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Ladies and gentlemen,
It gives me great pleasure to join you this afternoon in Frankfurt.
When I received the invitation for this conference last autumn, the financial crisis was at its height. The European banking sector was on the verge of collapse. And there were increasing signs that the financial turmoil could impact economic growth.
In Europe we acted quickly. Member States, working closely with the Commission and the European Central Bank took coordinated steps to re-capitalise and guarantee banks to prevent a widespread dry up of liquidity. As consumption and investment began to fall, we launched a coordinated fiscal stimulus for the economy to boost demand and support economic activity.
Today, 18 months after the outbreak of the crisis in the US, the financial system has avoided meltdown but still remains under severe strain. On the other hand, the degree to which the crisis has spread to the global economy has exceeded our worst fears.
The world is seeing its deepest recession in decades. In the EU, growth is forecast to fall by nearly 2% this year and unemployment to rise by 3.5 million. And we are not alone. The US and Japan are also experiencing severe contractions in their economies. This deterioration is having further knock-on effects for financial markets.
Yesterday the European Commission adopted a stock take of the measures taken to contain the crisis and limit the downturn taken over the last months. The figures are huge. To boost demand, Member States have channelled 400 billion euros of fiscal support to their economies – representing 3.3% of the EU's GDP. The results of this massive stimulus should start to feed through in the next months.
However, one clear message stood out from our assessment: economic recovery can only take hold if confidence in the financial sector is restored. This crisis began in the financial system and unless we can rapidly return stability to markets and re-build trust in the system, the economy will continue to pay a high price.
Fixing the financial system for recovery
How then can we restore confidence in the financial sector?
First, we need to anchor macro-financial stability in the EU by ensuring that financial support provided by governments are put in place to good effect.
So far, 2.5 trillion euro has been issued in guarantees for banks and 300 billion euro of capital has been injected into financial institutions to shore up bank balance sheets. As a combined consequence of the monetary policy easing and of these actions to support the banking system, interbank lending rates and spreads, although still volatile, have declined over the last couple of months.
We now need to ensure that these packages continue to be implemented effectively and in full adherence to the rules of the single market. This is particularly important when it comes to financial institutions with significant cross-border operations.
These days there is too much talk about the situation of some banks with subsidiaries in Central and Eastern European countries. Of course, they need to ensure that their subsidiaries also see the benefits from any support packages launched in their home country.
If a local banking system is left with a lack of liquidity, it would not only cause serious problems for local economies, it would soon become a problem for the parent banks too. This is not just a question of keeping banks afloat. It is a matter of safeguarding macro-financial stability in Europe. And the Commission is monitoring this situation closely.
Second, we need to re-build trust in financial markets. I don't need to tell you that confidence levels are low. Financial institutions continue to announce large write-downs. Even 18 months after the beginning of the crisis, the full scale of losses in unknown. And estimates of banks' exposure to impaired assets are growing.
This is doing nothing to defuse the climate of uncertainty in the industry. Most worrying, banks are beginning to show unwillingness to lend and households and businesses are suffering from reduced access to finance. If appropriate action is not taken soon, it will aggravate the drop in economic activity and deepen the recession.
The Commission is calling on banks to disclose impaired assets on their balance sheets as a means to evaluate their solvency. The sooner they do so, the sooner confidence will be restored to the sector as a whole. A number of EU countries have also announced their intention to take direct action to clean balance sheets by identifying and removing impaired assets. Hence the European Commission came forward last week with a set of guidelines to facilitate these actions.
Let me be clear that we are not advocating measures by all Member States. Not all countries are affected to the same degree and not all will find it necessary to announce schemes. Nor do we stipulate how these schemes should be designed. Whether to go for a 'bad bank', state guarantees or a hybrid arrangement is for the individual Member State to decide.
However, asset relief measures should be coordinated if they are to be effective. This is true not just in Europe but around the world. Nevertheless, a coherent approach is even more important for the EU if we are to maintain a level playing field among banks in the single market. This is why we have proposed common principles for deciding which assets are eligible for treatment and common methodologies for their valuation.
The medium and long term impact of asset relief measures also need to be considered. Schemes should be feasible from a budgetary perspective and must not inflict harm on the long term sustainability of public finances. Where necessary, they should be accompanied by a restructuring of the bank in question. We cannot simply pour taxpayers money into banks that are not viable in the long run.
Ultimately, asset relief schemes are a costly solution to the problems in the financial sector, and that's why they should primarily be paid for by the banks themselves. However, if we do nothing, it is the economy and ordinary citizens who will end up paying the price. Restoring confidence in the banking system is a pre-requisite to re-establish the flow of credit to the economy. And once credit is flowing to the economy, the fiscal stimuli will have a greater impact. This, together with the ECB's cuts in interest rates, should create the conditions for a gradual recovery to take place at the beginning of next year.
Building a sustainable financial system for the future
So far I have set out our priorities for financial markets from a short term perspective. Yet, our actions to stabilise the financial sector need to be matched by a far reaching reform of financial markets, at EU level and globally.
The crisis has revealed serious shortcomings in the regulatory and supervisory structure of the financial system. Two decades of light touch regulation plus an environment of ample liquidity and low interest rates have sown the seeds for the problems we are experiencing today.
Of course, it is difficult to prevent the occurrence of financial crises, but we have an obligation to ensure that a disaster of such a profound and systemic nature cannot happen again. We need to take action to move the European financial system from a model based on short term excessive risk-taking and speculation, to one founded on stability and sustainability.
To this end, we have already adopted a number of important proposals since October 2007, including measures to protect bank depositors, to strengthen rules on capital requirements and to regulate Credit Rating Agencies.
We are now at the stage where we need to push forward with more ambitious measures to put the financial system back on a more secure and sustainable footing. Hence over the course of this year, the Commission will implement an extensive timetable for the radical overhaul of the European financial sector.
One of the most important of these planned reforms is in the sphere of supervision. Having largely national based supervisors for a highly integrated financial sector with numerous cross border financial institutions has long been recognised as a liability. However, the political will for serious reform was absent. That was before the crisis. It is now clear that maintaining the status quo is simply out of the question.
The Commission realised the urgency to act and last November we asked a high level group of experts, chaired by Jacques De Larosière, to make concrete proposals to strengthen the supervisory structure in the EU. Last week the De Larosière report was published and we have welcomed its broad and constructive recommendations.
The Group highlights the lack of coordination, consistency and trust between national supervisors. They identify failures in both the way supervisors look at specific cases and in the way they prevent and manage issues in the financial system as a whole. Therefore, the report makes two key proposals, to address both the macro-prudential supervision and micro-supervision.
On macro-prudential supervision, the group proposes to establish a new European body that would gather and assess information on risks to the financial sector as a whole. This body, to be called the European Systemic Risk Council, would operate under the auspices of the European Central Bank and in cooperation with the Commission and the Committees of European Supervisors. The Commission welcomes this initiative as a particularly crucial means to identify and manage systemic risk at the European level.
On micro-prudential supervision – in other words, supervision of individual companies – the group recommends setting up a European System of Financial Supervision. This would transform the Committees of European supervisors –the Level 3 Committees of the Lamfalussy framework- into authorities that would operate at EU level, while relying on colleges of supervisors and national supervisors to continue supervision of individual companies.
We fully agree with the structure of the existing Committees needs to be reformed. The current arrangements are not adequate to ensure financial stability in the EU and there is clearly value in combining centralised responsibilities at European level while keeping specific tasks for national supervisors. We support transforming the three Committees into authorities. These authorities could play a very useful role in overseeing colleges of supervisors for cross-border groups and hence contribute to the early warning system that should help us to preserve financial stability.
Working on the basis of these two recommendations, the European Commission will now develop proposals to establish a new European supervision system which we will present by the end of May. Provided these changes are agreed at the European Council in June, they should be up and running in the course of 2010.
In addition to efforts in supervision, a number of critical reforms are called for on the regulatory side:
For example, on hedge funds and private equity. These pools of capital have become important market players in their own right. So the Commission will bring forward legislation establishing regulatory and supervisory standards for these and other forms of non-harmonised investment funds before the end of April.
We will also review the framework of Basel II in light of the crisis. In particular, we may have to address the pro-cyclical impact of the current framework and the tendency of rules to amplify market trends upwards and downwards.
We will bring forward a new initiative on executive remuneration in the financial services sector by April, with the aim of aligning rewards more closely with the longer term benefits of companies.
We will make proposals to further increase transparency in derivatives and other complex structured products, based on a report to be released in June.
In the same month we will also present a proposal to increase the quality and quantity of bank' prudential capital and tackle securitisation followed by a proposal to address liquidity risk and excessive leverage in the autumn.
We will be asking the spring European Council to endorse this reform agenda later this month. Let me say that this is not about introducing excessive regulation for the sake of it. We will take care to strike a balance between improving resilience of financial markets and preserving the capacity of the sector to innovate. But we must tackle the weaknesses that aggravated this crisis.
And it won't be enough to act at European level. We need international consistency in standards and rules if we are to anchor stability in the global financial system. The EU played a leading role during the Washington summit in November to establish consensus on renewing the global financial architecture.
We need to show the same clarity, the same European solidarity at the follow up meeting in London in one month's time. If we can stand together and speak with one voice, Europe will be well placed to propose concrete solutions to challenges at the global level.
For example, on reforms to the global financial and regulatory system. We need to push for stronger bank prudential rules and accounting. Credit rating agencies, hedge funds and private equity should all be subject to appropriate regulation at global level as well as EU level. Moreover, it is only at the global level that we can effectively tackle non-cooperative jurisdictions.
We will also strongly advocate for an early warning system to be established for the global economy, with the IMF at its centre. The IMF should play a critical role in safeguarding the future stability of the global economy. It needs to enhance its surveillance of the financial system and work in closer partnership with the Financial Stability Forum. And it should beef up multilateral surveillance of the world economy, so that it can effectively mobilize efforts to reverse the global imbalances that contributed to the current crisis.
Last but not least, we will use the London meeting to send an uncompromising message on protectionism: we will not tolerate the resurgence of economic nationalism that in the world economy. However, this message will only be strong if the EU sets an example at home, by upholding the principles of openness and fairness in the Internal Market.
The Internal Market is an enormous asset for the European Union and has driven increases in economic growth, trade and jobs over the last years. We will not let this crisis undermine those gains. The Commission will work hard to ensure that any national measures taken by Member States as part of fiscal stimulus packages or support to financial institutions comply with both our EU treaty and our international obligations.
Conclusion
Ladies and gentlemen, let me conclude.
The European Commission is working hard with Member States and with Central Banks to restore growth to European economies. We have launched unprecedented and coordinated actions and directed billions of euros to support economic activity and demand. But unless we can fix the financial markets, unless we can re-build trust among financial actors, our efforts will be in vain.
Fixing the financial system is now our number one priority and rest assured that we will do all that is necessary to return markets to normal functioning. And we will not stop working once the recovery is in place.
The global crisis is exposing weaknesses in our financial systems and revealing lessons that we cannot afford to ignore. We are committed to learning those lessons and acting on them. Over the coming months and years the Commission will work hand in hand with national authorities, EU level institutions and our international partners to implement an ambitious timetable for financial reform. I am confident we can deliver a more stable and resilient financial system for the future.
