Vice President of the European Commission responsible for Competition Policy
New rules for finance: Putting the genie back in the bottle
EP Committee on Economic and Monetary Affairs
Public hearing on Tackling the culture of manipulation: Global action
24 September 2012
Ladies and Gentlemen,
The issues we have on the table today describe well what went wrong with finance. We are invited to talk about integrity, transparency, trust, governance, and systemic failures.
The age of deregulation has produced a financial sector which has grown too large and too complex for comfort; which serves its own interests a whole lot better than the interests of the rest of us; and which poses a serious threat to the stability of our economies. The original financial crisis of 2007-2008 has snowballed into a much bigger affair.
At this point, there are two things that I want to make perfectly clear. The first is that banks are not the root of all evil – far from it – and the second is that the financial and economic evolution of the past three decades is not an inexorable law of nature.
What I mean to say is that it would be unfair to put all the blame on greedy bankers and their moral flaws. In the end, they are part of larger processes involving many other figures, including political leaders, business people, and opinion makers. The responsibility is broadly shared.
Of course, a number of managers and traders have flouted the rules – and that was wrong. But we’re not here today to talk about their shenanigans. We’re here because the rules themselves were wrong and we want to understand how they should change.
Banks and other financial services are essential factors of growth. They can make our economies more efficient and our lives easier in many ways. But without a sweeping reform of the regulatory framework, they are simply not sustainable.
We need to see the end of what some call the financialisation of the economy and others casino capitalism. We need to redefine the place for finance in the real economy and in the body social and politic.
What is the role of competition policy in this context? Quite large, I would say. The principles of competition policy support the good functioning of markets and are a useful guide to identifying failures and dysfunctions.
The basic principle of competition is access to markets. Any efficient player should be able to participate in an economic activity provided that they comply with other regulatory requirements such as those on safety, minimum quality standards, and – in the case of the financial sector – stability.
Competition policy fights business conducts that unduly prevent market access and fair play. I will argue here that any market where essential information is locked in the hands of a privileged few who can handle it as they wish, withhold it from counterparts, or even misreport it – with little or no supervision – is a market destined for manipulation and fraud.
When those who control the information explicitly agree to manipulate it at the expense of other players in the market, I believe we have a clear case of competition-policy violation. I also believe competition rules are flouted when a single firm or a group of firms willingly withhold information for the purpose of impairing the efficient functioning of a market.
For these reasons the Commission since the beginning of the crisis has stepped up its vigilance in the financial sector. At present, our investigations cover market-information providers, Credit Default Swaps, as well as benchmark rates and financial derivatives. The experience we are gathering as we throw light into these areas of finance can help us understand where the rules of the game are too weak.
We brought two cases against Standard & Poor’s and Thomson Reuters; two leading providers of financial information. Among other things, we were concerned that the restrictions they imposed on the use of their data and codes made it too difficult for their clients to use alternative providers if they wished to. Standard & Poor’s proposed adequate remedies last year and we closed the case. The remedies proposed by Thomson Reuters are being analysed.
We are also investigating Credit Default Swaps. We have opened two investigations in this market; one concerning the clearing of credit default swaps and the other on CDS information.
We have learned many things during this investigation. The conclusions will not confirm all our initial doubts, but other elements of the bad functioning of this market, in some respects. I cannot go further but I can say this investigation is pursued as one of our top priorities.
We are currently running several cartel investigations in which a number of financial operators are cooperating. In October 2011 the Commission carried out unannounced inspections at the premises of several banks active in the sector of euro interest-rate derivatives linked to EURIBOR. We have also sent requests for information.
Our concerns are that certain companies, in particular banks but also brokers, may have violated EU antitrust rules that prohibit cartels.
Certain market players may have colluded to submit aligned rates in order to benefit their trading positions in these interest-rate derivative products to the detriment of their trading counterparties as well as non-colluding competitors.
Among other things, they also appear to have exchanged information about their trading positions and about their pricing intentions of interest-rate derivatives and their expectation of future trends in derivatives prices.
Given the number and value of transactions in interest-rate derivatives and their crucial role in the management of risk, these products are of high significance to the financial sector and the European economy as a whole.
These investigations are still on-going and we expect to conclude them as soon as possible. We are giving high priority to these cases.
As we conduct our investigations, we are in constant contact and cooperation with several other competition authorities, as well as with other authorities and bodies involved in the matter at EU level.
While our investigations aim at verifying some of the banks’ and brokers’ collusive behavior, I believe that the endemic problems that these investigations bring to the surface – in particular the existence of perverse incentives in the functioning of the current system, issues of conflict of interest, and lack of transparency in the financial-data market – will eventually need regulatory solutions. And the Commission is already acting upon these issues as mentioned to you by my colleague Michel Barnier.
But it is also the responsibility of the Commission to check whether or not EU antitrust rules have been breached. We have to ensure that competition in financial markets takes place on a level-playing field.
I have left for last our control of the public bailouts of European banks in distress. Our main goals here are maintaining stability in financial markets and preserving the integrity of the Single Market.
To conclude, our experience confirms that financial services need new and better rules. I hasten to add that these rules need not stifle business. As an enforcer, I can tell you that good regulation is easy to implement and easy to comply with.
It is also clear that the new rules should result from a concerted global process. Since finance is a highly integrated global industry, national or even regional efforts would be futile – even within major jurisdictions such as the US or the EU.
Finally, I am convinced that the success of any new framework crucially depends on implementation; because without a good enforcement system – including competition control – its intended effects would not be felt on the ground.