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Calomiris Says ESRB May Be More Effective as a ‘Moral Authority’

October 13, 2011

Oct. 14 (Bloomberg) -- The European Systemic Risk Board may be more effective as a “moral authority” for the financial system rather than as an enforcer of bank rules, said Columbia Business School Professor Charles Calomiris.

“It may actually be good as a standard setting body not to have enforcement power,” Calomiris, a member of the ESRB’s Advisory Scientific Committee, said in an interview late yesterday in London. “The absence of any enforcement power, or having to have compliance immediately with your standard, frees you to actually set a standard that won’t be politicised into meaninglessness.”

The ESRB, which aims to warn of developing risks in the financial system, was set up in January as part of a new European architecture designed to ward off another financial crisis. As concerns mount that banks may not have enough capital to withstand a Greek default, it urged policy makers last month to tackle threats that have risen “considerably.”

“The argument is, ‘What good is it to be a standard setter without authority?’’ Calomiris said. ‘‘The answer is that you have moral authority. Your moral authority is greater because you’re actually having a conversation at a high level about what makes sense.’’

The ESRB board is led by European Central Bank President Jean-Claude Trichet, who defended the watchdog after its first meeting in January, saying it has a ‘‘lot of moral authority.’’

‘‘If the board in its recommendations earns the trust of the sovereign nations within Europe, then I think it can be influential,’’ Calomiris said.

In the U.K., the government has set up the Financial Policy Committee at the Bank of England. While it’s currently working on an interim basis and can only make recommendations, it will gain fuller powers when approved by Parliament in 2012.

‘‘I’m not saying that it wouldn’t be good to eventually evolve toward having more authority and power” at the ESRB, Calomiris said. “But I’m saying when you start off with very different financial systems, it’s better to have that endorsement approach where you’re able to have a more legitimate discussion of what the standard should be.”

--Editors: Fergal O’Brien, Francis Harris

To contact the reporter on this story: Scott Hamilton in London at

To contact the editor responsible for this story: Craig Stirling at

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