ECB’s Orphanides calls for more regulation

The financial crisis highlights the need for more effective regulation and supervision, European Central Bank (ECB) Governing Council member Athanasios Orphanides said on Thursday.
Orphanides said he believed that the model of removing supervision from central banks had proved inadequate during the crisis. He cited as an example the British system, under which regulation is now shared between the Bank of England, Financial Services Authority and the Treasury.
"The experience not only of today's financial crisis, but historically, the economic evolution of the past centuries, indicates it is impossible to fully avert future crises.
"We can however, exert efforts to limit their scope and frequency," Orphanides said in the text of a speech to the Cyprus Chamber of Commerce and Industry.
Establishing the ideal framework of regulation and supervision was not easy, he said, but the experience of financial turbulence since August 2007 suggested that supervision exercised until today contained "serious gaps".
"The financial crisis has shown that countries whose central banks had immediate access, and detailed knowledge of the supervisory framework of the entire banking sector, both on a macro-economic and on a micro-economic level, were better placed to successfully deal with the consequences of the crisis," said Orphanides, who heads Cyprus's central bank.
There had been a global trend to remove supervision from central banks from the 1990s until 2007, assigning it to other authorities, he said.
"One example would be the supervision model in the United Kingdom, when we witnessed the banking run, the sudden withdrawal of deposits because of a breakdown in confidence to Northern Rock, and the subsequent collapse of the bank in September 2007," he said.
"In my opinion, this model has been proven inadequate during the present crisis."
The Bank of England rescued Northern Rock with an emergency loan in September 2007 after it had problems raising finance. The news sparked a run on the bank. The government calmed the panic by guaranteeing deposits, but in February 2008 was forced to nationalise Northern Rock.
Banking supervision must be on a technocratic footing, be totally independent and free of political influences, he said.
"The experience of the past months suggests that countries and sectors where the responsibility of supervision was not exercised by independent agencies (and) which were prone to political influences and interference enhanced the present crisis," Orphanides said.
The ECB has cut its benchmark rate by 300 basis points since October. It is widely expected to cut it again to 1 percent next month as well as spell out what other tactics it may use to help the euro zone recover from the financial crisis.
Orphanides made no comments on monetary policy or the economic outlook in the text of his speech.