The financial crisis has led to a resurgence of nationalist agendas in financial governance – nowhere more so than in the most integrated multinational financial system, the euro zone.
In the fall of 2008, individual member states intervened to protect “their” financial system from a meltdown. In the protracted euro zone crisis that has evolved since, they have succumbed to the blame game: representatives from financially stronger countries are pointing fingers at bad banks and weak regulators on the other side of otherwise-dismantled national borders.
This approach assumes a world of independent financial markets governed by independent regulators, a world without free capital flows or a common currency, that is, a world in which the current crisis could not have happened.
Then in June, as the bickering over national interests continued, the ECB published its latest Financial Stability Review. Hidden in the back of the report is a network analysis of interbank relations in Europe, which is the chart shown above. Although it is only a simulation based on proxy data, the image is telling.
While interbank relations tend to be particularly dense within countries, they also are pretty strong between countries – and this is years into a crisis that was managed so that some banks would have the time to shed their ties to their most vulnerable counterparties.
So which banking sector is Spain’s? Only Spain’s, or also Germany’s and the U.K.’s? Who failed to monitor and supervise these markets, regulators in the home country or the host country?
Who should be responsible for the costs of the crisis, the taxpayers in the country where the crisis manifested itself, or perhaps also the taxpayers in the home country of the foreign parent banks whose shareholders benefited mightily from financial expansion during the boom years?
Looking at the chart, one may be tempted to suggest that Germany is unlikely to allow Spain to fail. And indeed Chancellor Merkel has recently thrown her support behind that country. Yet, thinking that Greece could easily be cut loose, given the weakness of ties between Greek and foreign banks today, might be misleading. The ECB chart only depicts the existence of inter-bank lending relations. It says nothing about their size, the terms on which the loans were made between different bank pairs, what collateral was used, or who insured them.
This raises profound questions about the governance of contemporary financial markets. Shouldn’t supervisors and regulators know more about the legal structure of these inter-bank relations? And how would an integrated European supervisor monitor euro zone banks without a clearer picture of their structure than a probability chart based on proxy data can possibly render?