It is a great privilege and honour to chair this session on banking and finance in your honour, dear Mathias. When thinking about how to introduce you and this topic, I came up with three points that I think characterise you and your work.
- The first point is your academic contribution.
- The second is your genuine interest in difficult policy questions of all kinds (I remember debating with you whether the Pope had stood up to Trump well or not).
- The third, and perhaps most important point, is that you care. You care about the many, not only the few. You care about every individual colleague and employee. You care about how economic theory and economic policy contribute to the public good.
So let me try to say a few words on each point in the context of this panel on banking and finance:
Academic contribution
The intellectual foundation is his book: Prudential Regulation of Banks (Mathias Dewatripont and Jean Tirole, MIT Press, 1994; 262 pp.) (Walras–Pareto Lectures given at the University of Lausanne). The intellectual heart of the book is the “representation hypothesis.”
In a non-financial firm, the threat that creditors will intervene in bad states — by withdrawing credit, refusing to roll over, or forcing reorganisation — disciplines management. Put differently, control rights in bad states are allocated to debt holders as the influential paper by Philippe Aghion and Patrick Bolton puts it
This does not work in banking for two reasons: First, small, dispersed, and often insured depositors cannot and will not perform that monitoring role: they have neither the information, the incentive, nor the coordination ability. Second, as banks engage in maturity transformation, uncontrollable runs a la Diamond-Dybvig (1983) can happen (even more so in the age of internet banking: Silicon Valley Bank witnessed $42 billion deposits being withdrawn on 9 March 2023 alone). The result would be financial instability and high macroeconomic costs as the non-bail-out of Lehman Brothers showed.
Prudential regulation is therefore not a “tax” on banks, but some sort of corporate-governance mechanism: the regulator should act as the representative of the debtholders, replicating, on behalf of depositors and the deposit-insurance fund, the kind of state-contingent control that creditors typically exercise in non-financial firms.
Bank capital ratios and bank supervision is about replacing the control that debt holders/depositors would typically exercise in a bad state of the world in non-financial companies.
The book is probably the first formal economic justification for the capital-ratio framework that forms the backbone of our current Basel Pillars and of European bank-resolution thresholds.
Policy Influence
In 2010, Mathias wrote an influential policy piece with Gregory Nguyen, Peter Praet and André Sapir for the European economic policy institute Bruegel that I later had the honor of leading. In “The role of state aid control in improving bank resolution in Europe” , the authors argued that we need a European resolution framework that would avoid single market distortions; mitigate moral hazard; and coordinate the resolution efforts of national authorities. Absent a full European resolution authority, they propose that the European Competition Authority exercises a role on all three dimensions.
This work also played a role for a Bruegel paper of 2012 that constitutes the foundation of Europe’s banking union. In “What kind of European banking union?” Jean Pisani-Ferry, André Sapir, Nicolas Véron and myself laid out the four necessary pillars that a European banking union needs to have at the European level: regulation, supervision, resolution and deposit insurance.
Mathias continues to write on the issue. For example, in a 2021 Bruegel blog post, he argued for “Urgent reform of the EU resolution framework is needed” (with Lucrezia Reichlin and André Sapir).
And obviously needless to say: Mathias was Executive Director of the National Bank of Belgium and member of the Basel Committee. He was also a founding member of the SSM board.
The banking and finance policy debates now needs to also reflect on geopolitics and its impact on the global financial system: We live in one of those big historic ruptures. Adam Posen, at the Peterson Institute, argues that Trump has switched the United States’ role from global insurer to extractor of profit.
It is too early to say what will be the implications of this geopolitical transformation on banking and finance, which I hope we can discuss further in this panel. We certainly see some moves by the US to change capital rules (Michelle Bowman). And European banks have lobbied for simplification but also reduction of capital requirements to become more competitive relative to their US rivals. The European Central Bank hesitated for some time whether to publish its assessment of capital requirements. The fact that it has now done so should be applauded as it shows that the ECB is ready to defend the interest of the tax payers.
Mathias, Peter, André and I have recently argued in a piece for VoxEU that these new geopolitical trends could have massive implications for the European financial system. European policy makers need to move their debate beyond the question of competitiveness and prepare for a geopolitical sea change.
Mathias cares
Populists in the US define freedom negatively as the absence of the government – as the historian Timothy Snyder recently argued. Freedom as a reduction in government regulation and less oversight and control. But freedom cannot be defined in a negative way.
Mathias work reminds us that freedom requires a government to take care of the public good. Without a government ensuring prudential regulation and adequate capital ratios, depositors and ultimately tax payers’ freedom will be diminished. (Of course, we know that governments can be captured and Mathias has always been outspoken when he thought that policies are wrong because of capture). Caring about outcomes is incredibly important in these times. Your clarity on the importance of capital in banks on outcomes for citizens matters.
Coming back to my starting point: Mathias work marrying contract theory and banking provides the intellectual foundation. Mathias true compassion with the many, not the few, is the basis for caring about the public good. It is ultimately all about freedom. Freedom cannot be defined as absence of government but on the contrary requires a government that defends the interest of the many.
Which better place to celebrate Mathias than here at the Free University of Brussels?
This has become too long of an introduction. So thank you Mathias for being you and I really look forward to more cooperation.
To discuss all these three points: the intellectual contribution, the policy work and the public interest, I cannot think of a better panel than the one we have here.
Claudia Buch is the chair of the ECB’s single supervisory mechanism’s board. She is a former professor of economics and has a distinguished career in academia as well as policy making, including at the Deutsche Bundesbank.
Marco Becht is Professor of Finance here at ECARES and also has a distinguished career in banking and corporate governance .
Peter Praet is also a ULB colleague and former chief economist of the European Central Bank with a distinguished career between academia and policy making.
