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Michel Barnier

Member of the European Commission responsible for the Internal Market and Services

Forging a new deal between finance and society: restoring trust in the financial sector

Figures and graphics available in PDF and WORD PROCESSED

European Financial Services Conference

Brussels, 26 April 2010

Ladies and Gentlemen,

I welcome all of you who have made it to Brussels despite the recent travel chaos.

The subject and title of this conference is well chosen. And I fully subscribe to it.

We need a new deal between financial regulation and society.

A deal in which financial services are back at the service of the real economy. And at the service of citizens. Citizens who are also taxpayers. Those same taxpayers who are paying the bill of bailing out the banks.

Citizens and taxpayers who have lost all trust in the financial system. Who don’t believe it works for them.

And who won't forgive us if we don’t learn all the lessons of the crisis. And change what needs to be changed in the financial sector.

This must be the starting point of any "new deal" between the world of finance and society: restoring trust.

1. Where do things stand?

We are slowly emerging from the worst economic crisis in living memory. GDP fell by 4% last year in Europe.

Recovery is taking hold– but remains very fragile.

Looking back, we must admit that we were not prepared for such a crisis.

We had to become fire-fighters - to prevent a complete meltdown of the financial system.

From the start of the crisis, the Commission played a key role leading and coordinating the fire-fighting. Both within the EU and at international level.

However, our role is now evolving. We are turning from fire-fighters to architects of a new financial system.

We have already laid the first foundation stones – including a package of proposals to reshape financial surveillance at European level.

But there is much more to do.

2. A few weeks ago, the Commission adopted its work-programme for 2010

In it, you have proposals which form a structural and long-term response to the crisis. Proposals aimed at creating a new order in financial services.

Proposals that will create the right basis for a thriving financial sector. A financial sector that contributes to job-creating and sustainable growth.

Proposals based on a new starting point. Because the crisis has forced us to reconsider some of our fundamental assumptions about the world of finance.

First, a common assumption was that markets – when left to themselves - act rationally.

Second, that financial innovation is always useful and generates profit.

Third, that transparency is not that important.

And that the right answer to jobs and growth was a complete "laissez faire".

I think we can all agree that those assumptions were too simplistic. And wrong.

That is why we are in the process of developing an appropriate regulatory 'rethink' for the financial sector.

This "rethink" must be comprehensive.

It's about building a whole new architecture – where the financial sector can once more be at the heart of growth, but for the long term.

There are many strands of work. Many foundation stones to lay.

We need:

  • Prudential reforms: Improved supervision. Changes to capital and liquidity requirements to reduce the likelihood of banking failure.

  • To deal with large systemically important banks. Action to reduce or manage the complexity of the financial sector.

  • To change the culture of governance. We need better corporate governance. More transparency. Better risk management – within companies first. But also more effective external checks and controls.

  • Consideration of what needs to be done to increase consumer protection. Across the board.

These objectives are in line with the G20 roadmap. Our common global roadmap.

I sometimes hear that the Commission is passive. This is not true.

Europe is leading the way on implementation of G20 commitments.

The Regulation on Credit Rating Agencies is already in force.

We made proposals on hedge funds and private equity a year ago already. I agree the Commission's original text was far from perfect. But the text has now come a long way. And is nearly ready for final agreement if all sides show a bit more flexibility.

On supervision, the target date to put in place a new framework of European Supervisory Authorities for banking, insurance and securities is 1st January 2011. Time is running out. I know how sensitive some issues are. But we cannot afford failure. And again, with a bit of flexibility, quick agreement is possible. And essential.

Next year too, the new European Systemic Risk Board should start its work. To better anticipate crises before they happen.

So – on all these files - I urge the Council and European Parliament to work quickly and agree. Our collective political responsibility is at stake.

And if we look ahead:

We'll tackle the derivatives market in June. To bring light to a very dark world.

We need more transparency. Greater harmonisation of products. Registration in trade repositiory. And compulsory clearing via Central Clearing Parties.

Second, we need better and more capital. I have just received nearly 150 replies to our consultation on CRD IV (Capital Requirements Directive). I will make the necessary proposals by the end of the year on bank capital requirements. I will take account of the latest thinking at international level, including issues of liquidity management, leverage ratios, and pro-cyclicality.

We are working hand in hand with the Basel Committee in this regard.

Third - for consumers - we will revise the Directive on Deposit Guarantee Schemes, as well as the investor compensation rules.

And I will look at guarantee schemes for insurance.

And we need to give SEPA – the Single European Payment Area - a renewed momentum. I believe that binding end-dates are important in this regard.

Fourth – none of this works without a real crisis prevention and management framework in place. I presented my initial ideas resolution of banking crises and cross-border crisis management last week. This is not easy work – but it's essential.

The debate is sometimes very focused on bank levies and taxes. We all know why. And I welcome the good IMF report of last week in this regard.

But we need to be clear - a bank levy or stability fee is only one tool out of many in a broader crisis management framework. It is one line of defence.

And its purpose should never be to be a bail-out fund for banks.

No, the idea is to ensure that the necessary funds are there to intervene early in case of problems. And to ensure an orderly resolution of a bank.

To avoid that taxpayers' money is first in line next time.

Finally, I am often told that what the market needs most is legal certainty. I fully agree. That is why our regulatory responses will be coherent – not fragmented.

And let me assure you how aware I am of the cumulative impact of various proposals. And the need for calibration – both in time and scope. We must help – not hinder - the economic recovery. But no action is not an option either.

3. Conclusions

Ladies and Gentlemen,

Please allow me to close my remarks by highlighting a number of challenges.

The biggest challenge you and I face is restoring citizens' trust in the financial sector.

There are already strong tendencies of populism and protectionism.

And that worries me.

Because the first victim would be the Internal Market.

And that includes the financial services sector.

Populism and nationalism can only hurt the recovery.

So we need our citizens to believe we are taking the action necessary to create a new financial architecture. A financial system that is the heart of jobs and growth, and one that serves them – not the other way round.

Yes, the financial sector must continue to be attractive to investors. But everyone has to realise that the profit levels seen before the crisis are a thing of the past.

Second, international convergence is critical.

As we speak, the preparations for the G20 meetings in Toronto are ongoing.

Divergences between EU and third country policies are bad for competitiveness. And they create the risk of regulatory arbitrage.

Nowhere is this felt as clearly as in financial regulation.

I think about derivative markets, capital requirements, accounting standards.

I will make this point when I travel to the United States next month.

But I will make the same point to our partners from Japan, China, India and other countries.

Together – we can get this right. [And create a volcano-proof financial regulation.] But it needs everyone's participation. And commitment.

Thank you for your attention.

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