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Dr Michael Koetter: 'European financial markets should have centralized supervision'

02 September 2008

The financial world is being haunted by the credit crisis and it looks like the end of that crisis is nowhere in sight yet. One of the causes of the current economic malaise, according to Michael Koetter, lecturer in Economics at the University of Groningen, is the lack of transparency in the financial markets. He is therefore in favour of a centrally organized type of supervision. ‘There is a fundamental lack of trust’.

Many banks and other financial institutions are having a hard time thanks to the crisis. To prevent banks going bust, the central banks – for example the European Central Bank (ECB) – are currently pumping extra money into the economy. Koetter: ‘But the price you pay for this is rising inflation and products like oil, food and energy – goods that are hard to find replacements for – become more expensive. The more money there is in circulation, the more it falls in value. In addition, I think that there is a psychological effect. Intervention by the central banks sends out a negative signal.’ Increasing inflation has in turn a negative effect on, for example, unemployment and the rate of economic growth.

Koetter has observed that there is next to no transparency about the relationships between the state of the financial world, inflation and the effects of these on the man in the street. This is partly due to the fact that the ECB has to tailor its monetary policy to fifteen different countries. This is made even more difficult because the national financial markets are very closely intertwined. ‘There is a close-knit international network of relationships between banks, insurers and investment institutions.’ The national central banks in Europe are not very good at reacting to this. ‘They have to supervise the banks in their own countries, but that’s only a small part of the financial world as a whole. Most national banks, for example, do not take insurers or investment institutions into account.’

Koetter is thus in favour of the European national banks transferring their supervisory duties to a single centralized institution, for example the ECB. This institution would then supervise all sectors of the financial system in Europe. This centralization would make it easier to keep an eye on the financial markets and follow a monetary policy that is well tailored to the complexity of the European economy. Koetter emphasizes that he is not proposing more supervision. ‘I don’t think that would work. However, I do think that we can organize the supervision much better. Supervision should concentrate on making the financial world more transparent.’

A lack of transparency, in his opinion, is one of the causes of the current crisis. ‘When banks lent money in the past, they always checked the risks in detail. They don’t do that anymore because the loans are sold on in packages to third parties. The bank is thus no longer responsible. Selling on loans is not a problem in itself, but the purchaser of those loans must have the correct information about the risks. That did not happen in the past. This has resulted in the fundamental lack of trust prevalent today. And trust is the core of every capitalist system.’ More transparency would therefore ensure that purchasers would know where they stand – so that trust can return. According to Koetter, centralization and more transparency are desperately needed to make our economic system healthy again. Sadly these measures would not offer any solace for the current crisis. ‘Introducing centralization would take decades. That’s why it’s so important to start as soon as possible.’

Curriculum Vitae

Michael Koetter (Germany, 1974) studied Economics in Maastricht and at the Stern School of Business (NYU). After graduating he worked for the Boston Consulting Group. In 2005 he gained his PhD at Utrecht with a thesis on the efficiency of German banks. He then worked for the Deutsche Bundesbank and in 2006 Michael became a lecturer in the department of International Economics & Business of the Faculty of Economics. His specialisms are banking and finance, mergers and failures, efficiency and growth.

Information

Dr Michael Koetter, tel. (050)363 36 33 (work) or 06-19974774.

Last modified:30 November 2017 3.48 p.m.
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