- 1. DISCUSSION PAPER EUROPEAN COMMISSIONG20+G20+ TASKSCAPABILITY
ISSUES By Robert McDowellRevised 3 times through to December
[email protected]
2. CONTEXT 1: making this an effective reality? 3. Argument All
competent authorities lack macro- macro- financial models at both
state & EU levels!NOTES To regulate at EU level requires tools,
Central banks & competent state authorities have models, data,
that build on EU laws (CRD, conflicts of interest in carrying out
different objectives Solvency II & finance sector data etc.) We
have (macroeconomic stability, prudential supervision, the laws,
not tools for analysis & reportinginvestor protection or
competition). required by EC & G20 agendas. Worse (in EU) if
those objectives are only those of state As various measures of
governments, policy makers (national interest, bailing-out of a big
bailing- central banks impact all kinds of intermediary). Hence
importance of EC rules, laws & intermediaries (commercial &
investment banks,guidelines. investment & hedge funds, pension
funds & insurers):Financial systems traditional 3-way division
into 3-States & EC coordination can be cumbersome, withbanks,
capital markets, & insurance washundreds of bilateral &
multilateral memoranda ordefeated by events;colleges of supervisors
etc.Defeating also VaR & capital adequacy models,Level 3
Committees (e.g. Cebs, Cesr & Ceiops), in& exposing equity
values (200% of banks total spite of excellent if limited permanent
staff, dependcapital wiped out gross & more in share value of
banks)wholly on their constituents members/authorities &Asset
swaps & capital injections reminded allhave rigid tripartite
competences (banks, securities &that macro-bailouts are
responsibility of states, macro-insurance) - an obsolescent
framework.only assisted/ adjusted by EC authorities;Bail-Bail-out
decisions are by central banks, In spite of progress, the system is
unable to respond toregulators, governments, who were
supervisingchallenges of integrated inter-linked markets (no over-
inter-over-the impaired entities; arching models exist). 2 urgent
demands:No lender of last resort or government had Much better
cyclical protection for investors, citizens, &liquidity on
scale needed but could create it bymacro-economyrelatively
limitless power to grow a states short- short- Dramatic
improvements in regulation to redirect role,term off-budget balance
sheets (less so by ECB foroff-culture & flexibility of the
financial industry.Euro Area where states gave money market
operationsto ECB). ECB). 4. CONTEXT 2: EU-wide agreement without
EU-wide forensics?EU- EU-To contain an earlyBut, who iswarning
system onSpecifyingmacro-economic &Macro-model
macro-financialtoolset & dataprudential for
this?developmentsThe Big PictureIncluding legally But, who
isbinding mediation Specifyingbetween national
Micro-datasupervisors & formatregulatoryfor
this?authorities.The Small Details 5. COMPREHENSIVE ACTION PLAN Is
there a project management office for ECs G20+ comprehensive action
plan Note: G20 tasks Short- Short-term immediate + longer medium
term taskslisted grouped by immediate & medium term &
byterminformation & actions.Two keys: (our phrasing) keys:
(ourImmediate tasks are mix of X A new global financial
architectureTechnical, regulatory & supervision infrastructure
new Bretton Woods system (addressing global imbalances), Economic
scenarios for economic capital models & Reporting to G20 &
from G20 to G192 UN, Doha)Policy Audits of/by national &
international bodies. set up quickly by IMF (purpose: financial
stability) include emerging & developing economies (in FSF
& IMF) Medium term tasks are Macro- Macro-prudential oversight
of global finance Reviews of effectivenes of all work done &
remainingtasks to be done by all bodies Y Auditing regulatory
supervisory regimesOver-Over-arching role for Commission
especiallycoordination & new directives based on assessments
counter- counter-cyclical finance (measures & standards)&
other G20 Commission tasks etc. asset derivatives clearing &
transparency (financial markets measures) liquidity measures
(instilling macro-prudential risk mgt.)macro- 6. FINANCIAL RISK
REGULATION AT EU LEVEL This will change in EU an enormously
responsible task (at EC Current crisis exposed poor organisation of
level) to oversee how regulators & central banks roles swing
financial supervision (central banks, EUbetween fiscal & lender
of last resort to policy-maker, & ministers, & treasury
authorities) even if they all strategic implementer (of what CRD
& Solvency II & other risk responded better than anyone
expected!. management in EU ultimately mean in a financial &
economic crisis). Crisis questioned efficacy of horizontal
allocation of micro-prudential competencies micro- across states
(fragmentation in US or single regulator in many EU countries)
& vertical distribution of macro-prudential (systemic &
macro- global liquidity) competencies, where only national entities
appeared to be in charge of policy responses & of supervision
(media comment scarcely mentioned CRD or C-ebs).C- US - a mix of
federal & state competencies while only states supervise
insurance; EU - states led policy & agencies are (in popular
mind) only at member state level; Euro Area - response was slower
than in UK & relatively smaller (where short-term treasuries
short- off-budget source of states short-term funding off- short-
are vested in multi-national ECB).multi-ECB). 7. ECOFIN TASKS (1 of
2) delegated to Commission until financial stability has been fully
restored, actions related to resolution & management of
financial crisis remain the top priority within the EU ECOFIN Nov.
08MACRO- MACRO-PRUDENTIAL Actions & InformationImprove European
supervisory & regulatory framework, amending, &updating
existing roadmaps where necessary (most vital are roadmaps for
Pillar II)Improve supervisory framework & enhance Lamfalussy
process (Mar 2009)Strengthening risk & crisis management
frameworkUpdate recommendations on functioning of EU committees of
supervisorsConsider legislative actions by end 2009Pro-cyclicality
(re. prudential & accounting rules) outline by end
2008Pro-Pro-cyclicality first report by March 2009 (finalised no
later than mid 2009)Pro-Work to keep critical role at international
level, in wake of G20 Summit/sReview guarantee schemes &
recapitalizations & submit recommendationsModify national
mandates of supervisors to take account of EU financial
stability(foreseen in CRD & Solvency II - Strengthen CRD &
SolvII Supervisors tasks)Ensure EU positions on new international
financial architecture are well founded. 8. ECOFIN TASKS (2 of 2)
delegated to EU CommissionMARKETS STABILITY & MICRO-PRUDENTIAL
MICRO- Actions & Information Put into place a European
oversight of credit rating agenciesLegislative proposals of
Commission: gaining agreement s on these?Improve transparency to
restore confidence in financial markets (needs massive
consultation)Mitigate counterparty & op risks & improve
transparency in CDSs market (bring on-market?)on-With CEBS report
progress on transparency of fin. firms?Executive pay system: member
states to implement EC recommendation ?Safe & sound European
post-trade infrastructures to prevent systemic risks ?
post-Increase transparency on the OTC derivatives markets (bring
on-market?) on-Strengthening prudential rules (CRD & Solvency
II) (needs road-map models & datasets) road-Definitive adoption
of 2 directives before end of Parliament mandate ?Modify decisions
on Cmte Supervisors so as to assign next tasks? 9. ECOFIN TASK
ISSUES MACRO-PRUDENTIALMACRO- EU supervisory & regulatory
framework (needs amending for Pillar II & III to provide
detailed worked economic templates with empirical constantly
updated stress models.)models.) Roadmaps (most vital in Pillar II,
more than of CRD, but only 5% of advice! Major Gaps!) Improve
supervisory framework & enhance Lamfalussy process (Mar 2009)
(This depends on issues some of which are not immediately urgent
for financial stability) Strengthening risk & crisis management
framework (Commission has taken steps here need to survey all
states current crisis response processes to learn lessons first
issues are definition of systemically important market or firm
event, then define KRI advance warnings e.g. what did supervisors
know but did not flag & instead left issues as confidential
part of supervisor Pillar II challenge dialogue?) Update
recommendations on functions of EU Committee of Supervisors
(College need for cross- cross-border combined research of EU-wide
resilience with stability awaiting per-review data efforts EU-per-
required to abstract multi-bank data in a systematic reporting
format)?multi- Consider legislative actions (Additions to CRD &
Solvency II that should be law not principles of guidance only.
Must distinguish hard from flexible data. IFRS could be specified
within CRD & Solvency II plus standardisation of FinRep/CoRep
accounting information report format?) FinRep/ Pro-cyclicality
(prudential & accounting rules) (IFRS/CRD on judgment areas)
Pro-(prudential rules) Banks are not continue to act
pro-cyclically; deleverging and raising credit margins!) pro-
Pro-cyclicality (Major unsolved issues in correlating banks &
markets to economy, E-Cap) Pro-E- Critical role in wake of G20
(Internal & External embrace of emerging economies into
process) Review guarantees & recapitalizations (Detailed
modeling, monitoring & refinement needed) Mandates of
supervisors for EU fin. stability (Needs Central Banks models &
oversight) EU on new G20 Fin. Architecture (EU study of global
imbalances & EU systemic risk role?) 10. ECOFIN TASK ISSUES
MARKETS & MICRO-PRUDENTIALMICRO-Mkt Transparency (OTC FX, MM,
BD bring on-exchange and/or ensure regular reporting? on-Currently
FX is surveyed every 2 yrs by BIS, but MM & Bonds trading not
reported! Need transparentmeasures of market liquidity by
instrument class and marketplace.)CRAs reform (need to be far
better defined - conflict of interest charging, model quality,
validation &transparency, TTC/PIT, new sub-AAA grades, &
individual v. portfolio, cycle economics listing &sub-checking
all CRA-type data sources incl. indexes & aggregate spreads
data. CRAs are major story in CRA-factors leading to present crisis
should be interrogated. Scope for new European CRAs out of
firmsthat do similar analyses)CDSs market (netting standards
available, but not full trading & clearing standards?)Executive
pay (regulatory checklist under appropriate risk categories +
extending risk policies &independent risk unit oversight of
bonus levels & risks risk authority checklist?)Clearing
(Quality of Market data, gross not just net, are not reported? More
needed on Oprisk. Too Oprisk.much emphasis in past on commercial
competition & not regulatory quality. Clearing should be
regulatedlike banks (possible project to extend Basel II principles
to Exchanges as appropriate? they hold largemargin collateral c/p
risk same applies to in-house investment bank clearing/netting
& prime brokers. in-Attention to stock lending?)OTC derivs (OTC
instruments non-standard and/or customers excluded from X access,
& degree ofnon-CFDs, & derivs Xs driving the cash market
price discovery needs rethinking) 11. NOTES 12. Note: Contextual
matters of public opinion? DG ECFIN history as a watchdog for EC/EU
core principles, but not yet expressed in tools & models? now
adds responsibility for wider econ role (EU in global structure)
not at all easy to be held responsible in critical manner for
EU/Eurozone economyEU/Eurozone Now loaded with tasks from ECOFIN in
respect of G20 - not fully coordinated in central plan?Regional
context to ECFINs work may be embraced in G20 tasks?EU is in
fragile position (hence European Recovery Programme) even before
melt-down. Programme) melt-down.Too much poverty around its borders
(and some bad history)Critical issues e.g. include how to make a
deal with RussiaEU may be going green but how to maintain borders
etc.?Does G20 statement offer basis for wider problem
resolutions?"G20" statement rich countries need support of worlds
major non-OECD countries non- rich countries best effort at reform
of international financial institutions + framework to maintain
"level playing fields" (globalisation programme) programme) risks
rejection by countries where most of world's population live but, a
surprising number of poor countries are implementing Basel IIUseful
blueprint (or not?) for 21st C, for at least next decade (Best
result may be obtained by focus on modeling of external economics
of EU as Europe Region & then integrating with UN global models
before informing into IMF models. All currently lack detailed
finance sectors.) 13. Note: ECOFIN welcomed fair value (fV)
guidance by IASB(fV)Accounting rules for fV between trading &
banking books, on & off B/S are critical, but ECOFIN sees
urgency to improve real economic market valuation when assessing
government schemes & cases but more to be done by IASB &
BIS.G20 decision: ECOFIN will examine progress & need for
action re. IASB governance reform (accountability to public
authorities).ECOFIN states, Banking institutions have made progress
to release states, exhaustive & comparable financial
information related to their exposures, losses & write-downs
arising from the financial crisis. Nevertheless, qualitative write-
disclosure on valuation techniques still has to be improved. The
Council encourages the industry to pursue its initiatives regarding
the improvement of investor information & transparency in the
securitisation market. market.is debatable. Progress is limited
& problematic, not exhaustive or forexhaustive comparable
financial information banks are obfuscating, but they also
needinformation guidance on flexible judgment calls (e.g. in
stress-testing of e-cap models).stress- e- Qualitative disclosure
needs improving, yes, but also standardising, & standardising,
quantitative definitions e.g. of market turbulence adjustments also
improved! adjustments Precise relationship (mapping) between IFRS
& CRD Pillar II is key! 14. Note: EFC to work on:Review IMFs
resources & loan instruments for short-term policy IMFshort-
IMF relations with other fora & IFIs Assess progress of key
short-term prioritiesshort- Assess causes & lessons of present
& previous financial crises Take account of financial stability
in all markets (no model expected before 2012!) Propose updated
short-term & long-term work priorities short-long- Standard
setting & surveillance of financial institutions at global
(G20) & Ecofin roadmaps: progress in sharing information with
non-cooperative jurisdictions; non- strengthening IMF surveillance
how IMF should develop early warning mechanisms build on swift
identification of systemic vulnerabilities stronger integration of
bilateral & macro-financial surveillance macro- strengthen
joint IMF/World Bank Financial Sector Assessment Programs review
mandate & governance of IFIs. 15. Macro- Macro-models 16. Bank
of England Model This model is illustrative & was never
realised by central banks or regulated commercial and investment
banks? 17. MACRO- MACRO-MODEL issues in summary All authorities
lack macro-models with detailed finance sectors (which must
include,macro- alongside national sectoral & regulatory data
& calculations as per CRD & Solvency II law) ECFIN task has
over-arching approvals regime & policy initiatives role in
coordination over- & collation of EU-wide responses regarding
G20+ agenda.EU- Key primary G20 & prudential focus is to link
financial stability with economics (macro- (macro-prudential tier)
is CRD (& Solvency II) in Pillar II (e-cap modeing):
(e-modeing): least complete parts of CRD & Solvency II (&
of IFRS); that Banks (& insurers) have greatest practical
problems with; Understanding market shares accurately & in
context of national financial sectors quality Unless solved they
cant calculate or monitor cyclical behaviour! can EC, with
supervisors & central banks could specify
macro-financial-economicmacro-financial- models, with USA + EU-wide
& Euro Area dimensions - complicating national sectoral EU-
models & should monitor with BIS cross-border obligations:
cross- Various techniques missing, but can be advised, explained
& summarised; Pillar II & IFRS framework, data sources
& model structures & harmonising these for IFRS, SolvencyII
& CRD are critical; To take account of full range of G20 tasks
& results usefully feeding into macro-models. macro-models.
This could be single biggest contribution to financial stability
& The only basis for analysing & determining many pro- and
anti- cyclical issues pro- anti- Current projects indulge too many
short-cut assumptions to avoid processing allshort- available date
(& game theory + asymptotic single factor macro-economy
variables for those who cannotmacro- understand macro-economy
accounting models or dont want to!)macro- 18. G20 TASKS IN EU 19.
G20 tasksImmediate tasks Immediate tasks + Medium Term(TAKING FAR
LONGER THAN FIRST EXPECTED) tasks (timescale n/a)financial
technical, regulatory & supervisorypolicy infrastructure action
plan mandated on relevent authoritieseconomic scenarios generation
for economiccapital models & divided into groups of tasks &
issues: policy assessments of measures by national & 80
Immediate (SHORT TERM) international authorities.tasks & issues
57 Medium term tasks & issues Medium term tasks distinguished
as information orassessment of the effectivenes, adequacy
&action tasks.qualities of all the work done & remaining to
be done by all bodies involved. appropriate role for Commission
includes coordination & application of this assessment at EU
level similar to a Basel II ICAAP applied to individual banks
except done by, or on behalf of, regulators & supervisors &
central banks as monetary authorities, & of governments as
fiscal policy-makers regarding financial system. 20. Immediate
priority: A. Regulatory RegimesA. Regulatory RegimesPro-cyclical
behaviour by banks (credit cycle exactly matching the
economiccycle) is biggest single unresolved issue of Basel II
banking & Solvency IIrecommendations toinsurance regulations
(EU CRD law).mitigate pro-cyclicality,pro-Hitherto, banks have been
late in deleveraging (withdrawing credit) into aby reviewing
howdownturn & late in expanding credit in the early quarters of
a recovery.valuation & leverage, This is central to Basel II
Pillar II economic scenario stress tests, but canbank capital,
executive only be addressed looking at all of financial sectors,
not by bankscompensation, & individually.provisioning
exacerbate BIS published papers as guides to banks to correlate
their experience to thecyclical trends?underlying economy. None
succeeded. Too little academic literature on thefinance sector to
general economy relationship. Banks lacked precisetemplates how to
do this.BIS & regulators told banks to make their own
solutions. This proved to betoo intellectually difficult. 3rd party
solution providers could not help either!Regulators issued some
indicators for stress tests, but all banks stress-tested much too
weakly; none to the extent of what needs to happen to wipeout their
capital. In aggregate, credit crunch + recession are each wiping
outall bank capital by 200%. Governments are supplying 100% &
debtrecoveries 50%. The remaining 50% has to be replenished in
other
ways.______________________________________________________________Note:
Cyclical trends are subject to retrospective revision e.g. US
recession now officially beganDec.07! UK&I may revise recession
data to having begun in mid-08. EU current officialrecession may be
revised up to positive growth until 2010 when US is in recovery
& UKfollowing soon after! Perception is as important to
confidence factors as fundamental actuality.Economic patterns are
mixed across trade surplus (e.g. Germany) & deficit states
(e.g. Greece),& across credit-boom (e.g. UK) &
credit-limited economies (e.g. Italy), with some (e.g. Spain) amix
of both. But, principles & common features can be established!
21. Immediate tasks (1 of 10) B. Prudential Oversight B. Prudential
OversightIn EU 10-13 are in hand, all else is unresolved. 10-.3
ensure credit ratings agencies (CRAs) meet IOSR standardsCRAs
operated faulty models until June 07 &.4 & CRAs avoid
conflicts of interest,accepted commercial conflicts of interest.
But,CRAs occupy a role more central & essential to.5 provide
greater disclosure to investors & issuers, financial valuations
& markets, as risk drivers &.6 differentiate ratings for
complex products, & ensure quantifiers, in banking &
insurances than.7 CRAs role is to deliver superior unbiased risk
assessments economic indicators, auditors or stock (but under legal
risk/ solvency threats & cant prove if superior models)?
exchanges. IOSR to reviewCRAs are essential, but must be
regulated,.8 credit rating agencies standards andqualified &
reformed. Credit crunch deepened.9 mechanisms for monitoring
compliance.dramatically when ABS issues, banks &Monolines were
downgraded, or subject to Supervisory Authorities to ensure
potential downgrades, & share prices crashed.10 financial
institutions maintain adequate capitaltriggered by CRAs once they
fixed their models..11 in amounts necessary to sustain confidence.
But, problems remained in grey areas between International standard
setters to set out TTC & PIT risk grades, single & p/f
ratings..12 strengthened capital reqs. for banks structured credit
andreqs. More model transparency needed, or banks &.13
securitization activities.insurers (less so) cannot create their
own IRmodels. All IR models currently rely on CRAs. Supervisors
& regulators to Internal models only extend to unrated SME
&.14 build on launch of CDS clearing services in some
countrieshousehold loans (using score-cards) & calculate
score-.15 speed efforts to reduce systemic risks of CDS & OTC
derivsfor collateral & sureties..16 insist market participants
support exchange-traded or exchange-Efforts to create exchange
clearing for illiquid &.17 electronic trading platforms for CDS
contracts; OTC instruments = very important. But, currently.18
expand OTC derivs market transparency; &standards are available
only for netting CDS..19 ensure OTC derivs infrastructure supports
growing volumes.CRAs are not yet producing hold-to-maturity risk
hold-to-gradings for TTC ABS valuations.A few new CRAs are emerging
to do this but thereis an oligopoly & insufficient quality
validation. 22. Immediate tasks (2 of 10) C. Risk Management C.
Risk ManagementIn the EU, regulatory supervisors are already doing
Regulators to develop & implement implement20-29 as adequately
as possible in current .20 enhanced guidance to banks risk
managementbanks turbulent conditions. 30-37 are outstanding .21 in
line with international best practices, &problems. .22
financial firms to re-examine internal controls &re-Liquidity
risk, concentration risk & stress-testing .23 strengthened
policies for sound risk management.are ill-defined despite recent
new guidance = .24 policies & procedures for fin. firms to
manage liquidity risk currently inadequate for detailed assessment.
.25 Including by creating strong liquidity cushions.All banks
failed to include one or more essential factors in their liquidity
analyses. As with Supervisors to ensureensure economic scenario
stress tests, banks want much .26 Fin. firms develop processes for
timely & more precise templates. .27 comprehensive measurement
of risk concentrations & This is a hard-to-change culture in
which CRD is .28 large counterparty risk positions across products
& treated as a regulatory overhead = not yet as .29 across
geographies. central & core to how banks manage & operate.
Financial Firms to to Liquidity risk used to be treated as
relatively .30 reassess risk models to guard against stress
&simple, predictable, easy to understand, trsy mgt .31 report
to supervisors on their efforts. operation, now a crisis!? .32 have
clear internal incentives to promote stability & Credit crunch
dramatically exposed liquidity .33 have necessary actions for this
in placeignorance, but banks boards & senior officers lack .33
avoid rewarding excessive short-term returns / risk taking.
short-confidence how to take a precise or firm view of .34 exercise
effective risk management &the issues. .35 due diligence over
structured products & securitization.Ideally, it would help if
they had more precise Basel Committee to to standards with worked
examples & a liquidity .36 study need for improving firms
stress testing models &firms health measure. .37 provide help
to firms stress testing models, as appropriate. firms 23. Immediate
tasks (3 of 10) D. Promoting Integrity in Financial MarketsIn the
EU, regulatory supervisors are co-operating in 38 & 39above.
40-47 all in need of research & data & by central D.
Promoting Integrity in Financial Marketsbanks with ECB. What they
do not address is issue of post- National & regional
authorities to promote & ensure MiFid fragmentation away from
EUs major stock exchanges. .38 working together to enhance
regulatory cooperation Ensuring cooperation among banking &
insurance regulators .39 between jurisdictions on a regional &
international level? in applying CRD is main function of C-ebs. .40
information sharing about domestic threats & National
supervisors have right to challenge each other & .41 cross-
cross-border threats to market stability & host country
supervisors can examine banks home country .42 national (or
regional) law is adequate to address theseregulatory
submissions.threats?Degree of such co-operation was most clearly
evidenced in .43 review business conduct rules to protect markets
& failures of Fortis, Dexia, & others, whether funding
problemsinvestors? (new Company Law standards?) or error-ridden
failure to comply in detail with CRD legal .44 especially against
market manipulation & requirements. .45 fraud &New
liquidity risk reserve ratios, other cyclical buffers & .46
cooperation to protect Intl. fin. system from illicit actions. much
more template detailed Pillar II analytics are in train, .47
appropriate sanctions regime for misconduct. but much remains to be
detailed.Issues of cross-border financial stability threats
includingstock-lending & short-selling as well as
shadow-banking,how securitization issues were packaged & sold
(between fin.Firms & between banking & trading books, &
between proprietary &customers portfolios) & fair value
issues are capable of beingresolved, but only if firm principles
are enforced = notcompromised to please or disappoint everyone
equitably.Operational risk issues of fraud & cross-border
cooperation,44 -47, are variously in hand in EU. Differences remain
&cannot be ironed out soon. 24. Immediate tasks (4 of 10) E.
Reinforcing International Cooperation In the EU, CEBS is in process
of standardising supervisortraining = a form of supervisory
college. But, this does not E. Reinforcing International
Cooperationextend to level of detail required by G20. CEBS is not
designed Supervisors to collaborate to strengthen...for this with
culture or skill-set to act at this level. .48 supervisor colleges
for major cross-border fin.firms,cross- fin.firms, EU Commission
could devise such a process? There is a process .49 surveillance of
cross-border firms cross- in place for supervising cross-border
financial institutions, but .50 regular meetings with major global
banks for not yet a formal or regular meeting between systemically
.51 comprehensive discussions of firms activities & important
cross-border institutions to meet with a college of .52 assessment
of the risks the firm faces.supervisors from each jurisdiction
involved. Regulators to take all steps necessary toThis could be
devised on an EU-wide (& non-EU partners) basis .53 strengthen
cross-border crisis management, cross- beginning with template
example of FSAs ARROW reviews = .54 incl. cooperation &
communication with each otherinterrogatory challenge
system.Regulators may co-operate on cross-border crisis management,
.55 with appropriate authorities, &but does not yet fit in all
regulators national remits. .56 develop comprehensive contact lists
&Only central banks are strictly responsible for fin. sector
system .57 conduct simulation exercises, as appropriate.stability.
Regulatory arms or separately constituted supervisoryauthorities
are responsible for resilience of individual firms, notsystemic
risks directly. Finance Ministries (and ECOFIN) havecoordinating
responsibilities. Therefore, 53-57 could be anappropriate
coordinating role for Commission as in case ofpricing of national
government & central bank support for banks& also European
Economic Recovery Plan (November 26th 08),plus Regulation setting
up European Globalisation Fund? 25. Medium-Medium-term tasks (6 of
10) G. Regulatory RegimesG. Regulatory Regimes CRD is
half-completed towards ensuring most of All G-20 members commit to
undertake Financial Sector G-above. Self-assessment or external
assessment is a Assessment Program, report & support
transparentvery significant undertaking for EU & a major
assessments of natl. regulatory systems.natl.contribution to single
market policies & perceptions. Each country or region pledges
to review & report:Essentially it is EU-wide audit that
Commission has .81 on structure of its regulatory system & much
experience of in economic & social programmes .82 principles of
its regulatory system using external auditors. Asessment is almost
identical .83 ensure it is compatible with a modern & to
principles of Basel II ICAAP, except applied to .84 increasingly
globalised financial system. regulatory regimes. EU is a single
market, a meta- Authorities review & report on differentiated
nature of:economy above national economies, & with an .85
regulation in banking, securities, & insurance sectors
&international single currency & monetary zone. .86
outlining the issues &Thus cross-border comparisons are
economically .87 making recommendations on needed improvements
important & cannot be satisfied by individual national .88
scope of Fin. Regs for unregulated firms, instruments,
&reports. markets C-ebs is co-ordinating on CRD & related
regulatory .89 appropriate regulation for all
systemically-importantsystemically-supervision & announced
cutting down of national institutions. exceptions. But, there is
more than this. National & regional authorities to review
Commission could scope an appropriate study & then .90
resolution regimes &put this to tender in whole or in parts.
One weakness is .91 bankruptcy laws in light of recent experience
& to ensure that with 93 & 94 there is not a reference to a
95 to be .92 orderly wind-down of large complex cross-border wind-
cross-some standardisation of economic-capital models financial
firms.definitions & implementation = more critical than
Definitions of capital to be be capital adequacy. .93 harmonized,
in order for .94 consistent measures of capital & capital
adequacy. 26. Medium- Medium-term tasks (7 of 10) H. Prudential
Oversight There are calls for creation of one or more European CRAs
- a logic, notwithstanding globalised nature of financial markets.
& there are H. Prudential Oversight nascent European-based
firms with potential to Supervisors & central banks togrow into
fully-fledged CRAs on a par with S&P, .95 register CRAs that
provide public ratings Moodys & Fitch. .96 develop robust &
internationally consistent approachesBut, 95 is a task to define
who are & who are notfor liquidity supervision, (including)
ofCRAs, & then what are all credit ratings data .97 central
bank liquidity operations for cross-border banks. cross-sources
& providers & then validation checks & certification or
some regular regulatory audit. Indexes should be included. 96 is
partly also an index issue, as liquidity risk can be dictated by
credit risk gradings. This, & central banks liquidity windows
are complex issues that require considerable research by financial
experts working with economists & practical mathematicians.
There is no single institution or standards body that can address
all of the above. Hence this again seems a place for EU Commission
to coordinate. 27. Medium- Medium-term tasks (8 of 10) I. Risk
ManagementIn official G20 text, in 98 economists must also be
implied here - an important point since economists have generally
I. Risk Managementbeen left out of standards setting for banks
& insurers. International standards bodies to work withwithThey
have much to contribute centrally to Basel II, .98 broad range of
economies & other appropriateSolvency II (EU CRD) Pillar II.
bodies, But, over & above this they are important in navigating
the .99 to ensure regulatory policy makers are aware ¤t
economic cycle. Pillar II requires banks & insurers .100 can
respond rapidly to evolution & innovation in to stress test for
a 1 in 25 set of market & economic financial markets &
products. shocks, in effect a severe recession. Undertaking this
Authorities should monitormonitor today is changed obviously when
in the middle of such a .101 substantial changes in asset prices
&set of shocks. It should surprise no-one that banks .102 their
implications for macroeconomy &internal models & systems
are not attuned or designed or .103 for financial system.capable of
determining recovery strategies & short term implications in
next few years. Economists now, by force of circumstances, have a
critical role to play, more than designers of Basel II imagined. EU
authorities could address this issue with the same application
applied to economic analysis of the introduction of the common
currency. At that time, external economists were not much employed,
but it should be different this time in addressing 102 & 103,
but quite possibly will not be given the cultural resistance within
banks to empowering their macro-economists? 28. Medium-Medium-term
tasks (9 of 10) J. Promoting Integrity in Financial Markets J.
Promoting Integrity in Financial MarketsItems 104-107 have in mind
off-shore financial centres National & regional authorities
should implement & tax-havens. They can also apply to
unregulated .104 natl. & internatl. steps to protect global
financial system shadow-banking types of firms generally. .105 from
uncooperative jurisdiction & We do have views & analysis
that can be contributed .106 from non-transparent jurisdictions
thatnon-here as to all previous tasks, but not on items 108-114.
.107 pose risks of illicit financial activity. On eve of Credit
Crunch & during it, various attempts to Financial Action Task
Force to continue work againstextend transparency & regulation
fell before legal &political obstacles. .108 money laundering
&What we do not yet have is comprehensive assessment .109
terrorist financing, &of the scale of issues involved. This
would seem a .110 support efforts of the World Bank proper study
for Commission DGs. .111 UN Stolen Asset Recovery (StAR)
Initiative. Tasks 108-111 are in hand within EU & while more
Tax authorities to draw on bodies such as OECD to coordination may
be called for, these are not isssues .112 continue efforts to
promote tax information exchangewe are able to comment on with
authority & that applies .113 on lack of transparency &
also to 112-114. .114 failure to exchange tax information. 29.
Medium-Medium-term tasks (10 of 10) L. Reforming International
Financial Institutions Underlying these are global (&
Commission) questions relating to how trade & payments
imbalances respond L. Reforming International Financial
Institutions to & raised a demand for spectacular growth of
Bretton Woods Institutions must bebestructured credit or debt
instruments. Theories about .126 comprehensively reformed so that
they can better savings, with export-led or endogenous growth, .127
reflect changing economic weights in world economy & shortage
of government bonds, credit-boom bubbles, .128 be more responsive
to future challenges, withcommodity booms etc. .129 emerging &
developing economies given more voice & This is an area for
global & multi-regional macro- .130 representation in these
institutions.empirical economists. Bretton Woods model has a IMF to
conduct vigorous & even-handed even-handedspecial interest for
EU & Commission as within EU .131 surveillance reviews of all
countries, arguably ECB (in conjunction with Commissions .132
giving greater attention to financial sectors &external
development programmes) may become more .133 integrating reviews
with IMF/WB financial sector like an EU IMF (except for UK
objection). This is high- .134 whereby macro-financial policy
advice is strengthened.macro- politics that has a long history
since Delors Plam, OECD economies, IMF, & other international
bodies for...European recovery Plan & current debates over if
2% or .135 capacity-building for emerging & developing
countriescapacity-8% reflation is needed & if Commission should
have .136 formulation & implementation of major new
regulations,regulations, borrowing rights to issue large quantities
of long term .137 consistent with international standards. debt to
support cross-border transfers within EU. These matters will have
more light shed by coordinating with IMF to remain close to shape
& formal processes a new Bretton Woods could be. In current
context it is key to EUs near term external policy & global
role in financial matters & in terms of global economic
recovery. Currently, we surmise, there are more published papers
(if not many) with interesting ideas & analyses on what EU,
Commission, could do. 30. Thank you for your attention