There is a strong case to place them to a higher level of responsibility. This is understandable. Banking, or credit in particular, is deemed to be the lifeblood of the economy. Through provision of credit to businesses and consumers, the banking system spurs productive economic activities. Lack of trust and confidence in the banking system might lead to disintermediation and cause slower economic growth, rise in unemployment and decline in wealth generation, just to name a few. The consequences are dire, and the stakes are high. Since the financial crisis, more than $ billion have been levied on banks for various cases of misconduct and breach of trust. As recent as three weeks ago, a major bank was fined $ billion. Both of these are astronomical amounts. In Malaysia, over the past three years, Bank Negara Malaysia has imposed close to RM110 million in penalties. To strengthen the system against these abuses and breaches of rules and regulations, a Code of Conduct and Principles was issued last year by Bank Negara Malaysia. In a more positive light, there is evidence that public trust in banks around the world is improving. This is something we can build upon. The right place of finance is to be the catalyst for the economy. As guardians of public trust, bankers must protect the system against any threats. This means protecting against abuse, misconduct and exploitation. No banker should tolerate misselling of products to customers which are not suited to their needs.
The ECB’s entire range of instruments, characterised by a wide corridor between the interest rate on the marginal lending facility and the rate on the deposit facility, weekly repurchase agreements, the acceptance of a large number of counterparties and a wide range of collateral, is based on the money market functioning. If the money market doesn’t work, the mechanism for transmitting monetary policy doesn’t work. The only solution remaining for a central bank at this point is to stand in for the market and perform the role of the banks, even by lending directly to the private sector. Maybe this solution is the most preferable? I don’t believe so. In my opinion, the functioning of the market is a statutory objective for a central bank. It should therefore intervene to guarantee the liquidity of the market. It should be remembered that every injection of liquidity is guaranteed by the collateral deposited by the counterparty banks. This means that banks’ assets are made liquid. It’s obvious that without such a liquidity intervention, the market would collapse, taking the banking system with it. This is always true for last-resort interventions whose objective is to keep a solvent but illiquid system alive. It is at the heart of the role of central banking, particularly in times of systemic crisis. There can be no doubt that the ECB had to take on this role and I believe it has done so in an appropriate way.