European Central Bank chief Mario Draghi has spoken for 45 minutes at today's Bank of England Open Forum, however, the speech did not include any hints at fresh stimulus measures in the euro area.
Markets can be defined by the instruments traded on them - oil, gold, etc., he started. But they’re also defined by the people who use them. And you need appropriate governance to prevent misconduct - particularly when markets cross borders.
Global trade is more important and interconnected than ever, ECB chief
said, with technology means distance between buyers and sellers is no
longer significant. The cost of moving capital between borders is near zero now.
Draghi continued:
"During the crisis, the market for securitised assets was all but destroyed by a collapse of confidence. Lack of oversight allowed excesses to be committed and market abuse to take place. Securities that were previously deemed safe, certainly with some measure of complacency and too much blind confidence, turned out to be very unsafe indeed, and imparted significant losses on their holders."
Efforts to clean up the asset-backed securities market after the 2008 collapse caused problems. There was "too much opacity" about what had been tied into those products, a threatening breakdown of confidence in the integrity of those who packaged and sold them.
"And the immediate temptation of regulators was to impose punishing capital charges on holdings of asset-backed securities, independent of their individual characteristics, mixing the wheat with the chaff."
Urging to found a proper banking union in the euro area might be the most important thing from his speech. The union should include a single deposit insurance scheme to protect savers when their bank fails, Draghi said.
"With a single currency the benefits of a single market are commensurately higher. But the costs of the market fragmenting are commensurately higher, too. For countries that share a single currency and a single market, therefore, the case is clear – I would say almost undeniable – for stronger common governance and deeper institutional integration."
"Today, that means as a priority completing banking union: a fully-equipped single resolution mechanism and a uniform deposit insurance scheme."
This is a disturbing issue in the eurozone - German taxpayers may be concerned about potentially compensating Greek savers. But Draghi suggests it’s simply too risky to not have such guarantees in place when the next crisis arrives.
He concludes that all markets need proper governance to be really free, especially in a shared currency union:
"Those countries have entered into an irrevocable union, built on the fertile ground of Europe’s common values and history, but also on deep mutual vulnerability. For those countries it is even more important to complete economic and monetary union in all its aspects."
Although the euro area has some banking union, with the ECB responsible for banking supervisions, it doesn’t yet have a uniform deposit insurance scheme. This is still controlled by national governments.
Mario Draghi’s main message is that politicians need to pool more sovereignty, to make sure their financial markets work better.
