Madame President, honourable members,
It has not been long since we last had our last exchange of views but unfortunately, the outlook for the EU and World economy has got much worse. It is difficult to see a turnaround in 2009. What is clear though is the decisions we take now will determine what shape the recovery will take when it comes. This is the first time we are seeing an almost symmetric slowdown across all major economies. This makes me cautious about predicting the speed of recovery. In the past we have looked to the US to bounce quickly out of economic slowdowns but this does not seem likely this time. The high levels of personal debt going into this crisis coupled with the enormous destruction of wealth means that consumers will want to reduce debt and replenish savings before engaging in the level of spending that underpinned growth in the past. There are parallels in many of our MS. Export markets are contracting.
Economic activity is slowing across the Union. Unemployment will grow this year, by 3½ million. Uncertainty is increasing with investment losses and falling housing prices. Banks have become warier about lending. For businesses, the toxic mix of a deteriorating business climate and tighter financing conditions is especially worrying.
Restoring confidence is not going to be easy but unless we do this crisis will be prolonged. Unless we get the banking system functioning properly I would be afraid that the other measures being taken to stimulate our economies will not have the desired effect. I will come back to this later
1. We have got to act
Contrary to what some have suggested, the European Commission has been active right from the start, working with Member States on national rescue plans, working with the French and Czech Presidencies on a coordinated response and coming forward with legislative proposals.
With your support, we moved to quick resolutions on strengthening Deposit Guarantee Schemes and putting some order into fair-value accounting and I thank you for that.
But there are a number of proposals on the table where we now need to close the deal.
On Credit Rating Agencies, we have a good proposal. It addresses the prevention of conflicts of interest. It ensures that agencies remain vigilant on the quality of the rating methodology and the ratings. It ensures that they act in a transparent manner. It is tough – and after manifest failures – it should be. It is an important step for bringing back confidence. Let's close out.
On Capital Requirements, you know that I have taken a lot of flak on the securitisation rules and on liquidity and prudential regulations. I do not regret this. Getting incentives right in these markets is the right thing to do and I am grateful for your broad backing. But again we now need to close the deal and that means resolving two areas and resolving them in the right way.
First, I want to be absolutely frank here: the proposed carve-out of all short term inter-bank exposures from any prudential rules will jeopardise the stability of the financial system. Member States don't want this. Supervisors have warned against it. And I urge you to be against it.
Second, I'm happy to see that some Members of the Parliament even suggest increasing the securitization retention requirement to 10% or 20%. But any attempt to exclude vaguely described types of securisation from the requirements will result in huge arbitrage opportunities and gut the proposal. The result must be legally watertight. Binding. Applicable. The well paid City lawyers must not find a way round it.
We also need to act urgently and close the deal. The response of the industry has been disappointing. Time is running out. I cannot wait any longer. We need to find the best solution we can. In this respect, I welcome proposals to address the issue of clearing of Credit Default Swaps on a European CCP, pending a more complete review of the whole derivative area. . I had hoped the industry would agree on the necessity to clear trades on EU entities on at least one CCP in the EU. However at the last minute they pulled out of an agreement and now a regulatory approach is necessary. CESR and the ECB both consider that clearing of CDS on a CCP in the EU is essential for financial stability and oversight. I would urge the parliament to support an amendment to give effect to this.
On Solvency II likewise we also have to find an agreement. Nobody would understand that in the present context, one would not be able to agree on a text which will considerably improve the prudential soundness of the insurance sector. Not to agree will deny the EU global regulatory leadership. So let's knuckle down and get it done.
I know that some of you have reservations on parts of all these and I respect your views.
I know that some of you would rather go further.
I know that some of you would like to make the entry into force of the CRAs or CRD contingent on wider regulatory or supervisory changes such as a legally binding mediation mechanism, or a European system of supervisors. Of course, if supervisory integration moves forward, post de Larosière, we will have to modify certain arrangements.
But this is not the time for blockages. These measures are ripe for adoption and we need to get them into law before the end of this Parliament. We need to get the financial sector back on track so that it can play a full role in the economic recovery that all of us want. The European public will simply not understand if we do not or we end up infractious, useless debates and no action. We have to compromise and seal the deals. Given the crisis we face not to do so would be a dereliction of our public responsibilities.
2. Further work is needed for a comprehensive reform of the financial system
At the same time though, I agree with you that we need to get on with longer term work on a broader and comprehensive reform of the financial sector. We have to recognise that important parts of the current regulatory and supervisory system failed, and need repair.
Everybody agrees on the need for reform. But the question is not whether we need more regulation, but what kind of regulation. We should regulate thoughtfully and carefully rather than rushing lemming like to adopt substandard texts. We must be able to understand the complex issues that have emerged. If we do not do our homework on this, or rush solutions, we risk ending up with flawed and ineffective measures which do more damage than good.
This is why I have launched an open consultation on hedge funds, and a review of national regulation/industry codes for private equity. The review of private equity codes and national regulation is intended to identify any gaps that need to be addressed by EU legislation.
The Commission is also organising an important open hearing on 26th and 27th February to which members of this house have been invited. The findings from these will be crucial in helping us to design the right regulatory solutions. This is the better regulation principles which this House supports.
It is why I have asked Commission services to examine executive pay and remuneration structure problems in financial services. The 2004 Commission Recommendation on executive remuneration needs to be revised. On remuneration structures in the financial services industry, measures that focus on abolishing perverse incentives (e.g. those that induce excessive risk taking) are being considered.
My services are also working on a White Paper on crisis management for this summer – setting out the policy needed to implement a framework for much more effective crisis intervention. There is a large gap in the existing framework which needs to be plugged. We need to get beyond 27 national frameworks to a single EU framework where crisis management authorities can interact and cooperate. We need to create the right incentives so that cooperation can actually take place. So information can flow.
We have tried to work through colleges of supervisors for the larger cross frontier financial institutions. But this has not found favour with MS. We cannot go on and leave things as they are.
There is a growing gap between the supervisory structure in the EU, which is primarily organised on a national basis, and market developments, where integration and globalisation have lead to complex interlinkages and spill-over effects.
That is why the De Larosiere group has been established
The crisis has thrown into sharp focus the weaknesses of the present arrangements, with significant coordination problems between Member States.
The de Larosière Group will bring forward concrete proposals by the end of February and I look forward to them. We will respond to their Report in an overall Commission Communication on the economic and financial crisis for the Spring European Council. The Communication will set out the contours of our regulatory response. We will want to have Heads of Government support for whatever approach we bring forward. This House will also play a major role in this process.
Improving supervisory arrangements at EU level is crucial for any reform of our financial over sight system.
The Financial crisis started in the US and is now global. The economic downturn is also global. It could be tempting for countries to think that by acting on their own they could mitigate the effects of this crisis. That would I believe be a major error and we would risk reliving the worst of the great depression on the 1930s. It would be the utmost folly for the EU, US, China, India and others to all start pushing in different directions. It would be the utmost folly for us to have effective cross-border supervision and monitoring at EU level without our international partners taking equivalent steps as needed.
Under the joint chairmanship of the UK, Brazil and South Korea, the G20 has been fleshing out the bones of the Action Plan agreed last November, with four subgroups, two on financial regulations and two on the reform of international financial institutions.
They are working hard ahead of the next G20 summit on 2 April. The Commission is active in these groups in partnership with the Czech Presidency. We are working to ensure that the EU and G20 work in tandem. We have been at pains to ensure that the consensus reached in the G20 reflects not just those who are at the table, but those outside. We have been working with Member States and I welcome the views of the Parliament.
And on bilateral relations, we have made it clear that we are keen to start working with the new Obama Administration, Treasury Secretary Geithner and new Chairs of the federal regulators.
But let me also be clear. The G20 will not work unless the EU is strong. By that I mean – unless EU regulation and supervision is strong. Only European Institutions can deliver the G20 convergence. Not the other way round. The G20 has not binding institutions.
Madame President, honourable members,
These are very difficult times in Europe and around the world. But we should bear in mind that the changes we are making and will make to the regulatory structure will strengthen financial oversight in the future. We must at the same time look at the measures necessary to restore confidence in our financial systems and economies now.
Earlier in my remarks I referred to the need to get our banks functioning properly and ensuring that credit is available to companies and individuals. This is complex and could be costly if not properly thought through. Removing the dead weight of underperforming assets from Banks balance sheets is essential. The Commission has prepared a paper to help MS reflections on how best to go about reducing the burden of these assets.
The most difficult issue is how to put a proper valuation on complex assets. Too high a valuation and the taxpayer could end up footing the bill. Already it is increasingly difficult to explain to taxpayers why more money must be given to the banks. Whatever schemes are drawn up then they should be structured in such a way that the taxpayer is not over exposed to the risk of further losses and that the State can benefit from any upswing in the value of the assets in the years ahead.
2009 will be an enormous challenge. It won't be easy to find the common approaches and solutions. But if we fail to work together then we will inevitably prolong and deepen the pain that this crisis can bring. This is the challenge we face. We have some real advantages to build on. We have a functioning internal market of 500m people. We must build our responses around the enormous potential we have around us.
Our aim must be to rebuild confidence; to strengthen financial stability; to restore growth and welfare.
Thank you very much.