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Oec. Magazin

«Swiss politicians and the industry have understood better than elsewhere that some- thing needs to be done – and quickly – and are acting on this.» Prof. Dr. Jean-Charles Rochet zVg Zingales of the University of Chicago published a book called «Saving Capitalism from the Capi- talists.» They argued that, while free market en- try of new talent produced many successful new technologies, innovation had not always been useful to society as a whole and had, at times, only served the interests of powerful minorities. Echoing such concerns, the American economist and former Fed Chairman Paul Volcker noted in 2009 that the only true financial innovation over the past couple of decades had been the automated teller machine. Everything else, in his opinion, was designed to increase bankers’ rents rather than raise public welfare. More positively, to solve – or at least mitigate – such issues, Rochet believes a counter-power to the official authorities is required. Specifically, that means involving activists or non-government groups - individuals who are not driven by finan- cial interests, but genuinely want to do what is best for society. Brussels-based Finance Watch is one such non-governmental organization re- searching finance topics. Its guiding principle is that finance should benefit everyone by bring- ing capital to a productive use, and should not be detrimental to society as a whole. Its research- ers are not influenced by the industry, but are able to talk to the industry. «Yes, the experts are biased,» Rochet reiterates. «But if one provides them with a careful analysis of the data, they will be obliged to take a look at it and say «maybe you’re right.» Also because they don’t want to look captured in front of the public.» This is why full disclosure is crucial, he believes. «In the old days, the authorities would not want to disclose information, fearing people would misinterpret it, and this would have disastrous effects. But that is changing.» Stress Tests as an Example A conspicuous example are the recent stress tests introduced to determine banks’ ability to cope with a crisis. Rochet praises the US approach, where all findings are revealed and any necessary actions taken immediately to avoid any panic. Europe’s approach – initially at least – has been different, and less satisfactory, creating the im- pression regulators were reluctant to divulge the full facts for fear of triggering a run on weaker banks. The result, however, has been a loss of credibility. Here too, Rochet suggests changing the rules to allow «benevolent experts» to inter- pret the data and offer a credible counter-voice, helping to dispel destabilizing rumors. «The reason why people believe and spread silly ru- mors is precisely a lack of trust in the authorities and the official interpretation of their experts», he says. «You see the same happening in other fields: for example, as more people believe doc- tors are captured by the pharmaceutical indus- try, many of them turn to alternative medicine.» As matters stand, «benevolent activists» aren’t asked for their opinion – raising uncertainties about whether recent policy decisions have been adequate or appropriate. «There have been many good ideas, but that does not necessarily mean that they are all implementable», says Rochet. He argues simplicity is crucial – and that’s where policy makers often fail. Take the Dodd-Frank Wall Street Reform And Consumer Protection Act, signed into law by President Obama in July 2010. At 2,300 pages, the legislation was so com- plex and forbidding it wasn’t actually implemen- table and required many exemptions. The other aspect of simplicity is accountabi- lity. If a rule is too complicated, the public can never really tell whether regulators have done their job adequately. Monetary policy provi- des good examples of simple rules. A target in- flation rate set by the central bank, for example, can be openly monitored by everyone. The same should apply to reforming banking regulation: simple rules that the average taxpayer can un- derstand and monitor. If the source of the prob- lem is political, rather than economic, can banks do anything to restore trust? Rochet says he once believed that was possible, thanks to a «stakehol- der» type of bank (meaning a bank conducting business in the interest of both shareholders and a broader group of stakeholders, including cre- ditors and others). He developed the idea after studying Switzerland’s Raiffeisen co-operatives. Spain’s Cajas should be similar, but are notori- ously beholden to local politics, and hence hard- ly an ideal. When asked whether «capture» by local inte- rests applies to Switzerland too, Rochet nods – «but to a lesser extent.» Switzerland’s direct de- mocracy prevents politicians from openly going against the public’s interests, he believes. Although last February’s referendum on immi- gration revealed some popular mistrust of pol- iticians Rochet says he’s more optimistic about Switzerland than anywhere else. «Swiss politi- cians and the industry have understood better than elsewhere that something needs to be done – and quickly – and are acting on this.» Oec. Juni 2014 19 FOKUS Jean-Charles Rochet is Professor at the Department of Banking and Finance since 2010 and holds a Senior Chair of the Swiss Finance Institute, the private foundation created in 2006 by Switzerland’s financial community and leading national universities.