Introduction
Good evening, Ladies and Gentlemen. Thank you for inviting me to address your gathering this evening.
Usually, when I address a dinner such as this, I like to break the ice with a little joke or light-hearted remark. But in these turbulent times, I find it hard to take my mind off the maelstrom that is breaking all around us. Markets are in freefall, investors are jittery, liquidity has all but dried up. We are facing an entirely new paradigm. The collapse of the investment banking model would have been unthinkable a year ago. The Bank of China's 20% stake in the French financial services subsidiary of the Rothschild empire is symbolic of the new world order. And we are far from the end of this upheaval.
But no amount of hand-wringing is going to make this crisis go away. Politicians and regulators have a responsibility to step up to the plate and take the necessary steps to reassure our citizens. The young families who want mortgages. The savers who are concerned that their investments are safe. The SMEs in need of capital to drive their businesses forward.
The ECOFIN Council of October last year came up with a roadmap of actions to be taken to respond to the current crisis, based on a reasoned analysis of what was going wrong. It is vital that we keep our focus on delivering these actions. I am convinced that they will help in preventing similar crises from happening in the future. But we must also be prepared to take bolder steps and accelerate the pace of regulatory and supervisory reforms. I will be discussing this with Finance Ministers when we meet for the ECOFIN Council of 7 October.
International co-operation
The current financial turmoil has pointed up in sharp relief the interconnections and interdependence of global financial markets. The hard-pressed family that defaults on its mortgage in Birmingham, Alabama has a direct impact on the would-be-borrower in Birmingham, UK. For this reason, it is more important than ever that regulators around the world learn from each other's experiences, align how they do things and, where possible, take a unified regulatory approach to the challenges that face them. The international regulatory dialogues that the European Commission engages in with colleagues in the US, Japan, China, India, Russia and elsewhere have never seemed more important.
Supervisory convergence
Closer to home, it is crucial for the future of European financial markets that we succeed in strengthening co-operation between European financial supervisors. In order to provide the banking, insurance and committees of supervisors with a robust framework to carry out their work, the Commission plans to adopt by the end of this year new Decisions on these committees. We will put a much greater emphasis on enhanced convergence of practices and approaches throughout the community and the role of the committees in financial stability monitoring and reporting.
Given the recent failures of major international banks, some are calling for drastic restructuring of the supervisory landscape in order to cope with a major crisis at a European financial institution. I know that this is, in particular, the view of some eminent Members of the European Parliament. A debate in this respect is necessary and I intend to actively take part in it.
ECOFIN Roadmap
At the European level, and also in each Member State, authorities and the industry are working hard to deliver the roadmap agreed on by European finance ministers one year ago. Achieving the goals set out in that roadmap are crucial if we are to bring back confidence and restore equilibrium. Improving transparency for investors. Upgrading valuation methods. Strengthening the existing prudential framework and risk management. And improving market functioning.
A lot has already been achieved. The industry has started to provide valuable data and statistics on the securitisation market, which will be updated regularly.
But of course there is much more to do. Two developments in particular may play a large part in averting future crises: the revision of the Capital Requirements Directive and the proposed legislative framework for Credit Rating Agencies.
Capital Requirements Directive
The Commission is about to come forward with proposals to revise the Capital Requirements Directive. The changes to the CRD are targeted at:
- improving the management of large exposures;
- harmonising the treatment of hybrid capital;
- increasing the efficiency of the supervision of cross-border banking groups – both in going concern and in crisis situations;
- improving liquidity risk management, and
- addressing the shortcomings in the 'originate to distribute' securitisation business model.
The changes to banking practices that these amendments will introduce should go a long way towards avoiding a future crisis of the type we are currently experiencing.
Credit Rating Agencies
Credit Rating Agencies were close to the origin of the problems that arose with subprime markets and that subsequently spread worldwide. They issued excessively favourable opinions on many structured instruments.
The crisis has shown that self-regulation in the area of CRAs - which is the current situation under the voluntary IOSCO code - has not worked. I have decided that we can no longer leave it to the CRAs themselves to deal with this. Legislation at EU level is now necessary to enhance investor protection and shield European financial markets against the risk of CRA malpractice. This business is much too important for the stability of financial markets for us to watch from the sidelines.
This is why I intend to propose in November, a legally binding registration and external oversight regime whereby European regulators will supervise the policies and procedures followed by the CRAs.
We want the CRAs to comply with rigorous regulatory requirements to make sure that ratings are not affected by the conflicts of interest inherent to the ratings business. That CRAs remain vigilant on the quality of the rating methodology and the ratings. And that CRAs act in a transparent manner.
With regard to conflicts of interest, I intend to include reforms to the internal governance of rating agencies, clearly separating the rating function from business incentives.
We also need to enhance the quality of ratings and of rating methodologies. I intend to include some obligations on periodic reviews of methodologies, improved monitoring of existing ratings and on the assessment of the available information.
As regards disclosure and transparency, it is clear that CRAs need to increase their transparency standards concerning the presentation of ratings, their performance statistics and the information on rating methodologies. We also need to find ways to raise awareness among the users of ratings about the specificities of structured finance products.
These are the substantive requirements we envisage for the new EU legal framework. Alongside these, it will be essential to make sure that a robust supervisory and enforcement regime is in place, so that we can be sure that the CRAs' policies, procedures and everyday conduct are in compliance with these requirements. But in doing so, of course we will want to preserve the CRAs' freedom to formulate and make public their opinions.
Conclusion
The world didn’t come to an end, as some had feared, when the scientists at CERN fired up the Large Hadron Collider near Geneva last month. Nor will it come to an end because a number of financial institutions have been shown to be unsustainable. But it may get more difficult for the short to medium term. It is essential that financial institutions regain the confidence to lend to each other. And that ordinary people have faith in the security of their deposits. Our job will be to strengthen the framework that underpins that confidence.
