The new structures may not live up to his expectations. The risk board, for instance, has only the power of its voice. In good times its warnings may well be ignored and during a crisis it may have to hold its tongue for fear of sparking panic. Moreover, it seems likely to duplicate work being done globally by the newly christened Financial Stability Board, an international body which held its first meeting on June 26th and 27th.

The new supervisory authorities are also hamstrung. They cannot compel countries to do anything that might cost money (“burden sharing” in the jargon), such as propping up banks with more capital. Nor can they wind up cross-border banks in an orderly way to ensure that all depositors are protected, something that is needed to stop countries from simply grabbing what assets they can when big banks fail. The danger is that national supervisors in Europe could well end up ignoring the new authorities and erecting barriers to foreign banks instead. “If we stick with national supervision we will end up with national banks,” says Dirk Schoenmaker of the Duisenberg school of finance.

The other major regulatory proposal to have come out of Europe recently inspires even less confidence. The commission has proposed heavy-handed regulation of hedge funds and private-equity firms. The principle of bringing all important institutions into a regulatory net is sound. But the directive clumsily lumps together hedge funds and private-equity firms when imposing disclosure rules and limits on borrowing. The Swedes are well aware of the problems and are likely to ensure that what eventually emerges is acceptable for both industries. Yet the focus on alternative-investment managers, which played a small role in contributing to the financial crisis, suggests that rules are being drawn up to satisfy domestic audiences.

... contd.