Ebook Credit Availability During Financial Crisis: Which Role for External Agents?
The recent crisis of the global financial system has been generated by a multiplicity of factors, among which the failure of national and international regulation systems. In a recent report, released in March 2009, the IMF argued that the main culprit was deficient regulation of the financial system, together with a failure of market discipline.
During the recent G7 meeting held in Rome on February 2009, participants agreed on enhancing liquidity and funding through traditional and newly created instruments. Moreover, they suggested to strengthen the capital base according to the assessment of the competent authority evaluating individual financial institutions. In a joint declaration, the G7 called for urgent reforms of the international financial system.
There is a general consensus on a set of common rules to ensure more transparency on financial markets. A commonly shared view is that monitoring authorities and international financial institutions should work together to provide a revision of the rule of conduct of rating agencies. Until now, the most important credit rating agencies adopted a voluntary IOSCO (International Organization of Securities Commissions) code of conduct.
According to Charlie McCreevy, the European Commissioner for Internal Market and Services, this volitional set of rules is a “toothless tiger”. In addition, this may lead to conflicts of interest as the issuers themselves pay the credit rating agencies to be evaluated and rated. With special reference to the European Union, the principle of the home country control prescribes that the banking monitoring system must be regulated and supervised at a country level, even in presence of a growing financial integration.
In an open letter addressed to the European leaders and appeared on VoxEU.org, a CEPR policy portal, several economists affirmed that European-level actions have to supplement and coordinate the national ones on recapitalisation of the banking sector. They argue that such disposals are of fundamental importance to both help solve the present crisis and prevent the occurrence of future ones. These operations should be carried out by an institution which acts as a Lender of Last Resort.
In Europe the natural Lender of Last Resort should be the ECB, but the Protocol of ESCB/ECB, art. 25, chapter V, allows it only to offer non-binding advice regarding the prudential supervision of credit institutions and the stability of the financial system. That being so, a reform of the economic-institutional system in Europe have to take into account the strong connection which exists among the role of the Lender of Last Resort, the monetary policy and the vigilance activity.
The aim of this paper is to demonstrate that trusted financial institutions can solve, or at least reduce, possible asymmetries of information between lenders and borrowers. This plays a fundamental role especially in periods of crisis, where trust between economic actors has to be re-established and where the access to credit for investors has to be facilitated. On a pure theoretical ground, we are interested in situations where external agents facilitate the access to bank financing for creditworthy borrowers. On a more policy-oriented ground, we identify the conditions that financial institutions should fulfill to qualify as external agents and suggest that the European Investment Bank Group is so far the best candidate.
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