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Ladies and Gentlemen,
Let me thank the organisers of this excellent conference.
An outstanding
turnout. It is always one of the best of the year.
Today's debate on European financial integration is an important debate. The way we go forward will make a big difference for citizens and business alike. Financial integration has the potential of bringing prosperity to business; cost-savings to consumers; and growth and jobs for citizens.
So far, the EU is on the right track. We have made considerable strides forward. Look at competitiveness:
- The European Union is now the major market in the world for commercial banking, insurance and foreign exchange, having surged ahead of the United States. We are the innovators in the derivatives market.
- Although the US is still in the lead in some financial market related activities, the European Union is progressively closing the gap. Our bond and equity markets are growing faster. The volume of initial public offerings in European stock exchanges is greater than that of the US.
We should, however, not take these encouraging results as an excuse for becoming complacent. Old gold medals are no guarantee for future successes. And there are also areas with less impressive results. So what is the right way forward?
This conference has discussed a number of challenges to further financial integration. I would say that the globalisation of financial markets, the organisation of financial supervision and the challenge of integrating EU retail financial markets are among the most important ones.
Financial globalisation
Let me first comment on the globalisation of financial markets. We are living in a fast changing world:
- The rise and emergence of new financial centres, reflecting the increasing importance of oil-exporting countries as well as China, India, Russia and Brazil.
- The new trend of transatlantic stock exchange mergers: The NYSE-Euronext deal is already signed, and discussions are going on between other transatlantic partners, in particular between the US-based International Securities exchange and the Deutsche Börse, and between the Börse Dubai/Nasdaq and the Nordic operator OMX.
- And of course the US sub-prime crisis that has caused very considerable financial turmoil across the world, including in European markets.
Financial globalisation offers new opportunities; new markets, more competitive financial structures etc. But as recent events show the potential negative effects, such as the risk of increasing financial contagion, are much greater than we would have anticipated only 6 months ago. We must nevertheless continue to build on the framework we have in place.
Cooperation is of course crucial. To open up markets. To promote convergent
regulation. To ensure that EU regulatory principles are recognised by third
countries. The cooperation within G-10 is of major importance. So are our
financial regulatory dialogues with third countries – US, Japan, China,
India. We have achieved a lot already. Take accounting as an example. After the
decision by the SEC to accept IFRS in the US without reconciliation we are on a
good track to truly global accounting standards. I intend to propose shortly
that we in the EU accept accounts filed under US GAAP without any need for
reconciliation.
Similar cooperation should also be possible in other areas,
and with other partners. Mutual recognition of securities regulation will likely
be a subject of discussion in 2008. And improving accounting valuation
techniques of illiquid assets. The rewards could be immense.
There will also be the inevitable lessons to be drawn from the current financial turmoil. The EU Finance Ministers have mandated the EU institutions to take work forward on a series of important issues related to the ongoing financial turmoil. The broad objectives are to make improvements to transparency, to valuation standards of complex financial instruments, to prudential rules and risk management practices, and to make progress on wider issues related to market functioning, including, in particular, credit rating agencies. The Spring European Council in March will be considering the follow up to many of these issues. In regards to transparency of derivative and related markets it is vital that any industry initiatives are brought forward in sufficient time so that they can be factored in to the preparation of this Council.
Insofar as supervision of EU financial institutions is concerned the current financial turmoil must be a wake-up call for everyone. On the positive side our regulatory framework has held up well. Nevertheless, the effects of the US sub-prime crisis have resulted in a small number of national financial institutions having to be bailed out. The speed at which the sub-prime crisis in the US spread to the EU took everyone by surprise, including the banking regulators and supervisors. How well did managers in banks and their supervisors understand the complexity of some of the financial instruments being used? How robust were the risk models used? One thing we can be sure of none were tested to the liquidity stress witnessed in the past few months. And that is the limitation of such models. The parameters used are not sufficiently stress tested. It is only when reality bites that the weaknesses appear.
So far we have not had to cope with a crisis in a major EU financial institution. And I hope we never have to. But in the light of recent events we do need to assess how well our response mechanism would work if say one of the 45 banks with cross border activities was in trouble.
Thanks to the integration of our capital markets there are now many more financial institutions operating across the EU. However, our regulatory framework is still based on a national system that frankly is out of date in regard to the structure of our largest financial bodies. This needs urgent attention.
The Northern Rock saga holds many lessons for us all. I would hate to think what might have happened if Northern Rock had been a significant player in a number of Member States.
Imagine a long line of depositors queuing up outside bank branches say in the UK, France and Spain. What would have been the reaction of the politicians and supervisors in the respective Member States? Would there have been the reflex or indeed the time to coordinate and develop an agreed approach? What procedures would they have followed? Would the same message be delivered to the depositors in the UK, France and Spain?
I have no doubt that if such a crisis had occurred the deficiencies in the present system of national regulation would have been all too obvious.
There is an urgent need to put in place a more effective cooperation and coordination process between supervisors who are responsible for overseeing large banking groups. We have been discussing this for some time and a useful report has been prepared by the EFC on how we can improve Financial Stability Arrangements in the EU. However this report was largely prepared during the benign market conditions in the last quarter of 2006 and first half of 2007. The report provides a good analysis of what needs to be done to enable national supervisors to work together to manage a major cross border group in difficulties. What is missing from the report is a sense of real urgency underlined by current market difficulties in finding solutions for the many issues identified. We have effective crisis prevention measures in the EU. Our crisis management arrangements need to match them.
Some would argue that an EU level supervisory body is the best way to address these issues. There are strong arguments for and against an EU Supervisory Agency. I am not coming down on one side of the argument against the other. But my political antenna tell me there is no chance that we would find agreement on an EU supervisory agency. However, I do agree strongly that we cannot let the present system continue as it is. In the area of supervision, I have always argued that evolution, rather than revolution, is the best way forward. What is needed though is to give evolution a push. At ECOFIN today I have called on Ministers to give a higher priority to implementing the EFC report on Financial stability arrangements. We cannot wait for a crisis to occur to kick start enhanced supervisory cooperation and coordination for large cross border banking groups.
I see no reason why we should not work to have a college of supervisors for each cross border banking group. This is not such a radical idea. We already have a College of Supervisors for Euronext and LIFFE. Informal arrangements have also been put in place in the banking sector, under the auspices of CEBS. A College of Supervisors would be much easier to achieve than an EU supervisory body. Such colleges of supervisors would meet regularly and have a full exchange of information about the company. In the event of difficulties the supervisors would be able to take effective and coordinated measures on the basis of a general approach worked out beforehand. It would not take a revolution to put such a system in place. But it does need determination. We do not need more studies or impact assessments. We need solutions.
All of this takes place against the backdrop of our reflections on modernizing the Lamfalussy structure. In any event cooperation at level 3 of the Lamfalussy structure needs to be strengthened. In the recently published Communication on the review of the Lamfalussy process, the Commission suggested that this can be achieved:
- by strengthening the political accountability of these committees,
- by requesting supervisors to regularly report back on their achievements, and to explain any non-compliance,
- by introducing qualified majority voting for all Committees' decisions and thus making their decision-making mechanisms more efficient,
- by revising supervisors' national mandates, to ensure that they are required to contribute to the regulatory convergence process at the EU level.
Retail financial market integration
My presentation on the challenges to financial integration would not be complete without mentioning retail financial services. This is clearly an area where financial integration is lagging behind. I will give you two examples:
- Fees for common banking services - such as current account, payments, cash withdrawal, account management - vary greatly between Member States. A typical family could pay up to ten times more for its current account in a year if it happens to live in the most expensive Member State.
- Euro credit transfers are free in some Member States and cost more than 10 Euro in others.
Both examples are not exactly a sign for a well integrated market and well functioning competition.
A better integrated retail financial market would be a great opportunity. Integration would bring considerable benefits to European citizens: lower prices, more choice, better products. And the Commission is working hard to make this a reality. Let me a mention some strands of our work:
- The first strand relates to the mortgage credit sector. Recent events in the US have underscored the importance of this sector for consumers and for the economy as a whole. A White Paper will be published towards the end of this year with proposals to ensure greater product diversity and an adequate level of consumer protection. At this stage, however, I do not believe a directive will deliver the value added necessary to justify a legislative measure. More work needs to be done before a final decision is taken in this respect.
- Another strand of work relates to the Single Euro Payment Area. Our efforts to make this a reality continue. I am convinced that an efficient payment market, where payments can be made quickly, cheaply, easily and reliably, is a key component of a competitive economy;
- On bank accounts, the banking industry will be invited to develop, before mid-2008, via self-regulation, a set of common rules to the benefit of all customers. Such arrangements should make it easier for consumers to open a new or to switch an existing account from one bank to another.
- The Commission is also actively engaged in actions to empower consumers. Financial education, throughout the life cycle, and better information and advice are our objectives. A forthcoming Communication will set out where we are in our work to enhance consumer capability.
These were just some examples of the ways the Commission suggests taking forward retail financial market integration. The scope of actions is wide, covering consumers, infrastructures and financial institutions. The tools also vary. Regulation is by far not the only way to foster cooperation and to lay down the rules of play. Softer instruments are sometimes more efficient. The whole spectra of actions and tools are being used to bring about an efficient retail sector, to the benefit of European citizens.
Conclusion
Let me sum up by reiterating the importance of strengthening the EU banking supervisory system. People tell me that Europe works better when there is a crisis. Well, I do not believe we can afford to wait for a crisis before acting. Action is required now. There are pragmatic ways to address this. What is needed is the political determinism to break out of the national mindset that has traditionally operated in supervision. Our industry is no longer national. We have created the conditions to let them grow and develop. Our supervisory capacity needs to catch up with the market reality.
Thank you for your attention!
