The European Commission has published a speech by Charlie McCreevy (European Commissioner for Internal Market and Services) entitled The future of regulation.
In the first half of his speech Commissioner McCreevy (CM) discusses the challenges of regulating financial services in the middle of a crisis. He states that financial services regulation serves two main purposes:
The so-called prudential objective, that is to prevent crises both of individual financial institutions, like Northern Rock, and of the financial system as a whole, as happened last autumn.
To protect investors, particularly retail investors. This is done by a series of rules which determine the way financial institutions conduct their business relations with their clients.
CM states that the right coverage and detail of regulation is the level which best achieves the above objectives without stifling business and innovation. However, it is difficult to get this balance right, particularly in times of crisis.
CM notes that there appears to be a tendency towards risk aversion in our society, with a strong body of opinion wanting to regulate risk out of the financial system. However, he argues that "while it is unquestionable that small depositors and retail investors and their savings should be protected, I do not think the same goes for those whose business model is to take risks to a greater or lesser extent. Our society badly needs them to continue to take risks. Otherwise how are we going to emerge from this crisis?”.
In the second half of his speech CM sets out recent examples of what the Commission has been working on as a follow-up to the financial crisis:
Global standards. Here CM states that there has been a clear mismatch between the activity of global players trading and doing business across the globe and supervisors and rule makers overseeing those players whose powers stop at their national borders. Therefore global standards and much more co-operation among supervisors are needed.
Credit rating agencies. Here CM states that the new rules the Commission has introduced are necessary to address the shortcomings and conflicts of interest related to credit rating agencies.
Capital requirements for banks. Here CM states that the challenge is to have targeted requirements, which kick in when they are needed and do not worsen cyclical tendencies. For this reason the Commission will introduce more capital requirements for complex products known as securitisations and for trading book activities, two areas where capital requirements have been lacking. The Commission will also examine how to mitigate the pro-cyclicality of current banking regulations.
Oversight and supervision. Here CM states that the Commission belives that the solution lies with having colleges of supervisors for cross-border institutions where all those who have a stake are represented. If colleges cannot reach an agreement, the Commission is planning to boost the powers of the EU-level Committees. Such Committees will work closely with national supervisors. Another element of the revised supervisory structure will be a European Systemic Risk Council (ESRC) which will monitor and assess the risks to the stability of the financial system as a whole. The lack of any body to monitor systemic risk was one of the factors contributing to the financial crisis.
Executive remuneration. Here CM discusses the Recommendation that the Commission has adopted on executive pay in the financial sector. He confirms that it is not the Commission’s aim to intervene in debates on what level of remuneration is appropriate. Instead the Commission wants to link pay and incentives to long-term performance and prevent excessive risk-taking behaviour. The Commission will soon propose to legislate to allow supervisors to require capital add-ons in cases of imprudent pay and remuneration structures which encourage short-term risk-taking.
View EC speech - The future of regulation, 13 May 2009