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Member of the European Commission for the Internal Market and Services
"What financial stability for the future?"
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Forum "Les Echos"
Paris, 18 March 2010
"What financial stability for the future?"
Your conference is asking the right question at the right time.
Some people — probably even some in this very room — take the view that we have now emerged from the crisis. The financial markets are making fewer headlines and emergency meetings of the national finance ministers are becoming less frequent. It is as if there is a new economic mood in the world. And the financial institutions are once again amassing healthy profits…!
And yet, have we really emerged from the crisis? Given recent speculative activities in certain markets, I would be inclined to be very wary. The economic and social consequences of the crisis are still with us and, in some cases, have not yet happened. Not only in France but in Europe as a whole. We are far from having restored the levels of employment and growth which existed prior to the shock of 2008.
We will not emerge from this crisis in the same condition as when we entered it, either in terms of regulation or in terms of the nature of growth, which will need to be more balanced, more socially equitable and show more respect for the environment. To remain as we were would be a mistake.
So have we in fact emerged from the crisis? As you will have gathered, I am not certain about this — even if there are some positive signs. But what I am certain of is that we are in a critical period — one in which issues will be decided, in which decisions taken at the highest level must be implemented and in which history will tip one way or the other. One in which we decide whether or not to learn the lessons of the past and choose what kind of financial stability we want to build. It is a moment of truth.
At the same time, we are hearing increasing calls, some more explicit than others, to do nothing. Warnings about the risk of over-reaction or of over-regulation. Sometimes from the very same people who, only a few months ago, were calling for public-sector intervention on a massive scale.
I am convinced otherwise: we must act urgently and we must act now.
We must take action because we have not yet learned all that the crisis has to teach us in terms of regulation and supervision.
We must take action because our public finances would be unable to withstand the cost of a new financial shock comparable to the one which we have experienced. The Commission has approved public assistance for the financial sector amounting to 13% of European GDP.
We must take action because it is our political responsibility to do so. If people thought that we had been incapable of learning the lessons of the crisis, they would have every right to criticise us harshly. And in every country in Europe, we would quickly see the centrifugal forces which have been lying in wait take hold and there would be a resurgence in inward-looking and even nationalistic behaviour. This house which we share — this area of peace and prosperity which we have been building for 50 years — would be undermined. The first casualty would be the single market.
The people of Europe have felt — and rightly so — that Europe has protected them during the crisis. We must now show them that Europe is taking action to end the lack of transparency and misjudgement of risks, and to avert the crises of the future.
That we should do this is a legitimate expectation and I can assure you that the new Commission is determined to roll up its sleeves in order to fulfil it and forge financial stability for the future. We call on the governments to assume their responsibilities and do likewise.
In my capacity as Commissioner responsible for the internal market and financial services, I will use all the tools at my disposal to work actively towards this. Not only in Brussels but also at local level, with Member States, economic operators and European citizens.
I – Effective and intelligent financial regulation
Before going into the details of what the founding principles of a sound financial system should be, I would first like to say a few words about how this should be achieved.
The action we take to carry out reform must be all-encompassing.
We will not get out of this predicament by changing a few parameters here and there. Nor will we do so by adopting a single radical and emblematic measure, whether regarding banking activity or market operations.
Instead, we need to build a coherent set of reforms which address each of the problems and weaknesses revealed by the crisis.
We need to incorporate into the system a more cautious approach, along with more stringent checks and additional safeguards. We also need a new risk culture within the financial system.
Taking resolute action but without improvising
I have no intention of avoiding difficult questions and will not hesitate to propose strong new rules, should they prove necessary. But when we take action, we will not improvise.
I want to listen, draw on detailed impact studies and take into account the economic effects of each prospective measure, and the cumulative effects of all proposed reforms.
In order, for example, to decide exactly how much additional equity the banks should be asked to provide and when such requests should be made.
Reform will not be effective without the commitment of everyone
One thing is certain: the main cause of the crisis is the "race to the bottom". I do not believe in self-regulation. The G20 heads of state have committed themselves to a roadmap which is clearly marked out. We must take action together in a sprit of dialogue and mutual trust in order to meet these commitments. We must trust each other but we must not be naïve.
I firmly believe that the European Union and the United States have a specific responsibility to meet the commitments of the G20. Our methods may be different but we must move in the same direction and achieve the same objectives.
There will be no reform unless everyone assumes their responsibilities
The Commission is doing its work and will continue to do so but it cannot do so alone. It makes proposals, and this is essential, but it is for the European Parliament and the Council to take the decisions.
So much for method, but what about our priorities? What are our priorities for building financial stability in the future?
II. The reform of banking supervision must be the cornerstone of our regulatory efforts
In the midst of the crisis, Mr Barroso took the decisive step of launching work in a fundamental area — and perhaps the most crucial area of all, namely banking supervision — by entrusting Jacques de Larosière with the task of analysing the situation and proposing solutions. This work was initiated back in February 2008.
In September 2008, the Commission put forward legislative proposals for setting up European supervisory authorities and achieving three main objectives:
Establishing macro-economic surveillance. We now need to have a global view of risks within the financial system. A single transaction may be perfectly prudent in itself but if everyone conducts the same transaction, this may pose serious risks.
Harmonising supervisory practices and settling differences of opinion between national authorities. A competitive internal market clearly cannot work if European legislation is interpreted differently in Prague or in Paris.
Finally, credibility at international level. This clearly is not possible if national supervisory authorities do not coordinate their efforts and if they take different positions.
This is a crucial area. We need to move fast and I will try to facilitate an agreement between the Parliament and the Council. This is a necessary and difficult step, but one which must be taken as a matter of urgency. The European supervisory authorities must be put in place at the beginning of 2011. Europe will then have a more robust and modern system, better able to meet the challenges of the future. And it will be the first region in the world to have achieved this.
III. Banks which are more robust
The second key area of work is to make banks more robust and more resistant to crisis. This is one of the commitments made by all the G20 countries. We should not have to face crises in which certain banks do not have enough equity or do not have equity of sufficient quality.
Work in this area is progressing. The driving force is the Basel Committee, which is doing good work. A few days ago, I myself launched a consultation on the revision of the Directive laying down these rules (CRD4).
I firmly believe that risky activities need to become more costly for banks. This subject is both complex and difficult but we need to find the right level at which to set the new standards over the next few months.
Too strict, and they will lead to the rationing of credit and kill the recovery.
Too lax, and they will encourage a return to risky practices.
We therefore need to find the right balance this autumn, not only in terms of the extent to which equity should be increased but also in terms of when it should be disbursed.
IV. Responsible financial institutions
It is, of course, essential that supervision be reformed and strengthened. But I believe that the first level of risk prevention and risk management is within companies themselves. We need to create a true culture of foresight.
We need better corporate governance. We need non-executive managers and administrators who are responsible and competent and who have the expertise, resources and time to fulfil their task. This will also necessitate better risk management and greater involvement and accountability on the part of shareholders.
More accountability also means pay which does not encourage excessive risk-taking. We will stringently apply the G20 principles, namely greater transparency, better control and deferred payments.
We will also propose extending these strict principles to other financial operators in order to avoid overbidding and distortions of competition.
Outside the financial sector, the Commission will also launch a debate on the pay of managers of listed companies. When economic times are hard, it is important to reward the long-term performance of managers and not situations marked by failure.
V- Markets and products which are regulated and transparent
This point is particularly topical in view of recent turbulence in the market for certain government loans. We are looking at the implications of speculation in sovereign credit default swaps and, depending on the results, will investigate whether measures are necessary.
More generally, we must forge ahead with our efforts on derivatives by imposing greater transparency, greater prudence and greater control. We will take steps to push strongly for the standardisation of derivatives. We will make it mandatory for central clearing houses to be used for the clearing of standardised derivatives. This should significantly reduce the risks ensuing from the bankruptcy of a market participant.
We will also use centralised entities ("trade repositories") to register transactions. This will also help to improve the action taken by the supervisory authorities. I will be making proposals to that effect in June.
Finally, those who engage in market abuses must be prosecuted effectively. This means that penalties must be a real deterrent and be comparable throughout Europe.
I believe that these measures will ensure that we have markets which are safer, without discouraging financial innovation.
Conclusion: foresight and crisis prevention
My ambition is for Europe to provide a real response to the crisis and to emerge from it both stronger and more competitive.
I do not believe in the simplistic opposing of regulation and competitiveness. On the contrary, I firmly believe that the continent which is the first to acquire an intelligent system of regulation and effective supervision will have gained a decisive advantage in attracting future investors.
This will be achieved by taking the immediate steps which I have just mentioned but also by doing the difficult but necessary work of crisis prevention and crisis management. I have a meeting in Brussels tomorrow with the Director-General of the IMF and with the President of the ECB to discuss this subject. The objective will be to define jointly the component parts of a European framework for crisis prevention. We will be launching an essential area of work which will require us to leave many of our national instincts behind. It will be the touchstone which, I hope, will ensure that Europe remains strong in the face of future crises.