Managing the Financial Crises: The Role of The ECB


Introduction of Speech Highlights

Today, the business environment is going to be more competitive and difficult for organizations. Organizations are exerting their high level of efforts in order to cope with changing business environment. Banking environment is needs an enterprise wide, robust plan in order to deal with unexpected financial crises. Organization brand and reputation, as well as the loyalty and trust of stakeholders, are entire crucial factors in the background of financial and crises management. At the help, leaders play a strategic role sustainability of an organization in order to contribute tangible deliverable via advance preparation, comprising financial, security and safety initiatives, talent management, solid communication plans, and leadership development in order to support crises management[1].

In this scenario of finical crises, UK banking industry needs an effective planning and monitoring activities in order to improve its performance to the great extent. The reason is that global competition is vigorous and business operations are going to more globalization. On the other hand, exceptional measure of European Central Bank (ECB) should not distract from basic reasons of the financial crises and the adjustments required in the structural, fiscal, and financial domains[2]. However, recovery from economic recession has been gradual and has altered the banking environment. The banking industry took a key hit, and the consequence has been enhanced regulation, number of acquisitions and mergers, and stricter lending policies that have left the banking landscape forever changed. After riding out the huge storm, the banking industry today is cautiously optimistic. Whether leaders regularly to be risk averse, they are also helping and strengthening their balance sheets by creating capital, thereby developing available funds in order to loan to potential borrowers[3] . Owners are in a position to take benefit of historically fewer interest rates and create relationship with competitive banks that want to earn more their business[4]. Further, there is a need to reinforce the framework of economic governance at the European Level.

In relation to background information regarding this speech, the basic objective of this paper is to critically analyze the highlight of speech. The viability of speech highlights can be checked out by analyzing the authenticity and feasibility of various sections of speech.  Further this paper is aimed to shed some critical light over highlights of various parts indicated in speech. Moreover, author will also comment on the viability of various provided information within various part of speech. Finally, findings of the paper are directed to overview the usability and importance of information delivered by the speech in the context of current UK business environment and financial crises of banking industry.

Description of Speech Highlights

This speech is all about managing financial crises and the role of the ECB. The basic aim of this speech highlight is to describe the response of ECB to the sovereign debt and financial crises in terms of guiding and measuring principles.  Further, speech shows that the role of ECB is not appropriate in order to settle the effective banking in the Europe. This speech provides lessons from past and future risks as well as response of ECB to the sovereign and debt crises. In addition, speech pushed the predominant message of ECB that the contingency steps taken by the organization were not going to resolve the financial crises. The exceptional measures of ECB should not disturb from core causes of the financial crunch and the adjustments required in financial, fiscal and structural domains[5]. This speech also shows that ECB has implemented the strict monetary pressures like reduction in interest rates. However, findings of this speech highlight the some issues faced by UK banking industry.

Further, the aim of this speech is to describe the central observation about the period before crises that most nations did not do sufficient in order to make resilience in front of adverse financial crises. For instance, fiscal balances in UK improved with the passage of time between the introductions of the Euro and begin of the financial crises this improvement was driven to a great extent by very positive cyclical conditions[6].

This speech also shows that ECB has taken a more active role in mitigating economic and financial crises in the era of euro, which has been completely consistent with its mandate. The ECB is one of the significant actors in sovereign debt crises and financial crises[7]. Main policy rates’ reduction has served to counteract acute risks of downside in order to price stability. Various non-standard actions have spoken impairments in order to monetary transmission channels, so essential changes in policy rates when greatly perturbed and dysfunctional market conditions hindered their effectiveness6.

As the exceptional measures of ECB should not distract from the basic reasons of crises, in the EU the institutional architecture has to make sure that member countries live up to their responsibility for reinstating fiscal competitiveness and sustainability and for applying effective financial supervision. It is critical in order to clearly separate the responsibilities of central bank from other policy domains like financial stability and fiscal sustainability[8]. The desirability and viability of a finance oriented growth regime is first measured against the historical record regarding several alternative regimes that have been projected as successors to Fordism[9]. The speech highlights have covered some critical characteristics of UK banking industry, which are required to be considered by the nation’s government before inducing strategic reforms within UK banking industry in the most efficient and effective manner. The speech highlight aims to show a detailed description of various effective measures for inducing various structural and non-structural financial reforms with UK banking sector.

This speech highlights also shows the efforts to reinforce the framework of economic governance at the European level are critical. In relation to this, policy makers of Europe have made crucial progress previously. The new procedures of Macroeconomic Imbalances constitutes a valid mechanism requiring UK government in order to adopt competitiveness- tackle potential sources and increasing policies of financial instability in their domestic economies. The development of the European Systemic Risk Board and the European Supervisory Authorities has led to more cooperation in macro and microeconomic supervision with the European Union that is commensurate to its increased financial and economic integration[10].

In addition, the development of firewalls in the shape of the European Stability Mechanism and European Financial Stability Facility will contribute in order to isolating the euro area on broader level from assistance linked to comprehensive and strong conditionality, these mechanisms should also  award recipient nations extra time in order to overcome structural flaws in their typical economic sectors.  The some clear and typical aims of the speech highlight including the reduction in the banking system’s sensitivity with various global economic events such as global financial crises, making the banking system’s payment of entire the banking initiatives more efficient and effective, and attracting investors to increase their savings with operating of various of different banking companies within the nation and so on. Further, the speech highlights also provides systematic and effective analysis of finance sectors and UK banking. In this context, speech highlights is exploring various types of information including throws light on the recommendation of the commission in order to induce financial stability in the UK.  In this portion, speech highlights have explored the conditions related to the financial stability of the organization working in the country. In this portion, speech also presents the some vital issues in relation to country’s existing financial strength and some critical measures in order to address these issues[11].

Analysis and Comments

The basic aim of speech highlight is to present the response of European Central Bank to crises of sovereign debt and finance and their guiding principles and measures. Whether the present financial crises are global, UK (Europe) has its own agreements of special institutional brand that are being tested in the extreme level and which have greatly worsened the financial crises. The monetary union is emphasized to asymmetric real shocks via external trade and opportunities[12].  With the incapability to effective adjustment of exchange rates, these financial and trade pressures are forced into the unemployment and labor market. However, this has led some nations over previous years to try to minimize financial pressures with fiscal slippage.

The consequently indebtedness has been worsened by the financial recession and crises, and this bad position in turn participating to underlying financial instability which is the most biggest problem of Europe[13].

Further, speech highlights shows that increasing inflation and financial crises enables the ECB to historically reduce the interest rate in order to balance the financial crises. This reduction in interest rates and steps related to the coping with inflation are referred to as measures of “standard” policy, since changes in short run interest rates are the key method used by the European Central Bank in order to accomplish its objective of price stability. The ECB has condensed its major interest rate from 1 percent to .75 percent, a record rate for the Eurozone. A cut in the deposit rate of ECB is designed in order to stimulate lending between banks, as funds placed with various commercial banks overnight are presently receiving .3 percent in interest[14]. Prices of consumer in the seventeen countries sharing the euro rose 2.7% annually the statistics of European Union said that marked a rise from 2.6% in August. Markets had also projected inflation to ease to 2.5%. Further, energy prices also jumped 9.2% after an 8.9% increase in the previous month[15].

Speech highlights also shows that activating a sharp decrease in global economic activity, the financial crises extremely affected the channels of monetary transmission. This thing is minimizing the ECB’s liquidity position. Today, it is necessary for every organization to maintain its liquidity position in order to better attract investors[16]. Markets think a fracturing of euro has material related probability. Investors comprehend that any nation with funding issues leaving the euro would do so in order to take benefit of converting credit risk into risk of inflation which can manage easily[17]. The best of financial crunch, going back several years, is that they are occurred due to excessive such as frequently monetary excesses which cause to an inevitable bust and a boom[18]. In the previous crises, we had a housing bust and boom, which in turn caused to financial disorder in the U.S as well as many other countries. Those monetary excesses were the real cause of that bust and boom[19].

This speech highlights recommended that the institutional architecture in the Europe has to make sure that member nations take their responsibility in order to restore fiscal competitiveness and sustainability and for the implementation of effective financial supervision. In the financial affairs for every nation fiscal policy has great importance in order to balance the trade. Deficit fiscal policy can lead to trade deficit and cause to financial crunch of nation (Horne, 2004). Finance is considered as robust strength for every nation and business so it is necessary for country to make financial, investment, and asset management decisions with care and effectively. It is also critical for Europe to clearly spate the responsibilities of central bank from domains of policy like financial stability and fiscal sustainability[20]. However, it is required to reinforce framework of economic governance at the European level. Governance at all level in a state is necessary in order to make transparent decision making.

In this speech highlight, Praet told that the development of firewalls in the shape of financial stability of Europe, European and facility stability mechanism will participate in order to isolate the area of Euro as a complete from financial disorder that affect small group or individual country.  In Europe, it is necessary for every country like UK to support economic and financial stability[21]. Now there are different developments in which the main agenda is the financial stability by addressing not only the supervisory authorities but the public policy makers in general sense. These developments may be the enhanced growth rate of financial transactions, more focus of new tools or related instrument, the huge costs associated for financial crises in system and different disasters that occur at individual base institutions[22].

Aims

The aim of speech highlight is how to manage financial crises and the role of the ECB in the management of crises. In this speech Fraet explained the various financial crises facing banking sector of UK and also ways to get rid from these potential financial crises. The basic purpose of financial system is also to make a balance in between the lenders and borrowers with an objective of making savings with reference to risk and return. The other purpose is to make sure for the investor that they have sufficient funds in case of any need arise considering the return and risk for specific projects that they undertake. The financial intermediaries try to minimize the costs associated with or have linkage with the transactions for the savers and for investors and these include in general functions or intermediaries. There is another problem arise in between the investor and business concern or entrepreneurs asymmetric information which are inherent in their relationship[23].

Further, the aim of the speech highlights is to make current UK banking system more effective and efficient to deal various environmental problems. Today, in the era of global competition environmental factors strongly affecting on the strategic performance of organizations. Every organization has a need to minimize the impact of various potential environmental factors like political, legal, cultural and social, and technological factors.

Moreover, the objective of the speech highlights is to make the current banking system more competent that it will be capable to cope with financial crunch and maintain their sustainability on long term basis. To maintain the future sustainability is indispensable for every organization in order to get success in the ever diverse global market. From previous many decades the role of real and financial activities has been increased of the corporate sector. This role or interest is most lucidly showed in the plethora’s models on imperfect information that have previously appeared in the financial literature[24].

In addition, the objective of speech is to make the self-reliance and effective bank operations that it can absorb entire operating losses irrespective to the support of taxpayers. In short, the objective is to make the banking system more supportive for various nations’ taxpayers. Today, client is more busy and knowledgeable so it is necessary for organizations to provide easy and user friendly services to them. Another objective is to improve and develop the present banking industry’s payment system in UK along with improvement of core banking services offered by various countries’ banks. Therefore, the belief and trust of customer in the present banking sector prevailing within UK can be increased to the great extent.   

Next, the objective of this speech is to present the strong role of European Central Bank in UK financial crises. ECB, the European Central Bank is considered responsible to great extent of Financial Crises and crises of Sovereign debts throughout the zone of Euro. ECB was operating on the basis of strict policy based upon the monetarist concept in which the central banks were reduced to protection of inflation regarding consumer price, this practice was adopted before crises. The financial stability and growth of employment were entirely ignored and the inflation of financial assets was also not given the priority. All of the aforementioned polices of ECB reflects the basic faults in its design especially associated to monetarist fascination. These policies are directly associated with institutional arrangement of European Union with reference to consumer price inflation[25].

Financial Stability

If we want to know the position of an intermediate position, it is quite essential to draw the historical as well as the empirical proofs and evidence simultaneously. And if it is required to promote the efficiency of investment as well as the economic growth in market based economy, economic development and well enhanced financial systems play an integral role for this purpose and the financial development has close correlation with these two dimensions. Only one dimension i.e. poor system of financial functioning is quite sufficient to obstruct the economic growth and economic development[26]. Financial viability is indispensable for every nation in the word in order to sustain. Therefore, Government was quite serious in order to increase UK’s financial volatility. In this speech, Fraet recommends some better macro-prudential and banking pressure regulations on various financial companies working within the banking sector. Therefore, financial policies recommended by ECB do not support in eliminating the key financial crises in domestic market, which happens because of various uncontrollable determinants such as country’s properly market violation.

 According to the recommendations of speech highlights, major large banks of UK are more associated in various types of global operations. Because of this global UK banking industry exposure opens up the scope of influence of various international events that leads in increasing the financial volatility in the market at internal level. Further, the aim of speech is to shade the lights on problems related to business organizations’ financial stability within the country with the support of structural method. However, it is necessary to make the framework of economic governance at the European level. Policy makers of Europe have made vital progress previously. As a consequence of empowering of fiscal rules of the Growth and Stability Pact and the introduction of the member states, fiscal compact now face stronger incentives in order to adopt robust budgetary policies which are critical to the smooth functioning of country’s financial affairs.

ECB has made tremendous efforts in order make the strong financial policies in order to eradicate the financial crunch from the Europe. The new procedures of macroeconomic imbalances constitutes a valid methods requiring governments in order to accept competitiveness-increasing various policies and tackle various potential sources related to financial instability in their home economies[27].

The severe impacts of financial crises have opened new thinking horizons for the world to rethink and reshape their approaches to address financial stability frameworks. These new approaches and revisions required redesigning the objectives and regulations associated with financial system. Following are the main areas where lacking was found in financial system, its economic development and financial stability:

  • In order to minimize the aggregate risk, it is quite essential to address the prudential tools to build up exposures against such risk, but the central banks and other supervisory agencies remained unable to put focus upon such issues.
  • In order to mitigate the systematic impact of failure, introduction and adjustment of special scope regimes are quite essential but the treasury departments remained unable to perform such.
  • The prudential supervisors also remained unable to develop and apply the sensitive standards related to prudential activities and due to this, it put much negative impact on complex institutions as well as on financial institutions.
  • The central banks also remained unsuccessful for the promotion of strong procedures systematically which are quite essential for overall settlements and clearing of trades matters in financial markets. Its example may be the less focus on derivatives of credit and its infrastructure.
  • If we see the framework in general sense, the effort for achieving the objectives is not conducted in encouraging way. The responsibilities and tools of central banks are not properly defined with reference to financial stability.

In order to achieve the financial stability, it is required that the systematic risk should be minimized in an effective way with a set of tools to be addressed. Now two questions arise here that which is the most effective structure composed of regulations, which will be beneficial for minimizing the systemic risk. And who will be responsible for applying such tools? The overall scenario suggests that the role of central banks is most important in all these contexts for financial stability as well as for economic and financial growth and development[28]. Summing up we can say in precise phrase that the frameworks at national level can contribute a lot for financial stability along with the intellectual clarity for financial markets that how these market respond against the regulatory and monetary policies as designed by the central banks and other financial institutions. The quality of leadership, available resources to central banks and supervisory agencies are key elements in this overall context of financial stability.

Competition

Competition is the important aspect which is discussed in speech highlights that purpose is to inducing reform within the country’s banking industry. There is an issue of limited competition in the UK which was increased significantly during global recession when various organizations were taken over or failed. In this situation, there was an important vacuum developed in the country’s banking sector after and during the recession. In speech highlights, Fraet explores the critical position of banking sector in the country.

The financial crises have impacted on many sectors especially on banking sector. The banks have close concern with of construction societies. These building and construction societies as well as the banking sector say that there is no competition in this sector due to unauthorized and undue overdraft charges. The Govt. has constituted a committee which will investigates the matters related to competition environment, the available options for retail banking, checking  previous Govt. workings on banking crises, discussing the consumer issue and analyzing the overall structure of banking sector[29].

For many last years, the competition in banking sector is not at peak and not functioning properly. The Cruickshank also reported that there is lack of effective competition in 2000 under the program ‘competition in UK banking’. Since that report, there was much involvement of competition authorities, the bodies associated with consumers and the regulators and Govt.etc[30].

In 2010, the Govt. constituted and independent Commission on banking system (the Vickers Commission), the basic purpose of this commission was to judge the basic banking structure in overall  UK and promote banking competition with the help of improving banking system via structural and non-structural ways or measures implementation. In 2011, this commission designed following recommendations for overall improvement of banking system:

  • Minimizing the systemic risk directly or indirectly associated with banking sector which occurs due to convergent banking size, their functioning style and scale of business activities of banks.
  • Eliminating the dismay moralities in banking sector
  • Focusing to reduce the chances of failure of banking sector.
  • Taking any step which will be fruit full for the promotion of retail banking as well as for investment banking. These steps are taken in such a way to make sure that the needs of banking sector, the needs of customers are effectively full filled. The other factor considering that the large banks have competitive advantage over others banks and diffusing the concept that the larger banks are more close to failure.

If there is great competition in any industry or in market of a specific product, ultimately the standard of product in term of service and price will be improved to great extent as there are number of alternatives available for the customers. The competition also leads to overall improvement and development of business organization. The commission, mentioned earlier discussion, focused to satisfy the needs and wants of customers in proper way. If this practice adopted effectively, the only way to rebuild the banking sector, there will be huge growth in banking sector and trust of investors as well as customers will be developed to great extent and the adverse conditions which were developed in banking sector during global recession sector can be addressed positively[31].

There is general perception that the huge competition in banking sector has negative impact on this industry because it became the cause of financial instability, but this perception will be proved wrong as far as concerned competition as per above findings[32]. If there is huge competition in any country in industries as well as in banking sector, the different aspects regarding competition should be carefully analyzed. One factor that should be looked carefully is that the roles of competition and supervisory authorities should be well defined. There are some countries who have given minor roles to the authorities directly associated with competition; such countries are advised not to give 2nd priority to such concern competition authorities. If the concern competition authorities are not considered at top level, the results might not be optimal[33].

Implementation

There is need to implement the effective strategies in the Europe in order to cope with financial crises in the countries like UK. In relation to this, policy makers have taken progressive steps recently. As an outcome of robust fiscal rules of growth and stability pact and institution of the various member states, fiscal compact face huge incentives to accept heavy budgetary policies, which are significant for the effective working of system.  These drive, inter alia, from national authorities requirements in order to legally accept a fiscal rule, especially at constitutional point, stipulating that the deficit related to general government remain below five percent of gross domestic product in structural sense. To make these reforms, UK government intends to put the enduring structure of continued financial stability and financial services at the core of its policy agenda of financial services. As a key portion of new regulatory framework of UK, projected to be in completed by the closing of 2012, and the FSA will be eliminated and its sagacious supervisory powers transmitted to the Bank. A new PRA (Prudential Regulation Authority) will be liable for the daily supervision of country’s financial institutions that are referred to significant prudential regulation. It will accept a greater judgment oriented method for regulation so that models of business can be altered, potential risks identified, and action taken in order to guard financial stability[34].

The various reforms implementation will be fairly associated with “internationally agreed Basel III capital standards’ implementation”. This project will be completed by the start of 2019. The entire case for legislative action in banking sector regulation is compelling. The authorities must be capable in order to cope with failing banks efficiently and effectively with long range of choices. The competent authorities need access over information which drives their actions. Good scheme of statutory depositor which commands the consumers’ confidence is required to minimize the likelihood of disorderly failure of bank following a retail basis and so to remove in turn the necessities for exceptional statutory guarantees by the state government[35].

In this implementation section of this study, it is quite clear that the recommendations that are provided are quite useful and effective if these are applicable in proper way. All of the proposals which are explored in this report for the implementation of recommendation are described in positive as well as in well directive way. The structural approach, which was discussed earlier, the Govt. can apply that approach for taking reforms in banking sector. Nevertheless, there are many barriers which can be faced in implementation stage, but yet those barriers can be removed with proper planning and consideration of related variables[36].

Conclusion

In conclusion, today commitment to planning will support customers, employees, the local economy, the community, and even the country. Effective planning also protects business investment and gives an organization a choice for long term survival[37]. Whether the framework of European Union governance contains major elements important to overcome the current financial crises and mitigate future risks, it is now supreme that these basic elements are applied in a steadfast and swift manner. Further, in order to cope with economic challenges, our economies will be confronted for future years, most notably in the shape of ageing population and growing competition from new market economies, efforts of structural reform aims at creating enduring economic growth should be vital point in European agenda.

Moreover, only if competitiveness and productivity keep pace with these problems will Europe be capable to secure a living standard similar to that people enjoy now. In order to this commitment to creating enduring economic growth, major principles for sustainable and sound growth could be preserved in the framework of common economic governance. Entire these efforts of reform will put the framework for macroeconomic and fiscal policies effectively and will facilitate the monetary policy’s conduct which has been helped by the robust official framework in relation to both monetary and economic union, attached with an postponement of  “rule type behavior” for other key policy related areas, can also make happen in order to address the problems of moral hazard inherent in any helping policy pressure that requires to be taken during the financial crises[38].