Investors accept the possibility of being wrong in their business forecasts for companies or in the evolution of the economic or financial scenario. They even admit the possibility of “black swans” arising—risks that are difficult to assess a priori and have equally uncertain consequences. However, they find it very difficult to accept legal uncertainty, the lack of clear rules on which to base their hypotheses, or radical shifts in regulation. Legal uncertainty creates a breeding ground for prudent fear or irrational panic, an environment of high instability conducive to speculation.
What has happened with the stock market performance of Spanish banks over the last ten days is a good example of the cost of legal insecurity. And it is a cost that we all suffer, whether or not we are bank shareholders. The distrust generated by an unexpected change in long-established rules spreads like wildfire to all sectors and economic strata. Fear is contagious. It can take a long time to recover the confidence lost due to an unexpected and perhaps not deeply considered decision.
Banking stability is fundamental for economic growth. Our authorities understood this during the crisis, which led them to approve strict regulation and apply exhaustive supervision to banks. The ECB recognized just this week that European banks face numerous risks that derive mostly from their activity, which is granting and managing credit risk. Others include geopolitical uncertainty, cybercrime, climate risks, and competition in financial services from new operators. Banks can manage these risks, provided they start from clear and predictable rules.
