On November 10, 2016 the Hazelhoff Centre for Financial Law organised a symposium on “Ethics and Moral Hazard in the Banking Union”. The European resolution mechanism and the possible European deposit insurance scheme aim to create strong safety nets for the Eurozone financial system. At the same time – and perhaps paradoxically – it can be argued that these safety nets could lead to greater risk taking, and thus to greater instability. Various parties, such as bank managers, shareholders, depositors and financial counterparties might put their trust in Member States bailing them out. What’s more, Member States might think that Europe will bail out their national banking systems. At this symposium, leading experts in the field discussed the possible relationship between moral hazard and the European Banking Union. The event was chaired by Professor Matthias Haentjens (Leiden University) and Dr. Gijsbert ter Kuile (European Central Bank).
Bank management and risk-taking: psychology & wrong incentives
The first two speakers focused on the issue of risk-taking by the bank management. The speakers were introduced by Matthias Haentjens, who gave an introduction on the notion of moral hazard and on several regulatory measures intended to prevent distortions. After this introduction it was up to Frank Elderson, Executive Director of the Dutch Central Bank (DNB), to clarify his standpoint. Mr Elderson began with a conclusion: “as supervisors we cannot prevent moral hazard by financial institutions, but we can diminish the likelihood of bank insolvencies.” He focused on the new type of supervision by DNB which partly consists of taking psychological assessments at bank management level. He explained how DNB’s supervision is now better matched to the psychological pitfalls which lie at the root of irrational behaviour by the bank management. The second speaker at the symposium was Petra van Hoeken, Chief Risk Officer at Rabobank. She argued that a resolution fund for banks does not necessarily create an unintended incentive to take higher risks. During her presentation she emphasised that moral empowerment is a key factor in creating a client-oriented business with an open mind towards regulatory compliance.
Bicycle helmets and balloons
After the break Gijsbert ter Kuile argued that taking risks is inherent in running a business. Interestingly, research has shown that a person blowing up a balloon who is wearing a bicycle helmet will take more risk that the balloon will burst than a person not wearing a helmet. According to Gijsbert ter Kuile this conclusion is also relevant in discussions about moral hazard in the financial sector as it suggests that safety nets may not always prevent people from taking excessive risks. Jan Reinder de Carpentier of the Single Resolution Board then went on to discuss the second pillar of the European Banking Union: the Single Resolution Mechanism. He explained that the Single Resolution Board is an agency that has recently been established in Brussels. One of its tasks is to take decisions on the resolution of failing banks in the Euro Area. The European bank resolution rules aim to ensure that shareholders and creditors of a failing bank bear the first losses. The Single Resolution Fund can be used in the application of the resolution tools and powers, but only under strict conditions. Dr. Karl-Philipp Wojcik (European Commission) argued that risk is not a bad thing as such. The problem is excessive risk taking and moral hazard. Whether the vicious circle between banks and Member States is really broken and banks are no longer rescued with public funds inter alia depends on the effectiveness of the resolution tool that aims to ensure that shareholders and creditors bear the costs of a bank failure, which is the bail-in tool, as well as the establishment and operation of the Single Resolution Fund.
The symposium was organised with support from EURO-CEFG.