23 October 2012

Bank of Finland Governor Erkki Liikanen: On the structural reforms of banking after the crisis

Liikanen focuses in his speech on changes in banking in the run-up to the crisis, public reaction to the crisis and the need to rebuild trust, the regulatory response to the crisis, and the proposals of the High-level Expert Group.

Remaining concerns

Many observers have noted that major systemic risks can remain in the various parts of the banking system, even if these are separated from one another. This is a valid concern even though separation by definition reduces interconnectedness as a key source of systemic risk.

The possibility to further review capital requirements and limits on risk concentrations and counterparty exposures in trading activities, as discussed in the other recommendations, are the means to further containing systemic risks. It is also important that the development of capital surcharges for systemically important institutions as well as macro-prudential tools such as caps on loan to value ratios (LTVs) is continued.

An obvious danger lies in the possibility that structural measures, together with higher capital and liquidity requirements, may drive an increasing part of banking to the shadow banking sector. If this implies that market expectations of implicit public guarantees shift to the less regulated shadow banking sector, then the fundamental problem has not been solved.  This is a matter that needs further consideration and needs to be constantly monitored. Proactive measures may need to be taken.

The role of banks in financing the European economy

Banks have a pivotal role in providing finance to households and firms. It is particularly so in Europe where the banks’ role in corporate finance has traditionally been large. The banks’ role in corporate finance is central especially for small and medium sized enterprises (SMEs). The continuous and smooth supply of banking services to SMEs is also essential to large corporations because SMEs are often subcontractors to them.

It is of utmost importance that regulatory reforms as a whole support and strengthen the banking sector’s ability to continue to provide these socially vital financial services efficiently and in a stable manner.

The reputation of banks and the public trust that they rely on has been severely dented during the latest financial crisis. This has hurt not only banks themselves but also the economies and societies of Europe and the whole Western world.

Trust and public acceptance must now be restored, and the proposals which the High-level Expert Group has submitted for the consideration of the EU Commission will contribute to this end. Achieving this important aim will benefit the banking industry and our societies at large. 

Full speech

CNBC interview with Liikanen © CNBC

© Suomen Pankki - Finlands Bank