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European Commissioner for Internal Market and
Good afternoon Ladies and Gentlemen:
The proposals approved today by the College for a revision of the capital requirements directive are proposals on which we have been working for more than a year now.
The two most important elements relate to the establishment of Colleges of Supervisors to enhance cross border cooperation between supervisors and the mandatory exchange of information between supervisors to help detect signs of stress. We are also imposing much clearer responsibilities on supervisors in respect of the allocation of capital for banks operating on a cross border basis. This should ensure that in each Member State where a bank has an operation it will be appropriately capitalized. The proposals will strengthen oversight for the 40+ large cross border banks, equipping the system to handle much more effectively the problems that could arise in the event of a cross-border banking failure. Learning from recent events, it is critical that there are procedures and policies that ensure the availability of liquidity in times of stress. As we have witnessed, when liquidity dries up the blood just stops flowing and life just withers away. These measures represent a real and important breakthrough in respect of the pan-European supervision of banks – a breakthrough that until now has met with stiff political resistance from many Member States.
I would like to refer you to the recent events in Belgium where supervisors and authorities from different member states have come together and addressed problems with two major financial institutions. This was a success and we need to build on it. From the Commission's perspective, it is important for such co-operation to be enshrined in the regulatory framework for normal and crises times. Rather than working in the sole interest of their own member state it is important that solutions for cross border groups are found in a collegial manner. The proposal on Colleges, needless to say, is predicated on co-operation and inclusion. But the arrangements need to be workable. We need to increase the stability of the system as well as the efficiency of supervisors regulating the system. Therefore, I have sought to balance inclusion and consultation with decision making powers in the absence of consensus.
On securitization I want rigour, discipline and risk sharing. It is important that in the much maligned "originate to distribute" model the originator and the investor, the seller and the buyer explain and understand what exactly is on offer. So the second important measure that I brought to the College today relates to the due diligence that banks must perform in the analysis of risk assets that they invest in. No longer will any bank be able to place reliance on credit rating agencies for their risk analysis. No longer will they be able to buy securitized assets without ensuring that the originator of those assets retains a net economic interest in them. The stake will have to be material and in any event not less than 5 per cent. From now on, originators of securitized assets will also have to make available sufficiently detailed raw data in respect of the cashflows and the security supporting securitization programmes to enable investing credit institutions to undertake appropriate sensitivity analysis and stress testing of their own rather than relying on credit ratings. If they don't undertake that due diligence or don't have recorded evidence of having done so they will face heavy capital penalties. Indeed the proposal as structured should facilitate the emergence of "investor-pay" rating services that will challenge the views and ratings of the "issuer-pays" model of the established credit rating agencies. The latter model contains inherent conflicts of interest that to date in the case of many of the most important credit rating agencies have not been adequately managed or addressed with the consequences that we have all seen.
The other main aspects of our proposal relate to placing limits on how much risk a financial institution can expose itself to a single counterparty (the so-called "large exposures regime"). Today's proposal will restrict banks in their lending to other parties, even to other banks. This may sound counter-intuitive in times of a liquidity crunch. But I must clarify that we are not banishing inter bank lending into oblivion but are ensuring that no institution puts all its eggs in one basket.
Today's measures are part of a much bigger roadmap on which we continue to work and in respect of which we will continue to bring forward proposals over coming months. For over a year now we have been working with Member States on the Roadmap(s) agreed by the ECOFIN Council as priority measures to respond to the crisis. In all, we have 40 measures on the Roadmap which include Improved Transparency of Markets; Valuation Standards for accounting of Asset values; Prudential Risk Management and Supervision, including Crisis Management; and the Strengthening of Supervision and coordination.
The second major regulatory response will be the forthcoming Regulation on Credit Rating Agencies which I hope to have with the college next month and which will provide for the registration and supervision of Credit Rating Agencies in the EU.
With our current measures we will have put on the table pragmatic and workable provisions for strengthening cooperation among supervisors in two ways.
Firstly through the reinforcement of the European Committees of banking supervisors, insurance supervisors and securities markets supervisors. Secondly through the creation of colleges of supervisors for the larger financial institutions in the EU we will have strengthened materially cross border supervision and information exchange.
Having a supervisory system that corresponds to the integrated nature of EU financial markets is urgent as today's turmoil underlines. Some have called for a single European supervisor. There are merits in such an approach but we need to proceed carefully. There are pros and cons that need to be teased out. In the meantime we must make the improvements that are necessary. Colleges of supervisors is a pragmatic step.
So Ladies and Gentlemen; much has been done but there is more to do.
It is important to bear in mind that we are not working in isolation. The European Union and the Treaty provide for a clear framework for action. It is equally important to note that this set of changes is also in line with work at G-10 level in Basel and in the G-7 Financial Stability Forum.
In the short term, Member States or Groups of Member States will continue to respond on structural issues and Central Banks will continue to address the liquidity problems.
For the medium term, the Commission will continue to strengthen the regulatory framework to prevent the recurrence of such crises. There is no "single bullet" but I am confident that the work we are doing today and the work we are involved with also in international fora will result in a more secure, more responsible financial services industry in the years that lie ahead. And I am determined to ensure that it does.