Preparation, planning and prevention are critical to every Crisis Management plan. Our experience includes the skills and techniques required to assess, understand, and cope with any financial situation, starting with the moment an incident first occurs to the point that recovery procedures can begin.
Prior to the crisis, the economic prospects of several countries were drastically overestimated. When these expectations had to be revised, doubts increasingly arose as to the sustainability of their debts and their ability to repay the loans they had been granted. And although these doubts initially centred on the creditworthiness of households, enterprises and, in some cases, governments, the banks, too, quickly attracted attention given their role as financial intermediary.
After all, banks’ balance sheets are always a reflection of their respective economies. Another factor was that not all national banking systems were prepared for a crisis to begin with. And because of the systemic dangers involved, the risks of the banking system became the risks of the government that had to come to the rescue. Ireland, for example, had a balanced budget before the financial crisis. During the crisis, the deficit then grew to stand for a time at more than 30% of economic output. At the same time, however, problems in public finances also impose a strain on the banking sector. For instance, the Greek haircut tore gaping holes in the balance sheets of Greece’s banks.
The banking union has to ease the pressure on the single monetary policy – but in terms of practical implementation, conflicts of interest between banking supervision and monetary policy persist. That is why both functions have to be strictly segregated. Though feasible, such segregation would be difficult to realise – difficult from an organisational perspective as well as legally. Another challenge is that, on the one hand, supervisory decisions must at least be subject to indirect parliamentary control; but on the other hand, the central banks’ independence must not be undermined. And in connection with the legitimisation of supervisory decisions, there is the question of voting modalities.
When this feedback effect threatens the financial stability of the entire monetary union, the result can also be to burden taxpayers in other countries as well as the single monetary policy – just think of the rescue packages or the non-standard monetary policy measures implemented by the Eurosystem. These risks that can spread from the financial system to monetary union were certainly underestimated before the crisis.
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