9.9.

Regulation.Regulation.

The Crisis and AfterThe Crisis and After

11

Regulation since the 80sRegulation since the 80s

A Recap:A Recap:

The The outburst of globalization in the 80s and outburst of globalization in the 80s and 90s90s. International trade and communications . International trade and communications dramatically increase.dramatically increase.

Relevant changes in public regulation: Relevant changes in public regulation: Privatization, Deregulation, Simplification, Privatization, Deregulation, Simplification, Liberalization,Liberalization, end of general economic end of general economic planningplanning. An almost opposite trend compared . An almost opposite trend compared to the period 30s-70s.to the period 30s-70s.

22

However, public regulation remainsHowever, public regulation remains..

Privatization needs Privatization needs public control on privatized public control on privatized industriesindustries..

Deregulations are flanked by forms of Deregulations are flanked by forms of re-regulationre-regulation (for instance, in the sector of air transport).(for instance, in the sector of air transport).

Simplifications have limited effects on legislation Simplifications have limited effects on legislation and and administrativeadministrative procedures. procedures.

General economic planning disappears, but different General economic planning disappears, but different forms of forms of sectoral programs and planssectoral programs and plans develop (e.g., develop (e.g., urban and commercial planning, energy, transport urban and commercial planning, energy, transport and health planning).and health planning).

33

Liberalizations request new rules (‘asymmetric Liberalizations request new rules (‘asymmetric public measures’): “public measures’): “freer markets, more freer markets, more rulesrules”.”.

During the last decade of the 20th century During the last decade of the 20th century antitrust laws antitrust laws are adopted in many countries.are adopted in many countries.

Lex mercatoriaLex mercatoria coexists with a coexists with a huge huge supranational public regulationsupranational public regulation (see EC law (see EC law and WTO agreements).and WTO agreements).

A continuity in public regulation is evident.A continuity in public regulation is evident.

44

The CrisisThe Crisis

CausesCauses

1.1. Pro-free market arguments: Pro-free market arguments: free market works well. The crisis is an accident. free market works well. The crisis is an accident.

It was a flaw of the US Government which supported It was a flaw of the US Government which supported too much house ownership with excessive mortgages.too much house ownership with excessive mortgages.

2.2. In reality, the causes are more complex.In reality, the causes are more complex. Housing: incentives for the purchase of houses; Housing: incentives for the purchase of houses;

subprime mortgages; lack of payments; failure of subprime mortgages; lack of payments; failure of mortgages originators; distribution of mortgages and mortgages originators; distribution of mortgages and securitisation; failures of distributors and investors. securitisation; failures of distributors and investors.

55

Excessive deregulation of financial markets:Excessive deregulation of financial markets:

Glass-Steagall Act provisions on the separation Glass-Steagall Act provisions on the separation between investment banks and depositary banks between investment banks and depositary banks were repealed in 1999.were repealed in 1999.

Weak control on securities and rating agencies. Weak control on securities and rating agencies.

66

• New financial products were subject to New financial products were subject to “shaky” regulations.“shaky” regulations.

• SIFI (Systemic Importance Financial SIFI (Systemic Importance Financial Institutions) were out of control. Being sure Institutions) were out of control. Being sure not to fail (“too big to fail”), they had an not to fail (“too big to fail”), they had an incentive to assume excessive risks. incentive to assume excessive risks.

Excessive deregulation of labor market.Excessive deregulation of labor market.

Low incomes, weak demand.Low incomes, weak demand.

77

First responsesFirst responses

Excessive regulations and public interventions: Excessive regulations and public interventions: •RescuesRescues•RecapitalizationsRecapitalizations•NationalizationsNationalizations

Paradoxically more evident in Countries with long-Paradoxically more evident in Countries with long-standing free market traditions (UK, Ireland, U.S.)standing free market traditions (UK, Ireland, U.S.)

It would have been better to avoid excessive It would have been better to avoid excessive deregulation in order to lessen the impact of the crisis. deregulation in order to lessen the impact of the crisis.

88

Present remediesPresent remedies

1. 1. As to financial markets regulationAs to financial markets regulationBasel III: new prerequisites for banks’ capital and Basel III: new prerequisites for banks’ capital and liquidity assets.liquidity assets.Reduction of incentives that led to excessive Reduction of incentives that led to excessive financial risks (stock options of bank managers; role financial risks (stock options of bank managers; role of rating agencies).of rating agencies).FSB’s recommendations. Inter alia, new rules on FSB’s recommendations. Inter alia, new rules on SIFI: no longer public capitals for rescuing these SIFI: no longer public capitals for rescuing these institutions; only private financial support. Strong institutions; only private financial support. Strong supervision.supervision.

99

The new framework of European Financial The new framework of European Financial Supervision. The three Authorities and the European Supervision. The three Authorities and the European Systemic Risk Board (2011). ECB direct supervision Systemic Risk Board (2011). ECB direct supervision over the major banks.over the major banks.

U.S. : Troubled Assets Relief Program (2008); Dodd- U.S. : Troubled Assets Relief Program (2008); Dodd- Frank Act (2010). FED supervision enhanced; a new Frank Act (2010). FED supervision enhanced; a new agency for the protection of securities consumersagency for the protection of securities consumers ..

2. 2. As to the overall regulationAs to the overall regulation

President Obama’s Executive Order of January 2011. President Obama’s Executive Order of January 2011. the need for a balanced regulation. Regulation must the need for a balanced regulation. Regulation must protect public health, welfare, safety and the protect public health, welfare, safety and the environment, while promoting economic growth environment, while promoting economic growth and competitiveness. The “proper balance” between and competitiveness. The “proper balance” between free market and the public interest”.free market and the public interest”. 1010

All this must not entail redundant regulation. All this must not entail redundant regulation. Enterprises suffer from excessive regulatory and Enterprises suffer from excessive regulatory and administrative burdens. Heavy regulation is not needed. administrative burdens. Heavy regulation is not needed. A better regulation is necessary. A regulation based on A better regulation is necessary. A regulation based on quality, transparency, and the balance between quality, transparency, and the balance between economic and social interests.economic and social interests.

1111

Another aspect of the financial crisisThe crisis of the States and the public finance.The crisis of sovereign debts.The Greek case.

RemediesEuropean Financial Stability Facility: a fund to finance Eurozone States in crisis.European Stability Mechanism after 2013.Enhancement of the Stability and Growth Pact (with infringement procedure for excessive deficit).

At international Level:G20IMFFSB