11 March 2008

ESFRC sees no end of recent financial crises

The European Shadow Financial Regulatory Committee released a statement on the recent financial turmoil stating that there is ”no sign that the subprime crisis is coming to an end”. Also, “current events demonstrate rather clearly that the main thrust of the Basel II Accord has serious shortcomings.”

The ESFRC therefore calls for further action by policymakers and banks to resolve the crisis, and which has to go well beyond generous overnight financing by central banks.

“The key to resolution is a complete recognition of losses as they can be valued today via a radical disclosure policy”, the ESFRC concludes. The Committee recommends that bank supervisors should have a closer look into the risk implications of the organizational structures that banks and other financial service firms put in place.

Further recommendations include:

- A “European Banking Oversight Board”, should be created as an institution that is independent of national regulators and supervisors and has the function of regularly observing the development of systemic risk of banks in Europe.

- With regard to deposit insurance in Europe, immediate payout should be the rule in times of crisis in order to reduce the risk of runs as occurred in the Northern Rock case.

- A system of Structured Early Intervention and Restructuring (SEIR) or, to use the American term Prompt Corrective Action (PCA), should be put in place as part of the supervisory process in each individual Member State.

- A European Standing Committee for Crisis Management to alleviate some of the shortcomings of the present system of handling a possible pan-European financial crisis

© Graham Bishop