 We've got a microphone somewhere, yes. Thank you very much. My name is Francesco Montzaferra. I'm head of the Yes, or Beats, or Guitar. I wanted a bit to react to the question of Professor Galperno. Where is the constitutional element here? So if we look at the logo, what you see there is a European flag. So first of all, you have a European element. And you have the European system of financial supervision. So this has been part of a policy response which came on purpose, bringing together three European authorities and one board, which were created each in its own competence. What we have been doing when we were established, by the way, was to recommend, first of all, the creation of national authorities. So there was a recommendation we issued to have macro-prudential authorities everywhere. A second one to identify what would have been the policy purposes, the objectives. And then the third one to try to see what would be the instruments and the data sources. And I think we are now testing all of this. And by the way, it's not by coincidence that yesterday the commission has decided to propose on the same day a review of all the institutions. And I think in a few minutes, the Vice President of the Commission will give a constitutional speech. Now, this does not mean that we have the best. This means, however, that it exists. We are testing it. It's not that we are outside of a framework. We have a framework which exists. To Professor Posner, the question whether legislation should be cyclical or not, in policy terms, it depends on whether the problem is a flow problem or it is a stock problem. And it is also crucially on whether you want to address the velocity, if you want, of the economy, the speed, or whether you want to increase resilience. All we know, the experience which we have is that we are in a phase where the best which we can do is to increase resilience. Why? First, we don't know very well the transmission mechanism. So we would not be able to know what is the timing by which the input of legislation is transmitted to the economy. Second, if we were doing two years in which we are applying a mere and three years in which we are not applying it, this would create a situation of uncertainty in the economy, which would be, I think, extremely serious. And third, to pass legislation takes time. So even if we wanted to have a legislation which is timely connected with a financial cycle, the parliament will never be able to do it. Thank you. Responses to that. Anna first. I agree completely. I think my point was not so much that the ESRB operates outside a constitutional framework. In fact, Europe is fascinating because of this ongoing constitutional moment and the fact that there is actually so much treaty making going on. But rather that we not lose track of what you were talking about in all the pixelation of capturing and mapping the risks, and also that some of the process you're talking about be not just going on, but be publicly accessible and intelligible so that you then don't end up on the receiving end of the cabal of technocrats behind closed doors came up with a document none of us can understand what gives. Then saying that they have a flag on their letterhead is not going to go far enough in response to that. So totally agree. Just a quick response. I agree with your concerns, but just a technical point, which I was not clear about. In the United States, we make a distinction between legislation and regulation, and you do in Europe as well, but the legislation is passed by the legislature. The regulatory agencies issue rules which are called regulations, and they don't need the legislature to do it. They do it themselves, and the reason why they can do it is that the legislature gives them the authority or competence to issue these rules, and because the regulators are these hierarchical institutions with one person at the top, they can issue these rules very quickly, and they can also suspend them, and since they also enforce the rules, they can stop enforcing them if they want to, which they often do, and so at least in principle, the regulators have enough flexibility to act extremely quickly in response to a downturn or a financial crisis or what have you. Laura, open again. Luca. Thank you, Federico Signorini, Banco Vittoli. I was intrigued by the subject of Mr. Posner's initial talk, student regulation being counter-cyclical, and my immediate reaction was, at least we should try avoid being pro-cyclical, and I'm not sure that we're entirely free of that. And then Professor Posner went on mostly talking about the potential for discretionary counter-cyclicality of regulation, and he said, yes, it's conceivable that may have been one or two cases, but it's difficult because you have to take account of the deadweight losses and the issues with the decision process, et cetera, et cetera. So in the end, on balance, it sounded more like a thumbs down. But towards the end of his presentation, he touched on the issue that for me is central, which is automatic stabilizers. And I think that the frame of prudential policy in general, macro prudential, most specifically, does contain some implicit or explicit automatic or semi-automatic stabilizer, including for instance the counter-cyclical buffer. But the issue is, I mean, there is also the possibility of having at least in the now-filled automatic de-stabilizers. And I think that for instance, President Draghi, when introducing this discussion, he mentioned a possible issue with the accounting rules for provisions, for credit provisions, when he said it's much better in the past for foreigners in some respect, but we have to recognize that this means that the effect might be prosyclical. And so we have to think about that. And that's one issue. And I think there are other issues, for instance, in the regulation of some market transactions, think of things like margining requirements or haircuts in a crisis. I think this is also extremely important in terms of stability at the moment when markets are experiencing troubles. So shouldn't we think more specifically and more systematically, I would say, about the existence or the sufficiency of inherent implicit stabilizers and possibly inherent implicit de-stabilizers? Shouldn't that be a lens through which we systematically look at the regulatory framework and supervisory practices? I think this is worthy of some further reflection. What's that first, Eric? Yeah, thank you very much. I like that way that you put that. And that is part of what motivated the paper, the worry that ordinary regulations are frequently prosyclical. Environmental regulations can be like that. You might think of minimum wage and other worker employment, worker protection regulations, often they're not binding during a boom because employees are eager to hire people and will pay them and provide them benefits. And so they only come into play during a recession. So I accept your comments. Kern, you want to weigh in on this one? Very good points about this issue of contra-syclicality versus pro-syclicality. And I'd like to think of it in a very basic sense in which financial markets are volatile by nature. And we should think of regulation in a way as leaning against the wind. When the wind's blowing one way, we want regulation to stand or lean in the other direction. And that's why ideally with contra-syclical capital when we've got a slowdown in the economy or recession, we want to loosen the capital requirements for banks so that they might lend more. And so that's the idea between the CRD-4 here in Europe is that you do have that ability to reduce the capital requirement. So that banks can eat into that buffer they've built up. But when we're in a boom when the market is frothy and we have that housing market bubble that we will always have, that regulation should lean against that. And then have higher capital requirements during that upturn in the market. Regulation should not reinforce market trends in a way very crude ways like Alan Greenspan saying, it's about taking the punchbowl away from the party when it gets a bit too wild. And so in regulation in a contra-syclical way should be thought about that too, I would say. And one thing about the contracts, private contracts, I want to add was in the EU now we've got regulators like ISMA, this European Securities Market Authority that has the power to ban the short selling of bank stocks during a crisis, during a bank crisis. And ISMA under the MIFID-2 directive can ban financial products, certain financial products that are viewed to be too risky and potentially proposing a broad risk to society, to consumers. In the UK we had this problem with the selling of PPI, the insurance, credit insurance risk policies that banks were selling. And so in the future now, regulators will have that power. Now of course there will be collateral damage from that. Regulators might ban the wrong product or they might tell investors you can't short sell stocks during a period in time when maybe we think the investor should be able to short sell stocks because it's a signal to the market that the bank is not doing so well. So but there are growing regulatory intervention tools to restrict the operation of private contracts. Now whether or not they have the economic, Eric was worried about the legal constitutional type issues the regulator might have for if they intervene and restructure contracts. I guess I'm more worried about the fact that there will be an efficiency impact of regulators using these strong tools to block products or to block the short selling of bank stocks in the markets. All right, you had a brief. Yeah, just very briefly. So when you have an ex-ante rule or a mechanism that is automatically pro cyclical, then you have three choices. You can either let it play itself out and that the losses lie where they may, right? Two, you can let it play out and then have a compensation scheme in place, right? Or you can override. And the choice among those three partly depends on how much do you wanna build faith in these automatic institutions, right? Because an override is gonna work once but then you're not gonna be able to use any of these automatic tools again, right? So then your choice really becomes, is it implement and let losses lie where they may? Implement and compensate and those have different elements to them. Davide Serra from Algebra's Investments. I have three quick questions for the panel. The first one. So if I take rating ages in the US, the $1 trillion loss, which equates let's say to 15 times the losses in Greece where because of the Fourth Amendment in the States, private, public, so not accountable. And how can we have $1 trillion losses on AAA and no one being accountable? Both private agency, rating agency, and the regulators that have used them like COs use McKinsey to cover back. So to say no one is accountable, yeah? So it's a way to basically mitigate risk. Always someone else is accountable. I wanna keep my job. The second question. There've been two instances in Europe. So if I take Bank of Spain, they had anticyclical provisioning. They were taken to court by the European Commission because they was deemed illegal, yeah? That's in the 97, 98. Jaime Caruana was governor of Bank of Spain. I remember very clearly. And now it's the new gold standard. So I see a change. The same applies to the Basel Committee. 2005-06, QS-free study of the Basel Committee, 600 billion euro of capital in the European banking system. They said there was 50 too much, yeah? On numbers. Now we have 1.5 trillion, so three times more. And they keep on telling us we need more. So there is a swing of three X. I haven't seen many people being fired in the Basel Committee or in central banks. They were round directionally by more than 300%. So from the, as an investor and as a private citizen, who can I hold accountable? Because if a buck always has to stop with a private citizen who loses job or the investor of a saver who loses job, but whoever has to regulate is always winning, yeah? So including compliance officers, regulators, and central bankers, then eventually populist will rise. Which is by the way what happened in Anglo-Saxon country where the bill of the banking crisis has been five to six times larger than in Europe. US and UK. That's a handful to go at. Who wants to start? Eric. Yeah, so it's a great question. I think the rating agencies actually did end up having to pay some money. They were originally sued for giving, you know, the wrong, you know, putting the wrong agencies and their defense putting the wrong ratings on these instruments. Their defense was the First Amendment, not the Fourth Amendment. It was free speech. And only in America could you win on that argument. But they won, you know. We make a distinction between facts and law. And so, oh sorry, facts and opinion. So if you're just expressing your opinion, you can't get in trouble. But they ended up having to pay some money. Not a lot of money. I think the SEC collected against them. Yeah, recently, yeah, recently. But your broader question is why can't you sue the regulators? The problem with suing the regulators is that the citizens end up paying the money. So if you sue the Fed, some people sued the Fed. AIG, the shareholders of AIG, for example, sued the Fed. And if they had won, it's being appealed right now. They could have won as much as 20 billion, 20 to 30 billion dollars. But the Fed, of course, just turns over money to the Treasury. So that would mean 20 or 30 billion dollars less for the Treasury, which mean that taxes would have to go up. This is a basic problem with using litigation to try to constrain the government. It's just not clear that the people who run the agencies care if the public FISC ends up paying the damages that they caused. And the only constraint is really political. If people are unhappy, they can kick people out of office, which is why we have Donald Trump as our president now. So there you go. Got a little bit, which is that we haven't said very specifically about how do you make these decisions between ex-ante and ex-post intervention. And the rating agency argument is that we have a product that is created for purpose A. You guys, the regulators, appropriated for purpose B, not my fault, right? And I think that that mechanism, that dynamic, it was understood, people were writing about it, but nobody really sort of thought it was that important. So this appropriation of private mechanisms for public regulatory purposes is seen as almost indispensable, inevitable, because of the information asymmetry, right? So the natural sort of, the lawyer response to that is, so how do we proceduralize that in a way that is more transparent, more accountable ex-ante, and then formalize that ex-post? I certainly don't have the answer, but I think that it's a problem of structuring the relationship between public and private inputs in the regulation. Very quickly, another example, so nest table funding ratios, you mentioned it. So when it came out, I did the numbers. On the planet, we were missing 5 trillion of deposits to meet that target. Okay, it's like saying, by 2020, I want all electric cars. Nice to say, there's not enough lithium, not enough cars. So I remember I published a paper saying, well, you put a target that is unrealistic, unless 5 trillion from deposits from Mars come or people are forced to sell other assets. Well, guess what? Everybody did the work when eventually, we gave up on nest table funding ratio, or keep on delaying it. So the issue is, should regulatory authority, when they put forward what they think we should have, which is an optimal world, actually be responsible for the unintended consequences of the realism of their own forecast? Because it looks like it's good to come with statements, but the practical feasibility has to be studied. In your experience in the States or in Europe, is there anything we can improve on this? Well, I would just say the issue of supervisory liability, the legal standards vary between different states in Europe. There's no EU standard for supervisory liability. When thinking about supervisory liability, there are different standards. There's a negligence standard in some countries like Switzerland. In the UK, there's a standard that's almost impossible to meet. It's recklessness to such an extent that the regulator knew they were doing a bad act, and the BCCI case was an example of that where the shareholders sued and because the Bank of England had turned a blind eye. So you have different standards for holding supervisors libel, but first of all, you'd have to show a standard of care first, at least, at a minimum, if you're having a negligence standard, that there was some known standard that they should have been meeting, that they knew they should have been meeting, but they did not meet. And so I think so much of regulation happens exposed. It happens in response to market developments. So we thought Basel II met the minimum capital requirements for banks. We now know that it was inadequate. It allowed not enough capital to be held against securitized asset exposures. And so today, a regulator doing the Basel II approach would be viewed to be acting negligently because Basel III is, of course, much stricter. So we have to look ex ante at what the regulators knew and was there a standard of their behavior that they were not meeting, that they knew they should have been meeting and whether they breached that behavior or not. Now I think there is an example in Spain and there's an example in a lot of the EU jurisdictions were regulators because of forbearance and the period leading up to the crisis. They were just looking the other way. They were laying the cajas and all these other smaller institutions make lots of loans that were poorly collateralized and to debtors that have very bad financial, back backgrounds and they weren't doing their due diligence. So one could sue supervisors and certain jurisdictions in the EU for that. But it would only have to be for known standards that they were not meeting beforehand, yeah, but not exposed. Okay, we reached the end of the time for this panel and it remains to me not to try to summarize but just simply to thank our panelists for giving us a wider perspective than we normally get on these regulatory, legal and so forth issues that are really fundamental for as I'm concerned, fundamental to our understanding of how we do macro-prudential regulation and we're very grateful to you. Thank you very much indeed.