So it is natural and indeed understandable that bankers harbour grievances and misgivings towards bank regulation and supervisors. And this is why the topic I am going to talk about is a very attractive theme to them. They would like to hear from a supervisor speaking on a subject that they can normally only discuss privately amongst themselves. 4. First of all, let me give you the good news! As I see it, there are two ways to get rid of bank supervisors, one fast track and the other a slow track. Let me start with the fast track! 5. If you can find a clock or time machine that would allow you to dial back time to 100 years or so ago, then you would find yourself in a happy world where there was little or even no banking supervision. Contrary to common belief, banking supervision as a profession or industry (or, as some bankers would no doubt have it, a “black art”) does not have a very long history. Until the Roosevelt New Deal era 1933 Banking Act in the USA, no depositor in an American bank could have been assured of clear supervisory oversight, following a century of uncertainty about state and national authority over banks and the issue of bank notes. In the UK, the first statutorily-backed regulatory regime was put in place only in 1979. Prior to that time, the Bank of England had exerted only informal authority, including through the venerable “Governor’s eyebrow”.
Chart 8 indicates, however, that much of that is attributable to the substantial fall in imports associated with the collapse in domestic demand, rather than a rise in exports (although to the extent that there was excess demand before the crisis – as Chart 4 suggests – part of that decline in imports will be warranted). Moreover, the necessary sectoral reallocation of resources is harder to achieve in a currency union than in a country with its own currency, as the exchange rate is not free to adjust to expedite the necessary adjustments in prices and quantities. Absent a supply-side miracle to  2  As productivity tends to rise faster in manufacturing than services, unit labour costs on average rise faster in non-tradables than tradables. But, as Chart 7 makes clear, the gap was much greater in Spain than Germany. 2  BIS central bankers’ speeches  raise productivity in the periphery, the necessary reversal in the movements in relative unit labour costs needs instead to come about through wage and price adjustment, which may require a sustained period of spare capacity in the periphery together with excess demand in the core. There is, however, an inherent asymmetry, noted long ago by Keynes, that when credit flows dry up, adjustment is compulsory for the debtor but only voluntary for the creditor. Moreover, not only does the creditor lack the urgent need to adjust, they may also feel that the debtor ought to bear more of the burden of adjustment on moral grounds.