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The sharp adjustment recorded in a number of financial market segments over the last few months somewhat reflects both worldwide and EU factors. Rising uncertainty on world growth prospects, the commodity price drops, persistent low levels of inflation and geopolitical risks may all have played a role. Italian and other European banks were hit hard, due also to concerns on asset quality and regulatory uncertainty, the latter in part, if not exclusively, related to the implementation of the Bank Recovery and Resolution Directive (BRRD), the new European bank resolution framework fully in place since the start of this year.
In the financial sector there are certainly risks of moral hazard as well as abuses and frauds, which the authorities, including banking supervisors, must prevent as effectively as possible. But prevention is not always possible and in periods of poor macroeconomic conditions risks of malpractice inevitably rise. This is why it is needed an overall resilient system, with banks well capitalised, better managed and more transparent, costumers with higher levels of financial education and authorities with severe sanctioning powers. “This notwithstanding, we have learned that market failures are not infrequent, and information asymmetries and expectations' coordination problems may trigger sudden and possibly long waves of euphoria or panic.” he said.
It is by now clear that markets are not always self-equilibrating and when they fail the consequences may be rather serious. On the other hand, markets should operate as much as possible without their force being bridled. There is no foolproof formula for striking this balance. Clear rules, impartially applied, are essential, but so is the ability to make sound and timely decisions in the light of circumstances. In the case of banks, this calls for the possibility to recur to public backstops, and in a Union like ours also a supranational one, in the presence of systemic risks and risks of contagion. This is something that still differentiates, contrary to a new apparently established belief, banks from enterprises operating in different industrial sectors.
Before the start of the current debate on the consequences of the new regulatory set-up, substantial observance of the rules on market protection and competition remain indispensable. However, in assessing the public role in the prevention and resolution of crises, and not only financial crises, Mr. Visco believes that greater consideration should be given to the characteristics that distinguish policies designed to activate market mechanisms from state aid that distorts competition.