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Member of the European Commission responsible for the Internal Market and Services
Financial regulation in Europe – where next?
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Dinner with representatives of the banking sector at the London Stock Exchange
London, 31 March 2010
It is a pleasure to be here in London. This is my second visit within six weeks.
I hope you don't think I am overdoing it!
I have said it before and I am happy to repeat it: I see the City of London as an asset to the European financial sector and to the EU economy in general. This is my conviction. And it has been reinforced in the last few weeks.
I also believe in efficient and intelligent regulation. It is not a threat to London's financial centre.
On the contrary, I am convinced that such regulation will be a significant asset for the competitiveness of this industry. And that it will contribute to Europe's attractiveness for investors.
Contrary to what some may think, we are not out of the crisis. There can be no business as usual in the financial sector.
We are at a turning point.
If we regulate well, we will go a long way towards preventing future crises like the one which is still not finished.
And this is an important point. We will not exit this crisis in the same way as we entered it.
And I want to be very clear. If we don't get the regulation right before the next crisis strikes, the road will be free for populism and protectionism. And the big loser will be the Internal Market. And all of us.
I would like to share with you tonight some of the principles and key objectives which will be my guiding light when regulating financial services in the years to come.
I. My first message is: I believe in regulation. But I don't want to regulate for the sake of regulation.
1. Self-regulation has failed.
The regulatory "race to the bottom" was a contributing factor to the last crisis.
However, I will not replace self-regulation with over-regulation. What we need is appropriate and efficient regulation.
We have seen in the past that regulatory gaps are always exploited. Credit Default Swaps, which are basically a form of insurance, escaped from insurance legislation in the United States. For this reason, these products did not require backing capital. That gap contributed to the fall of AIG.
Wherever there is a regulatory gap, there is a risk.
Let me be clear. Regulation and supervision can never cover everything that is happening in the markets. But policy-makers and regulators would fail in their duties if they left large parts of the market unregulated and unsupervised.
The rules of the road apply to all road users. Financial rules should apply to all market participants.
2. This is why it is important to conclude the work on the Directive on Alternative Investment Fund Managers.
I know that this Directive has caused concerns here in London. In particular with regard to third country managers and funds.
But as you know, the Commission's proposal foresaw a passport for third country managers. Subject to strict criteria of equivalence. I still believe that this is the right way forward. And I will play my role as an honest broker with the European Parliament and the Council.
3. Consistent regulation and sanctions are another important factor. We cannot have different interpretation of basic rules in different Member States.
We cannot have different sanctions in case of non-application of the rules or abuse.
I talk a lot about regulation but let me underline that I believe in better regulation. We need full consultation of all stakeholders. In this area, I plan some improvements. For example, I will ensure full involvement of stakeholders in the planned new Supervisory Authorities. And I believe in detailed micro- and macro-economic impact assessments.
II. My second message is that banks must be solid and well-governed. And be seen in that way.
The G20 has agreed that we need improved capital rules for banks.
1. This means first: More capital, better capital, rules that avoid pro-cyclicality.
The Basel committee is working on this. It will be reflected in our proposal regarding the Capital Requirements Directive (CRD) later this year. I have launched a public consultation on this subject until 16 April. I invite you to take part. It is important.
2. We must make sure that never again will the EU banking sector resort to public aid on such a massive scale.
The public purse cannot afford it. And the citizens will not accept it.
I strongly believe that banks must contribute themselves to the cost for future crises. You have all followed the discussions around a bank levy and resolution funds. As I said in Brussels two weeks ago, I intend to work in this direction.
3. I speak a lot about regulation of banks. But I know your concerns about the cumulative impact of those new rules.
And I am aware of the fact that we need the banking sector to support the economic recovery. By lending to the real economy.
That is why we consult and do macro and micro-economic impact assessments. Because we need to get both the scale and the timing of the new rules right.
I call that the "double calibration".
III. A third message is that there must be more transparency in securities transactions
Lack of transparency on securities markets contributed to the crisis. The extent of the risky transactions was not clear until a very late stage. And when it became evident, it came as a shock.
I come back to our G20-agenda.
1. First, we need to ensure more standardisation in the derivatives markets. To increase safety and integrity.
Our American friends are doing the same. They are even ahead of us.
Today, 80% of derivatives are traded Over The Counter. We need to get much more visibility in this market. I will present proposals before the summer to increase transparency on derivatives markets.
More clearing via central clearing counterparties (CCPs). Registration in trade repositories.
2. I will also revise the Markets in Financial Instruments Directive (MiFID) in order to increase transparency on alternative trading platforms.
And I will look at the Market Abuse Directive to extend its coverage.
3. We are also studying the effects of naked Credit Default Swaps on sovereign debt. It is a complex area and we need to get it right.
That is why we have put a taskforce in place to look further at this issue.
I may address this issue as part of my general work on shortselling. And let me underline that I don't speak about a ban. I speak about a framework of rules and transparency.
IV. Fourthly, we need a strategy for predicting crises and handling them if they occur
We are putting two pillars in place in this regard.
1. First of all, as part of the supervisory package, we will establish the European Systemic Risk Board.
The Risk Board will detect potential systemic risks. The Risk Board will not have legally binding powers. But the threat of publication of its warnings and recommendations will be a powerful tool of influence.
2. Secondly, we are working on a crisis resolution framework for the EU. This is one of my absolute priorities. We need to prevent future crises – prévoyance as I would say in French. Prevention is better than cure.
The questions involved are complex: How do we organise crisis resolution funds? What is the right European approach to cross-border bank failures? What can we do in terms of insolvency law?
I will present a paper on those issues to Ministers at the Informal Ecofin Council later this month. I am committed to taking this work forwards as quickly as I can.
V. Finally, supervision is at the core of our strategy for the financial sector
A common approach to macro- and micro-supervision is the keystone of our strategy.
It fully respects subsidiarity. Day-to-day supervision remains national.
The three new European Supervisory Authorities will play a key role in
- putting in place a single rulebook
- solving disagreements between national supervisors
- monitoring the correct application of EU law
- intervening in emergency situations.
This is an adaptation of supervision to reality. Financial services travel cross-border. Supervision has remained local.
We need an agreement on this package. The Commission has made its proposals. Now the co-legislators, the Council and the European Parliament, have to agree rapidly. Our political credibility is at stake.
Ladies and Gentlemen,
Let me finish where I started. There is no contradiction between regulation and competitiveness.
In all areas of business, jurisdictions with clear and coherent legal frameworks attract investment.
And I am absolutely confident that with better regulation in place, London will prosper even more than before.
So I invite you all to play your full role in the process of developing new rules. Make your input forcefully when you believe that our proposals need improving.
But we also need you to support us in our overall goal of enhancing the internal market. And establishing improved regulation and supervision in the EU. As a model for the world.