddressed.