05 November 2008

ECON meeting 4-5 November

ECON discussed the revision of the CRD focusing on securitisation and supervision. Eurogroup President Jean-Claude Juncker argued that the cause of the crisis could be found in the ‘deregulatory frenzy’.

Exchange of views with Mr. Jean-Claude Juncker, President of the Eurogroup

Jean-Claude Juncker, Chair of the Eurogroup, said the risk of the financial system collapsing had diminished, but the real economy was now being affected. “There is still a risk of a credit crunch, even if it is notably smaller now than in previous weeks”, he said and called on banks to take advantage of the stability support.

 

There would now need to be considerably more supervision and regulation in the global financial system, Juncker said, who argued that the cause of the crisis could be found in the ‘deregulatory frenzy’ of recent years. Some of those now leading calls for international regulatory reform had refused to consider the proposals put forward by the German presidency of the G8 as recently as 2007, he noted.

 

The Eurogroup had agreed that governments should adopt a counter-cyclical budgetary policy, within the room for manoeuvre provided by the "wisely reformed" Stability and Growth Pact", said Mr Juncker.  “The policy has to go beyond simply stabilizing financial markets”, Juncker said, but underlined that this should not take place in form of a ‘Keynesian Programme’. Responding to Elisa Ferreira (PES/PT), he called for governments with budgetary room for manoeuvre to use fiscal measures to help the most vulnerable sections of society, and to give support to SMEs.

 

Responding to MEP Garcia Margallo (EPP/ES), who asked for confirmation that we are now in the "exceptional circumstances" which, according to the Pact, could justify a budget deficit of above 3 per cent of GDP, Mr Juncker said that not a single member of the Eurogroup believes the present circumstances were not exceptional.  On the other hand, he also stressed the Pact's indication that such exceptional deficits should be temporary and close to the 3 per cent limit.

 

Responding to questions of Olle Schmidt (ALDE/SE), Mr Juncker said that non-euro states may now discover the advantages to euro membership, even those whose citizens are generally recalcitrant about deeper EU integration. Those outside the euro area have little influence on decisions taken on the world stage, he said.

 

He also stated that EU Member States should first approach the EU in case of stress situations, to ensure coherence between the conditions for loans as in the case of Hungary.

 

Asked by Pervenche Berès (PES/FR) about the implications of the recent meeting of Heads of State or Government of the eurozone on the future institutional arrangements for zone, Mr Juncker stressed that he did not oppose such summit meetings when circumstances called for it, but they should not become part of the EU routine. “There are already 12 meetings a year of the Eurogroup finance ministers – we should not add a routine meeting of eurozone Heads of State or Government ahead of each EU summit.  We cannot have 16 meetings a year to discuss the same issues”.

 

Capital Requirements Directives

Rapporteur Othmar Karas (EPP/AT) clarified in a second exchange of views that he will postpone the original timetable in order to elaborate more on the main problems. He intends to come forward with a draft report on 8 December, envisaging the vote in Committee on 2^nd February and the plenary vote in April next year.

 

He underlined that the review has to be coordinated with the proposals on Solvency II and on Credit Rating Agencies. The Committee plans to come forward with a resolution, to be voted in Parliament on 2^nd December, to exclude CRAs from the Commitology procedure. Mr Karas also reminded that the de Larosière group is currently working on supervisory issues, and a common EU wide position has yet not been agreed upon.

 

Next to supervisory aspects, securitisation is the other mayor issue that requires further attention, and both items were subject to a workshop held the next day.

 

Workshop

Events revealed that the problem shifted from a ‘too big to fail’ towards a ‘to big to be rescued’ issue, Rym Ayadi from CEPS underlined and questioned whether the current Basel II framework is appropriate to tackle current financial market problems.

 

Participants form the private sector called the CRD revision ‘a step in the right direction’. Hugo Banziger, Chief Risk Officer of Deutsche Bank however made clear that discussion has to go beyond the envisaged review of the directive. The main problem was that shock absorbers have been removed in the past accelerating pro-cyclical effects, he said and called for a proper infrastructure for financial markets.

 

A main point of concern was the issue of securitisation and in particular to retain a certain percentage. Although this is technically possible, Mr Banziger said, this provision does not help to overcome the current crises and will only delay the return to functioning markets. Barbara Frohn, Global Head of internal model validation at Banco de Santander went further saying that the proposals on securitisation will potentially ‘kill’ markets.

 

Discussion was stimulated when Robert Reoch, UK New College Capital Ltd., made clear that the problems resulted from investor-driven securitisation seeking for arbitrage, not from balance-sheet securitisation. They called to carefully distinguish between these two product groups.

 

However, the current proposal does not include such a differentiation and it was questioned if a clear definition could be provided.

 

Supervisory aspects were discussed in a second panel when diverging view on the future of common supervision became evident reaching from further convergence, as advocated by Thomas Huertas, UK FSA, to a decentralized European System of Banking Supervisors supported by Andreas Ittner of Austrian ONB.

 

Mr Ittner made clear that the concept of a ‘lead supervisor’ will not be accepted as this not only hinders a European approach, but also could means that national companies might become subject to foreign legislation.

 

MEP Ieke van den Burg (PES/NL) also agreed that there are immense problems with the concept of a lead supervisor and called on the Commission to come forward with a proposal.

 

Speaking for the Commission, David Wright, Deputy Director of DG Market, underlined the need to find the right balance between long term visions and short term and practical steps to be taken immediately. There may be a wider discussion after the de Larosière group had made its recommendations, he said, and there is certainly a longer term agenda.