TBTF strategy: Differences between US and Europe

Morris Goldstein and Nicolas Véron write this superb paper on the topic. It gives you an excellent flavor on many issues wrt financial sector and the differences policies in US and Europe.

Overall, US has been more anti-TBTF than Europe. Europe has promoted these big banks as national champions. As Europe remains a bank based system with universal banking, the banks have been accorded a more privileged role in Europe. Following this approach, US has been more aggressive in monitoring TBTF post-crisis whereas there has been hardly anything from Europe barring some changes in UK.

The paper says there are differences between Europe and US:

Financial Industry Structures: In the European Union banks play a much bigger role in financial intermediation than in the United States. This contributes to different attitudes toward regulatory reform. US banks accounted for only 24 percent of credit intermediation in the country, versus 53 percent in Japan and as much as 74 percent in the euro area. Another major  tructural difference between the United States and the European Union is the higher degree of internationalization of European banks, most of which takes place within the European Union.

Political Systems: A more intangible but no less important factor of transatlantic policy differences is the difference in political systems, which leads to strikingly different decision-making processes and to different allocations of priorities. In most EU countries, the parliamentary nature of the regime means that the executive and legislative branches are closely aligned, while in the United States, divergence between Congress and the Executive branch is typically more frequent. EU countries also vary widely in the respective strengths of the executive and legislative branches, with a rule of thumb that parliaments are generally stronger in Northern than Southern Europe.

That said, numerous examples and anecdotes support the proposition that the financial industry is at least as influential in shaping policy in many parts of Europe as it is in the United States. In Spain and Germany, local politicians sit on savings banks’ boards, and regions have direct equity ownership in the Landesbanks. In France, most senior executives in the banking industry have a civil service background, and conversely many prominent civil servants expect to move to banks in their later working years, which may influence their behavior and priorities. In Italy and Belgium, local communities play a significant role in the governance of key financial institutions. In the United Kingdom, city financiers actively engage political leaders in various informal venues.

Interesting bit on Finance and Politics in Europe. There is a revolving door mechanism there as well with people from govt moving into finance and vice-versa.

The authors then discuss the whole TBTF debate and its pros and cons. They also discuss the various proposals to address TBTF.

Great paper from the duo. Must read.

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