Graham Bishop's Personal Overview
Policymakers continue to focus on competitiveness – implicitly across the Atlantic. Already, regulators are grappling with one trans-Atlantic stock exchange and NASDAQ’s bid for OMX may yet lead to a second. Commissioner McCreevy commented on the rapid intensification of competition in global financial markets, highlighting both the growing importance of China in the financial services sector, and the fact that even the US is now questioning the competitiveness of its financial markets. U.S. Treasury Secretary Henry Paulson announced initiatives to enhance U.S. capital markets competitiveness that focused on strengthened financial reporting and on a more sustainable and transparent auditing profession. However, a study by three US university professors revealed that there is no evidence the Sarbanes-Oxley Act increased London's appeal to foreign companies at New York's expense.
Perhaps a more profound indicator of this competitiveness was the EU/US Summit decision to promote conditions for US Generally Accepted Accounting Principles and International Financial Reporting Standards to be recognised in both EU and US jurisdictions by 2009 without the need for reconciliation. The US President, George W Bush, and the two European leaders, Angela Merkel, President of the European Council, and José Manuel Barroso, President of the European Commission, resolved to work to promote transatlantic economic integration under six headings, including financial markets, specifically mentioning accounting standard reconciliation. This even raises the possibility of US companies using IFRS accounting. The global interest in such topics was revealed by the pattern of responses to CESR’s consultation on third countries GAAP: Signalling the global impact of EU capital markets, nearly a third of the responses came from the US, Japan and Korea.
The Competitiveness Council eventually reached, by qualified majority (Netherlands and Greece voted against, Belgium and Luxembourg abstained), a political agreement on the Commission's modified proposal for a directive on credit agreements for consumers. The discussion in the Council mainly focused on article 15 of the compromise text which deals with early repayments. But the text must now go to the European Parliament for a second reading in the framework of the co-decision procedure.
Its passage there cannot be certain as the EP’s IMCO published a study on the economic impact of the proposed consumer credit directive. The study surveys banks and consumer organisations in Great Britain, Germany and the Czech Republic and cautions that an increase in consumer confidence from the proposed directive would be limited and that costs of products will rise.
Ahead of the Council vote, the European Banking Federation was still calling for further work on the directive, particularly on the current calculation method for early repayment as it argued this was not economically justifiable. In the UK, a Study commissioned by a coalition of UK credit providers concluded that the directive would put upward pressure on the price of credit without improving benefits to consumers. The European Federation of Building Societies also warned that the compromise text gives Member State governments so much scope in transposing the directive into national law that uniform framework conditions for consumers and the credit industry will not be realised.
Retail financial services are now a top political priority and, in its Green Paper, the Commission set out three overarching objectives. It says that it seeks to develop integration in retail financial services markets in ways which will bring benefits for consumers by ensuring that properly regulated open markets and strong competition deliver products that meet consumers' needs. It also wants to buttress consumer confidence by ensuring that consumers are properly protected where appropriate. And it aims to ensure that providers are financially sound and trustworthy. The results of the consultative process will be incorporated into the Single Market Review, to be published autumn 2007.
Nothing is so fundamental to retail financial needs as making payments and Commissioner McCreevy outlined again the benefits that will flow from SEPA and called for a realistic timeline for its implementation. He said SEPA will bring huge potential benefits to the EU economy, and to individual players in the payments market. But he also cited the European Commission’s example as an early adopter and emphasised the need for the public sector to lead by example and play its full role.
Speaking at the first CEBS Conference in London, ECB President Jean-Claude Trichet called for enhanced cross border supervision of banks in the EU and greater cooperation between EU and third country bank supervisors to help safeguard financial stability. He said that the supervisory framework in the EU should be “supportive of a market-led process of cross-border banking as a driver of further banking integration.” He also called for enhanced co-operation between supervisors on a cross-sector basis. As background, he pointed to some powerful statistics: “cross-border banks” increased from 41 to 46 between 2001 and 2005 but their assets increased by 54% to account for 68% of EU banking assets. Within that, the key 16 groups represent a third of those assets. [Editor’s note: several major mergers have happened since then – or are imminent]
Hedge funds continue to attract attention and the G8 finance ministers called for continuing vigilance in the oversight of hedge funds. “The assessment of potential systemic and operational risks associated with these activities has become more complex and challenging”, ministers stated, while acknowledging that hedge funds have also contributed significantly to the efficiency of the financial system. Finance ministers also welcomed the Financial Stability Forum Report on Highly Leveraged Institutions and supported its recommendations for firm action by financial authorities, counterparties, investors and hedge fund managers to strengthen protection against potential systemic risks relating to hedge funds and other highly leveraged institutions.
The FSF said a small number of core intermediaries have come to play an increasingly important role in some key areas of wholesale financial markets. The links between these core intermediaries and hedge funds, through prime broking and counterparty relationships, has thus become more central to the robustness of the financial system. But Commissioner McCreevy stressed that he does not see the need for any new specific European legislation. “We have in place powerful regulatory safeguards and risk mitigation measures.” Separately, ECOFIN - in a carefully balanced assessment on the hedge fund debate - acknowledged that hedge funds have contributed significantly to fostering the efficiency of the international financial system while expressing concern about potential operational and systemic risks.
Graham Bishop
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© Graham Bishop
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