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Ladies and Gentlemen,
I want to first thank Jacques de Larosière and Daniel Lebègue for inviting me to participate in this year's Eurofi conference. With four months of capital market turmoil behind us and no end to the volatility yet in sight, there can be no doubt that achieving stability and efficiency in the European financial sector is imperative.
Before I talk about some of the challenges and priorities for financial integration in the EU, let me briefly address the current turbulence.
Recent events are a prime example of how globalisation of financial activities impacts directly on the EU financial sector and its development.
Problems originating in the US sub-prime mortgage market rapidly mushroomed into global disruption. The prospect of losses in this small US market has wreaked havoc not only in the US financial system but in financial systems across the world.
Uncertainty about the scale and location of losses has resulted in a generalised collapse in investor confidence. Several key financial markets – including inter-bank deposit markets – have either stopped functioning altogether or have experienced severe stress.
Global credit conditions have tightened and are set to tighten further as financial institutions come to terms with significant losses. Tighter credit conditions imply fewer borrowing opportunities. This in turn has raised the prospect of slower economic growth in the coming years.
It is too early to reach firm conclusions on what has gone wrong in risk management in the financial sector and whether regulatory initiatives are needed. We must ensure that our response is considered and measured. This is the approach taken by the work programme announced by the ECOFIN Council in October which will be completed in 2008 and which focuses on four major areas:
- Enhancing transparency for investors, markets and regulators;
- Improving valuation standards for complex financial products;
- Strengthening the prudential framework, risk management and supervision in the financial sector;
- Improving market functioning (including looking at the role of credit agencies).
Let me be clear. There is no presumption that this work will result in a raft of new regulatory initiatives that may simply end up stifling innovation in the financial sector. The objective must be to preserve as far as possible the many positive aspects of modern finance, while at the same time ensuring that investors are adequately protected and financial stability is safeguarded.
In parallel to the completion of this work programme, our efforts to integrate EU financial markets have acquired a new urgency. It is clear that financial markets and their smooth functioning have an increasingly important role to play in the performance of the economy. More integrated European financial markets make the financial sector more resilient and better able to deal with shocks.
On top of this, integrated financial markets can also enhance growth. They promote financial development via enhanced competition, the exploitation of scale and scope economies and wider opportunities for risk sharing over space and time. Financial development in turn improves economic growth potential through more efficient resource allocation and higher productivity of capital.
For euro area Member States, integrated financial markets also provide an important channel of adjustment to economic shocks, which helps to compensate for the absence of nominal exchange rates.
This powerful economic rationale for financial integration has been met with progress in recent years, particularly since the introduction of the euro and the implementation of the Financial Services Action Plan.
But although a lot has been achieved, we are by no means at the end of the road. There are still obstacles to overcome and attitudes to change if we want to deliver fully integrated European financial markets. For example, we are still some way from a single market in retail financial services or from a situation where cross border financial groups could operate and be managed on the basis of a single set of rules.
One of the major issues to emerge is in the field of supervision, where pressure is mounting for European supervisory arrangements to achieve greater convergence.
Financial institutions should be subject to essentially the same rules irrespective of where they operate in the Single Market. And these rules should be applied in the same manner, irrespective of the authority that sets them. These two principles are key for the efficient operation of an integrated financial market.
But that is not all; we also need to establish arrangements for monitoring market activity on a pan-European basis. Market based financing has become increasingly important. It is what markets demand. And it is what is necessary to preserve financial stability.
Our need for more convergence in supervisory arrangements is all the more urgent given that financial integration has heightened contagion risk for Member States via their linked financial systems.
A financial problem in one Member State is more likely to impact on other Member States. This certainly does not mean that we should retreat from the process of financial integration. What it does mean is that we must put in place the appropriate regulatory and supervisory framework that will allow us to manage this contagion risk most effectively.
The Lamfalussy arrangements, conceived in 2001, aim to do just this. But given the rapidly changing landscape of financial markets, Lamfalussy requires a reassessment to judge whether it can still deliver in the context of increasingly integration and the spread of cross border financial activity. We are highly aware that fragmentation of supervision must not become an obstacle to financial integration.
This is why the Commission, together with the Parliament, Council and regulators, is committed to revising the Lamfalussy process. Over the last two months, a series of contributions have been made - such as the paper from the Financial Services Committee and the paper from the Inter-institutional monitoring group – that propose different ways of strengthening supervision.
All of these contributions set the basis for tomorrow's discussion at the ECOFIN Council, and the conclusions that will be adopted by EU Finance Ministers.
In the Commission's contribution to this debate - our communication of two weeks ago - we propose an evolutionary approach. The objective would be to reinforce the capacity of the framework to deliver on its objectives of regulatory and supervisory convergence.
More specifically, we want to eliminate gold plating. We would also like to strengthen the role of the three 'Level 3 Committees'. In our view, the political accountability of these committees in relation to the EU institutions should be reinforced, as should compliance with Level 3 measures, even though they are not legally binding.
The current legal basis of the Committees provided by Commission decisions might need to be reviewed in order to better reflect the Level 3 Committees' tasks and functions. Also, their internal decision-making procedures should be improved and should, subject to possible safeguards, allow for qualified-majority voting on all decisions.
Clearly, there is a lack of consensus for more radical approaches at this stage. On the other hand, I regard these proposals as the minimum necessary to respond to an increasingly integrated financial market.
Anyhow, the Commission will closely monitor the functioning of the Lamfalussy process and will react appropriately if results indicate that further action is needed.
Progress is also being made in the area of cross-border financial crisis management. In October, the ECOFIN endorsed a set of common principles for crisis management and a strategic roadmap for improving current crisis-management procedures - further evidence that the EU is responding to the challenges posed by financial integration.
Again, I would view this progress as modest and reflecting an evolutionary approach. But, even small steps forward are highly welcome.
Conclusion
Ladies and Gentlemen,
The ongoing financial turmoil has revealed our vulnerability to adverse developments well beyond the borders of Europe. Moreover, the adequacy of our cross-border stability arrangements has not been truly tested.
As financial integration proceeds, it is essential that we are as prepared as possible to deal with cross-border crisis situations. To this end, we must ensure that the necessary framework, procedures and tools are in place as quickly as possible. If we are too slow, the consequences could be very severe.
