Almost every day, we have to make all sorts of payments: bank savings, house mortgages, home and travel insurances, pensions savings. Banks, fund management companies and insurance companies are often known quite simply as the financial sector. And as the financial sector of today is transnational, it has become an important issue for the EU. Especially since the explosion of the financial crisis.
“The financial sector affects us all – households, companies and authorities – in our every day lives. If you cannot manage payments, borrow money or take out insurance, then the everyday lives of individuals, companies or the economy as a whole, cannot function”, says Hans Bäckström who works with these issues at the Swedish Ministry of Finance during the Swedish EU Presidency. A functioning financial sector is as important as a functioning energy supply. The problem is that the financial sector and the financial markets are vulnerable to all kinds of disruptions, as we have seen in the last year. This is where society has an important role to play.
Professor Clas Bergström from the Stockholm School of Economics believes that instability on the financial markets are caused by declining trust among the banks’ financiers (for example households) and among the actors on the financial market.
“Households are very important. When the trust in banks decline in households, deposits in the bank also decline which means that the banks have access to less capital. When, added to this, trust between banks and other actors in the financial market declines, so that they no longer lend money to one another, then it turns into a downward spiral”, he says.
When the world economy flagged last year, instability on the world’s financial markets led to companies and households finding it difficult to borrow money. The effects of the downward spiral was falling growth, bankruptcies and unemployment as well as a substantial economic downturn.
“International cooperation was not enough”
Many financial actors, such as banks and insurance companies, are today conducting business in many different countries.
According to Hans Bäckström of the Swedish Ministry for Finance, the crisis clearly showed that international cooperation on supervision was not enough in today’s globalised world, where there is free movement of capital and services across borders.
“Above all, there were two major flaws: firstly the lack of any connectivity between company-specific supervision and the overarching analysis of the financial markets and secondly there was inadequate cooperation and coordination between the different national supervisory authorities”, he says.
To address the lack of connectivity between company-specific supervision and the overarching analysis of the financial markets, the EU’s ministers for finance decided to establish a special stability board: the European Systemic Risk Board (ESRB), at their meeting on 20 October earlier this year. The board will collect and analyse information on a market-overarching level, issuing warnings against negative tendencies influencing financial stability.
There will be further bodies established alongside the ESRB to address the second problem; i.e. the lack of coordination between national supervisory bodies. Three European authorities will be established with this in mind (for the banking, insurance and securities sectors respectively) to facilitate coordination between national authorities. They are to develop binding technical standards, work for a uniform application of common regulations, act as mediators in disputes between the supervisory authorities in the Member States, coordinate crisis measures and so forth.
“It is like having good and well-organised fire services”
The most important objective is to reduce the risk of new financial crises occurring but also to be able to act faster and more efficiently should the problem arise despite this. The new structure is meant to supplement, not replace, the work of national supervisory authorities and central banks.
“There will always be ’bubbles’ and other disruptions on the financial markets. The important thing is to discover and address problems before they threaten government finances, welfare and employment”, says Hans Bäckström. “It is like having good and well-organised fire services – even though you can take measures to prevent the risk of fire, there will still be fires now and again. But then you have to be on the spot quickly to put them out!”