SPEECH/07/573
Charlie Mc
Creevy
European Commissioner for Internal Market
Current
issues in the EU banking
sector
Dinner with BEF Board Members
Brussels, 27 September
2007
Ladies and Gentlemen,
It is my pleasure to address you in this splendid venue tonight. With financial turbulence around – the timing is good. It is crucial that we exchange ideas on the market situation and the lessons we should draw from present difficulties.
First lessons from the sub-prime crisis
The recent turmoil has clearly demonstrated the impact of interconnected global financial markets. Risks have been spread widely. And fast. Diversified risk spreading is positive. But at the same time, this dispersion of risks has also brought about uncertainty. Who is carrying the major risks? The losses? What are the actual exposures of market players? We still don't know. This uncertainty seriously affects investors' confidence. And banks' confidence in each other. So we have seen the consequence of extreme liquidity shortfalls, translating into some solvency problems. The whole episode reinforces the need for greater international cooperation among regulators – EU-US and wider.
Risk transferred through structured financial instruments has been one of the key factors contributing to the financial turmoil. We must ensure that firms improve their understanding and monitoring of risks in credit risk transfer products to withstand market disruptions.
The new Capital Requirements Directive, when it is fully implemented in Member States by the beginning of next year, should improve matters in some respects. But we must not be blind to a number of issues, not least being the weighting of risk, particularly in regard to the trading book, quality of ratings, procyclical tendencies and adequate street testing of models.
The ECOFIN Council in November will adopt an initial work programme setting out those and other measures that need to be examined in the light of recent market turmoil.
Improving transparency for investors, markets and regulators will also be important in helping to address a possible lack of transparency of financial institutions and across the market as a whole. We need better data. We are going to look at clarifying the role of credit rating agencies in structured finance markets and their governance in general. Are there conflicts of interests? Can you grant an objective rating to a banks' structured product if you have advised that same bank how to structure that same product? And should rating adjustments suffer from such long time-lags? Do ratings agencies make it clear enough what their methodologies and limitations are? We are following up these issues, and many more, with CESR as well as with our international partners.
These are some – and only some - of the lessons we see emerging from the present turbulence. I will be addressing them in more detail next month. I am still of the firm belief that a "light touch", principles-based regulation is the best approach for the financial sector. I will endeavour to ensure that there is no overreaction. But we must draw lessons. And we will. The industry, among others, must do better in the future.
Financial Stability Arrangements
Turning to the issue of crisis management in general, the existence of a mismatch between on the one hand market integration –which has accelerated in recent years in particular through cross-border M&A activity- and financial regulation in the EU on the other has not escaped EU regulators' attention. Indeed, Finance Ministers' concerns about the capacity of the current system to handle a cross-border, systemic banking crisis were first awakened in light of the April 2006 crisis simulation exercise, prompting them to set up a special working group under the auspices of the Economic and Finance Committee. The work in the ad hoc working group has been underway for a year now – well before the recent turmoil on the market.
All those involved in the discussions recognise that the current regulatory framework is not perfect. We at the European Commission have in particular been pushing for concrete and meaningful progress. In the past, progress was too slow, stymied by bureaucracy, and failed to keep pace with market developments. The current turmoil has added an extra degree of urgency, but at the same time it has created an opportunity, which we as regulators need to grasp in order to push through real changes and improve the situation on the ground.
But this is a daunting challenge. Now I would be the first to accept that there are legitimate concerns in regard to ex-ante planning and in particular burden-sharing. Each crisis is different and a predetermined script has serious limitations.
However, there must at least be some blueprint so that we do not start inventing the wheel again every time there is a crisis. The real problem, as I see it, is that until now we have organised supervision in Europe along national lines. Supervisors have a duty to safeguard their own banks and depositors.
When crisis hits, if there's no trust and cooperation among supervisors, it could be a case of "grab what you can get". In a worst case scenario supervisors will ring fence assets in entities they supervise – preventing them from being used in other parts of the group where they may be needed, for example for collateral provision. Such a situation would be incomprehensible to the general public.
What is now proposed boils down to agreeing on some fundamental political principles, establishing trust among supervisors and working out sensible modalities. A key, but very difficult aspect, relates to who pays? If public money needs to be used to shore up the system, whose taxpayers will pay the bill? Creating the right incentives for supervisors to cooperate by establishing clarity about how costs will be shared in a crisis. Clarity and mutual trust will be also key to making real progress on a whole host of other dependent issues – home-host responsibilities and cooperation arrangements, asset transfer, winding up procedures.
We are also keenly aware of the need to ensure consistency across the board for supervisory arrangements - there can be no mismatch of rights and responsibilities between ongoing supervision and in crisis management situations. So the implications of the current work extend beyond crisis management. It stands to shape the development of the whole European supervisory framework in the coming years.
I am among those who call for an evolutionary rather than a revolutionary approach. Our supervisory arrangements have not evolved as quickly as cross-frontier penetration of large financial institutions. I would like to see our supervisory arrangements evolve a bit faster to reflect market realities.
The conclusions to be adopted by the Ecofin Council on 9 October will help. I hope the lessons from the current market turmoil will give a greater sense of urgency.
The wide-spread review of the Lamfalussy process currently underway is also relevant in this debate. Various reports evaluating its performance will be published towards the end of the year. And in December the ECOFIN Council will take stock of them all. This debate is of major political importance and I expect that in 2008 we will continue a thorough discussion on the future of the regulatory approach.
The Lamfalussy process has been widely supported by the European financial services industry. It is an efficient mechanism enabling the legislation to respond rapidly and flexibly to developments in financial markets. It also provides a basis for greater supervisory convergence and cooperation.
However, there is also a consensus among the EU institutions, Members States, supervisors, Level 3 committees and market players that more efforts are needed to make the process fully operational – in particular regarding the convergence of supervisory practices. And to achieve this, active participation and support of all the stakeholders will be indispensable.
I therefore very much appreciate the strong voice of the European Banking Federation in the Lamfalussy debate since the very beginning.
And I am happy to note that your views are somewhat consistent with the Commission’s considerations. I believe that major institutional changes to the current Lamfalussy-based architecture are neither desirable nor politically feasible at this stage. But CESR, CEBS and CEIOPS must quickly and convincingly demonstrate their progress on fostering supervisory convergence and cooperation.
With this objective in mind, the Commission will present in December its ideas on achievable and practical improvements to the Lamfalussy process and in particular to the work of the Level 3 committees.
We believe, first of all, that this Level requires a strong political endorsement in order to enable adoption of pan-European supervisory standards and their effective implementation in the Member States. National supervisors should be enabled and encouraged to adopt a European view and strive for EU-wide convergence.
We will therefore encourage the Member States to provide their supervisory authorities with appropriate mandates to allow their effective work in CESR, CEBS and CEIOPS. And last, but not least, we will indicate the measures aimed at strengthening the position of the Level 3 Committees plus enhancing their decision making capacities.
Before concluding, let me refer again to the crisis in the US mortgage market. It has shown how much caution is necessary to properly regulate and supervise the provision of housing loans to retail customers. Lending should take place in a responsible way and consumers should be placed in a position to make well informed decisions. These issues arise, among many others, from the consultation launched with the publication of our Green Paper on Retail Financial Services in May. We received almost 190 responses from 25 Member States and the public hearing, held on 19 September, was attended by well over 300 participants. This overwhelming interest, combined with the widespread support for the Green Paper, illustrates the importance of retail financial services to European citizens and the economy alike.
A key message received in the consultation has been that retail financial services will continue to remain predominantly local for the foreseeable future. This confirms our own views stated in the Green Paper. But while recognising consumer's preference for local distribution channels, we believe that this does not preclude either the need to facilitate cross-border activity by retail financial services providers, or the need to make life easier for the European consumers who want to exercise their right to be mobile. The majority of contributions appear to agree with this conclusion.
I am now reflecting on the actions that may be necessary in the light of the contributions received. My own view is that any actions we take on retail financial services should have as their primary goal to stimulate competition. In this regard, I am attracted to facilitating customer mobility and making it easier for people to switch banks. I know this would not be popular with all around this table, but given the divergences that exist, action by the EU may be necessary.
On the other hand, I am aware that in a number of Member States, including the one I know best – and the UK - the banking industry has already introduced Customer Mobility Codes which, in general, are now working well. I would strongly urge those of you who have not taken such a step to take the initiative as soon as possible – to learn from the experience of Ireland and the UK and the other Member States that have already done it - rather than waiting to be forced into a straightjacket imposed by regulatory intervention.
Ladies and Gentlemen,
With 27 Member States meetings of the EBF are no longer small scale affairs. We have a big and diverse grouping here this evening from across the Member States - large and small. Technology and well targeted investment in human capital as well as a facilitative regulatory environment have opened up possibilities for everyone to provide financial services – wholesale and retail – across Member State borders. And as the markets grow, there will be opportunities for every Member State - whatever its size - to grow with them, and to specialise in particular niches or parts of the value chain. I am obviously particularly proud of the success of my own country in growing international financial services over the past two decades. The EU legislative framework has facilitated this development. There will, I am sure, be many of the new Member States – large and small – who will also want to develop international financial services centres over coming years. We need to make sure that the regulatory framework remains facilitative for them too.
To conclude Ladies and Gentlemen,
The recent financial market turbulence has been a cold shower for all of us. We must avoid over hasty reaction to these significant events. We all share a deep concern about what has happened.
There will be important lessons to be learnt. (The Ecofin on 9 October will set out the work that is to be done on some of these at European level.) I look forward to working with you to strengthen the robustness of the EU financial system.