NBR better off fierce superviser than tough policeman

This week NBR has published on its site a proposal for a new rule that would directly intervene in the credit market. It is not the first such rule and it will not be the last. Immediately it got the attention of the press and as far as I understood consumers were not too happy either. The main reason cited of course it was that it would kill the credit market.
First of all the credit market for households and companies it has been pretty much dead since October 2008. Second, where is this demand for credit that gets squashed by this proposal if it ever becomes a law? Third, after the events of the last two years it should have been expected.
I am a liberal, or borderline libertarian, and will remain one until something better comes along. Naturally I oppose such interference from authorities with what was supposed to be a free market. I was against MRR as I think their high level has actually pushed banks to borrow more from overseas than would have otherwise done and thus increase the CA deficit. I was against higher VAT especially during a crisis. Pretty much I like the government to take as few decisions for me as possible. As part of the deal if I screw up I will pay. This is the “contract” that I have with the government and this was the “contract” that banks had with the government until 2008.
Is there a case for such intervention in a market? If one really wants to do it then it can hide behind the characteristics of the banking sector, in that that for some time now it does not resemble a free market. Under such circumstances an interventionist would say that there is need for such a rule to correct the market imperfection. As I said before Mr. Market was delivering bankruptcy petitions left and right in 2008 but banks ran and hid under the big protective umbrella of the state. You see, the market was doing its job but something got in the way.
In 2008 the financial sector took advantage of its market dominance position and forced the government into bailing it out. This has happened in a large scale at the global level and to some extent (few banks) in Romania. Putting it in terms of the contract the banking sector did not hold up its part of the deal. When it came to paying the “bill” of overindulgence banking sector pleaded “handicapped by obesity” or “to big to fail”.
Three years later the governments around the world believe the time has come for banks to pay. Depending on the solution public is or is not on the government’s side. In this case clearly is not. Nevertheless, it seems that governments know better the free market dictum: There is no such thing as a free lunch.
In Romania this “payback” takes the form of the proposal from NBR to overcharge for some specific types of credit which they deem dangerous based on historical data. The NBR does not trust that banks will manage the credit risk. Furthermore the proposal is not for today’s economic conditions, it is supposed to work for the good times when banks, like any other profit making institution, will do anything to increase their assets size. I
Besides opposing it at the philosophical level I have some other practical problems with the proposal.
A small one is that it does not make sense as part of the overall government strategy to push Romania out of recession. I do not agree with the first house (Prima Casa) program (I have already written in the Romanian press about this) but the NBR proposal will be killing any hope that that program will ever work. . At least the two institutions should speak with the same voice. You cannot have the government implicitly subsidizing the housing market and the NBR proposal to limit its source of funding.
Another reason is that I do not think it will work in the medium to long term. Such measures never work. The MRR did not stop credit creation and this proposal will not stop it either. As long as the incentive for banks are as high as they are today, remuneration for volume not quality, ways will be found to avoid the regulation.
Another reason is the different treatment of credit in different currencies. It does not make sense to treat the risk differently based on currencies in the end if there will be a bubble due to credit does not matter which currency is denominated in as the aftermath will be pretty much the same. The best example is US. Furthermore, there is no guarantee that the EURRON or EURUSD will not be more volatile in the future than RONCHF.
Another reason is that in the end the higher borrowing cost will still be borne by the consumer and will increase bank profitability. The Romanian consumer, household and companies, will not move to the next stage of development without credit. The point is that instead of arbitrarily increasing costs rather asks banks to inform about the risks and offer protection for consumers. This should work for foreign currency risks and interest rate.
This final point brings me to where I think the role of the Central Bank, here NBR, should be in the economy. The NBR should step back and reclaim the role of the observer. It should set up the banking regulation to allow for competition among banks and to sanction any clear or implicit form of collusion. It should ensure that the sector is flexible and dynamic. When a bank fails, either because it cannot keep up with competition or because it has taken the wrong decisions, it is much better for everyone that others will take its place. Finally it should make sure, and I do not know how to emphasize this better, that inside the banks procedures and proper checks are in place. It should not tell banks how to do their job but it should make sure that within the bank individuals cannot take excessive risk without anyone knowing or that they cannot front-run clients, cannot abuse information etc.
In the relationship between the banking sector and the clients more regulation does not help it just makes the banks a bit less profitable in the short term but not in the long run. To protect and help the consumer the NBR should ensure that banks offer all information, offer tools to minimize the risk, and that information from clients is not used to front-run or manipulate the markets.
In this way the NBR does what is supposed to do, work for the public as a public institution. And next time please work with the market and do not allow an industry to waste our tax money.


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