Today, the European Parliament’s Special Committee on Financial, Economic and Social Crisis (SCRIS) held a hearing on financial issues raised by the recent economic crisis, and to discuss policymakers’ responses to it.

Testifying at the hearing were:

Keynote Address:

Panel One:

  • Jochen Sanio, President of the Federal Financial Supervisory Authority
  • Bettina Corves-Wunderer, the Chief Financial Officer of Allianz Spa
  • Thomas Wieser, President of the Economic and Financial Committee

Panel Two:

  • Avinash Persaud, Emeritus Professor of Gresham College and the Chairman of the Warwick Commission
  • Ieke van der Burg, former Member of the European Parliament
  • Erkki Raasuke, Chief Financial Officer of Swedbank and Chairman of the Supervision Committee of the European Savings Banks Group

Member Wolf Klinz, the Chairman of SCIS, opened the hearing by noting that “there seems to be a cross party view that financial markets need supranational attention.” He acknowledge Member States’ reservations about this view, reservations echoed by Governor Noyer, who stressed the need to avoid “re-nationalization” of the banking system while developing ways to measure liquidity risk. To Noyer, any policy proposal should be tested to determine the macroeconomic outcome to find the right balance between the policies adopted and avoiding measures that would further weaken the banking activity.

Governor Noyer acknowledged that capital requirements needed to be strengthened for banks, but that any such increases in capital requirements must be “well-calibrated.” Ms. Corves-Wunderer agreed, stressing the need to strike a balance between capital requirements and the long-term competitiveness of financial institutions at an international level. She agreed that capital adequacy ratios should more adequately reflect risk, and urged consistent stress testing including on- and off-balance sheet liquidity exposures. She also argued for flexibility in certain asset class designations and the ability to change the designation based on capital and reserve coverage. Ms. Corves-Wunderer also remarked on the role corporate governance played in the crisis, stating that risk management in financial institutions must be strengthened and must become “part of the DNA” of the organization. She also argued for more transparent and homogenous accounting rules and the development of compensation guidelines and principles based on transparency and deferred compensation.

Governor Noyer raised the issue of “too big to fail” institutions, and stated that preemptively developing such a list would raise the moral hazard issue. Mr. Sanio agreed, noting that there was “a need to limit moral hazard at the international level as the respective financial institutions operate globally.” Professor Persaud remarked that during periods of crisis, the benchmark for what is “too big to fail” is “actually quite small.” He called for more competition in the financial market as a possible remedy.

Ms. Corves-Wunderer raised the issue of an integration of national and supranational supervision, and stated that European and national supervision must “interact in a harmonized manner.” Professor Persaud agreed with this notion. Mr. Noyer warned against over-supervision and stated that while “guidelines are good in themselves, [if] there is not an adequate procedure, they might be excessive.” Lack of knowledge by regulators was the real problem, according to Mr. Sanio, and he remarked on the “terrible information problem” posed by the lack of knowledge of supervisors.

Mr. Noyer raised the issue of the G-20’s efforts toward convergence of international accounting standards and stressed the need for any such standards to take account of the real risks posed. Ms. Corves-Wunderer agreed, noting that “untransparent and insufficiently harmonized accounting standards had also led to procyclical behavior.”

The Special Committee will meet again on Monday, March 1 to host a workshop on the impact of the crisis on new Member States. It is expected to deliver a draft report on May 20 before the final report is adopted on July 13; afterwards, the full European Parliament will vote upon adoption at the September plenary session.