Madame President, Honourable Members,
I shall start by apologising for a longer than usual speech.
There is as you know an important exercise underway to draw the lessons from the current financial crisis and to design the appropriate response to strengthen financial stability.
The work we are embarking on now will inevitably lead to a new architecture for financial markets. This is an exercise that is being conducted not only in the EU but at international level as well. The conclusions of the G20 meeting last month highlight the commonality of issues with which we are all trying to deal.
Recently adopted measures
This evening I want to comment in particular on the Commission's response to certain aspects of the Rasmussen and Lehne Reports but before I do I think it is appropriate to review some of the recent measures I have proposed.
The strengthening of banks capital requirements as set out in the proposed revision of the Capital Requirements Directive is an important element of the response to the crisis. This proposal includes a provision to impose much stronger due diligence requirements for securitisations, significant additional capital charges where such due diligence is not undertaken and a retention requirement for originators or sponsors. I was pilloried in many banking quarters when I put this idea on the table last June. I am glad to see that this idea has found greater support today and I hope that I can count on your support for the proposal and for closing any remaining drafting loopholes that may exist.
I also faced opposition to my ideas for regulating credit rating agencies including from regulators in the EU. The proposal that is now before you is wide ranging. Some say it is intrusive, but it is a regulatory approach designed to restore confidence in the ratings process. We are imposing important corporate governance changes in the rating companies. No other jurisdiction in the world has demanded such changes. This is one of the areas where we need to go beyond the IOSCO code of conduct. Within the framework of the G20 and our Financial Markets Regulatory Dialogue with the United States we will be encouraging the other leading capital markets in the world to adopt a similar approach to us. It is important that we strive for consistency across the markets but the safeguards we are building into the credit rating agency proposal, on corporate governance in particular, are one of the essentials to addressing the very real issue of the conflict of interest at the heart of the "issuer pays" model.
We have also responded quickly with your assistance to the necessity to bring our accounting rules in line with other jurisdictions. In record time we were able to modify our legislation to allow EU financial institutions the possibility of moving assets from the trading to the banking book. Already EU financial institutions have availed of this facility in a significant way and this should continue to help to reduce at least some of the pressure on banks' balance sheets without in any way undermining the integrity or accuracy of financial reporting.
Ordinary consumers have benefitted also through our amendments to the Deposit Guarantee Scheme Directive significantly raising the minimum level of deposit guarantees throughout the Union. I would urge Parliament to be courageous here. Not only is it necessary to raise the limit it is also essential that the time customers have to wait to be reimbursed be reduced to the minimum. There will still be queues outside banks in difficulty if customers think their savings are going to be tied up for weeks. There is no reason why repayment to customers should not be undertaken in a matter of days.
Rasmussen and Lehne Reports
Let me now turn to the Rasmussen and Lehne reports. The Commission has responded with the relevant "fiche" – the bureaucratic way, as it were. Today I intend to give a political response to these two reports and announce what the Commission will be doing in the coming months in regard to hedge funds and private equity.
We need to draw a clear distinction between hedge funds and private equity. Our preliminary analysis indicates that the majority of the issues which warrant further investigation relate to the activities of hedge funds. There are some concerns too on private equity which I shall address later.
Hedge Funds
On hedge funds. I want to have a serious debate about hedge funds. Mr Rasmussen's report deserves no less. We all have our views about hedge funds. We have to recognise and accept that there are different angles to this debate. All of them perfectly legitimate in a democratic society.
The first thing we need to assess is the role which the hedge funds have played in this crisis. Some say they are among the major culprits. Others say hedge funds played a positive role, actually dampening the cost of the crisis to the economy. Others say they might have aggravated the crisis, exacerbating the gyrations of the market and increasing volatility.
The financial crisis has now muted into in an economic crisis. Many EU economies have technically entered into recession. Economic actors are acting pro-cyclically: Banks are raising their capital and deleveraging at the same time – That means they are severely restricting lending to "the real economy". Consumer confidence is low. So consumers are saving and this is reducing demand. It will be very difficult to break this cycle. So we should aim to avoid any measures which could depress economic activity even further. Let's be careful to avoid any action that would have the effect of aggravating the impact of this on the real economy with all the consequences that would have for living standards and employment.
This most certainly does not mean we should not look into hedge funds. Quite the contrary. But in reviewing their role we should be focused on two things: How to overcome the economic crisis and how to ensure that the stability of the financial system is never again put in jeopardy to the extent that it almost caused the meltdown of the world financial system and has resulted in massive costs to taxpayers. Mr Rasmussen in his report recommends that capital reuirements should be consistent for all types of investment firms.
The leaders of the G20 agreed on the 15th of November that "all financial markets, products and participants [should be] regulated or subject to oversight, as appropriate to their circumstances". The G20 has also decided that by March 31st 2009 "private sector bodies that have developed best practices for private pools of capital and/or hedge funds should bring forward proposals for a set of unified best practices. Finance Ministers should assess the adequacy of these proposals, drawing upon the analysis of regulators, the expanded FSF, and other relevant bodies."
Also, Members are aware that Jacques de Larosière has been charged with a wide ranging review of this crisis. Mr de Larosière's group has adopted a wide interpretation to its mandate. I particularly welcome this. As well as supervision Mr de Laroisière will review current regulatory and crisis prevention measures.
In this regard and in particular in assisting us in responding to the specific requests of Parliament in the Rasmussen report I look forward to the guidance that Mr de Larosière may be able to provide us pertaining to our future approach to hedge funds.
In the meantime, I want to move forward to organise our own input on the hedge fund debate which will feed into the G20 work. I will therefore already come this week to the College with a consultation paper on hedge funds. I intend to have the results of this consultation be discussed at a high level conference to be held in February. The aim being that the results of this exercise as well as the work being done in other forums such as the Group chaired by Mr. de Larosière can be fed into the G20 work. The Commission will then decide on the appropriate proposals.
The issues we are focusing on are:
- How should hedge funds be defined? How should we deal with the fact that most hedge funds are domiciled in "off-shore" jurisdictions? What would be the purpose of any legislation or oversight? Market stability and market integrity seem to be consensual objectives. Who should oversee hedge funds? Securities regulators? Central banks? Both?
- Many have said hedge funds should be more transparent. Does this mean transparency only toward regulators or transparency to the market? How can we ensure that too much transparency does not kill hedge funds and that we do not throw the baby out with the bathwater?
- What if anything should we do about short selling? Some have asked for short selling or at least for "naked" short selling to be banned. Others say short selling is a positive element which alerts the market about companies making poor investment choices, taking on excessive leverage or making the wrong management decisions. My instinct tells me they might be right. On the other hand short-selling may lead to excessive short-termism or market manipulation.
- Let's determine whether capital requirements for hedge funds or tighter controls on banks that lend to them – the so-called "indirect approach" – is the more appropriate approach.
- On risk management practices of hedge funds – Is regulatory intervention or the dissemination of sound principles the most sensible approach? I certainly want to see a return to less sophisticated measurements of risk. Internal modelling has become too complicated. Cruder measurements such as well targeted leverage ratios must be a feature of a revised framework.
- But the most important concrete input I want is on the contagion and systemic risks to the financial markets if we were to continue to rely on the existing regulatory framework surrounding hedge funds and banks.
This is a challenging schedule but I am determined to move with urgency to ensure that our conclusions dovetail time-wise with those of Mr de Laroisiere so that we can move forward quickly with the benefit of our combined insights and formulate the EU input into the G20 discussion.
Private Equity
In relation to private equity we need to be clear that the role it plays is very different to the role of hedge funds. Private equity is essentially about investing in and restructuring businesses to grow and be more competitive. It does not pose any significant risk to financial stability. I accept there are concerns relating particularly to corporate governance, transparency and reporting that must be addressed. I also accept that some private equity deals have been over-leveraged.
I have engaged in a dialogue with the industry to better understand what they have done to improve their transparency and corporate governance along the lines suggested by Mr Lehne's report. I think industry is moving in the right direction. But I want to make sure that their codes apply across the industry, provide sufficient transparency and are subject to effective monitoring. I shall report to this Parliament on this review within the next three months at the latest. I also believe that in reviewing the Basel 2 framework the appropriateness of the methodologies used to determine the risk weightings that are applied to private equity deals needs to be looked at with some fresher and more critical eyes than some of those who have been involved in the Basel Committee to date.
Our work on the review of the Transparency Directive will also provide an opportunity to look at issues highlighted by Mr Lehne such as notification thresholds, investment policy disclosure and identification of shareholders. The Commission will also address next year the issue of remuneration in the financial sector and in particular the need for reward structures to be more closely aligned to the real medium term benefits accruing to companies.
Mr Lehne has underlined the need for the Commission to take part in the work of the IMF in regards to sovereign wealth funds. We have taken a very active part in this work which has resulted in the agreement on a set of good practices to be followed by such funds.
The reviews and consultations underway in regards to both hedge funds and private equity will allow us to assess the adequacy of measures in place and to identify where strengthened requirements may be necessary. It is important that the EU is able to come forward with a coherent approach particularly in the context of the ambitious G20 schedule which envisages reports being available for the end of March 2009 ahead of the next summit in April.
Derivatives
Derivative markets have grown exponentially in recent years and the current crisis has raised many concerns about their potential impact on financial stability. I have launched work to induce industry to move Credit Default Swaps onto central clearing here in the EU over the coming months. This is essential if we are to restore counterparty confidence and have sufficient security and oversight of the risks inherent in this market. I am also engaging in a wider review of all derivatives to see if further measures are necessary to remove any risks to financial stability. This is to be completed by the end of March 2009.
Conclusion
I know many of you here like to portray me as the ultimate market liberal who would like to deregulate the world. I make no apologies for being a market liberal but I do recognise the value of good appropriate regulation. Some of you have said I have been sitting idly in my office doing nothing for the last four years. While I accept that some of this criticism may be attributable to what we call the political game, I think it is time to set the record straight. Today, I have brought you a table of all measures which have been adopted in the area of financial services since I took office in November of 2004. I have also included all the measures which are in the pipeline and which will be proposed before the end of my mandate. You will see that we have not been sitting on our hands for the last four years. I hope this contributes to distinguishing between myth and reality. I think we all recognise that it is on the qualitative aspects of regulation rather than the quantitative on which we must now focus. The concerns expressed in this House and elsewhere are legitimate. With the benefit of the feedback of the additional work I have set in train as well as the work of the de Laroisiere Group I am confident that we will have a clearer picture of where to move forward.
Thank you very much for your attention.
