05 April 2008

Informal ECOFIN meeting 4-5 April

The Informal Ecofin meeting agreed on further steps to develop financial stability and supervisory arrangements. On financial stability, a new MoU was signed to strengthen co-operation mechanisms around cross-border groups. Ministers and Governors also discussed the progress achieved on clearing and settlement and the way forward

On financial supervision it was agreed to invite Member States to give a European mandate to national supervisors. The 3L3 Committees should be tasked to contribute further to supervisory co-operation and be given a role on alerting on financial stability in Europe. The legal status of the Committees should not be changed.

Colleges of supervisors should be used more widely. Their role in organising co-operation and the sharing of information should be strengthened and further developed. Any progress depends on addressing the question of burden sharing.

The work on the convergence of regulatory and financial reporting should be speeded up.

On clearing and settlement Ministers and Governors expect that the ongoing technical work will results in precise roadmap for actions. CESR together with the ESCB are invited to develop recommendations to the authorities for common practices.

Formal Council conclusions and an update of the existing roadmaps as agreed in 2007 will be taken at the June ECOFIN meeting.

For further information go to:

I. Statement on the ongoing tensions in international financial markets

II. MoU on co-operation between the Supervisory Authorities

III. Clearing and Settlement

I. Statement of Ministers and Governors on the ongoing tensions in international financial markets and the appropriate policy response

Ministers and Governors discussed the ongoing tensions in international financial markets and the appropriate policy response.

In the short run,

1. To increase transparency and restore confidence, Ministers and Governors call on financial institutions to make full and immediate disclosure of on and off-balance sheet risk exposures and losses and on governors to guide this process as appropriate. CEBS has reviewed disclosure practices among EU banks as regards securitisation activities and structured products. As the review has revealed heterogeneities in these practices, Banking Supervisors are invited to work intensively on these issues and in particular to consider complementary guidelines by mid 2008.

Moreover, at the request of the European Commission, the European banking and securitisation industry is working on a number of proposals to enhance the transparency of structured credit markets which should be finalised by June 2008. Regulators and supervisors will assess the outcome at that time. Should it not be sufficient, it could be complemented by regulatory actions.

2. To improve valuation standards, Ministers and Governors urge supervisors and accounting standards-setters to ensure that the financial reporting framework functions properly with clear guidelines on valuation that can be applied consistently across institutions.

3. To strengthen further the existing prudential framework and risk management in the financial sector, the Commission will propose a revision of the Capital Requirements Directive in September 2008 for adoption by April 2009 at the latest as supported by the European Council. The revision will in particular address elements of the prudential treatment of securitisation, as well as the large exposures regime and hybrid capital instruments. It will also take into account the work under way by the Basel Committee on Banking Supervision on banks' liquidity risk management which is due to be issued in July 2008.

4. Lastly, concerning market functioning, credit rating agencies have announced self-regulatory actions to strengthen the integrity of the ratings process, to ensure its independence, to provide greater transparency about risks in rating methods, and to improve the general understanding of credit ratings in the markets. Ministers and Governors urge the industry to present as soon as possible a roadmap of planned industry wide initiatives. Before summer 2008 the Ecofin Council will discuss a Commission assessment of the role of credit rating agencies in structured finance and the process of rating complex financial products, taking into account international developments. If market-led solutions prove inadequate we stand ready to consider regulatory alternatives.

The EU response to the turmoil is consistent and co-ordinated with initiatives being considered in international fora, in particular the Financial Stability Forum, the International Monetary Funds and the international standards setting bodies.

Ministers and Governors will continue to closely monitor the economic and financial developments and call for full and timely implementation of the road map of follow up actions to the ongoing financial turmoil.

II. MoU on co-operation between the Financial Supervisory Authorities, Central Banks and Finance Ministries of the European Union on cross-border financial stability

Financial Supervisory Authorities, the Central Banks and the Finance Ministries agreed on a new Memorandum of Understanding on co-operation in financial crisis situations.

1. The Memorandum commits all signatories to co-operate across borders between relevant authorities, both in normal times, in order to ensure preparedness for the management of a potential cross-border crisis situation; and in crisis situations. The Memorandum is designed to facilitate the management and resolution of cross-border systemic financial crises and will seek to facilitate private sector solutions, to minimise the economic and social costs, while promoting market discipline and limiting moral hazard.

2. The new Memorandum extends the previous Memorandum signed in 2005 in two ways: First, the Memorandum includes common principles on cross-border crisis management, a common framework for assessing the systemic implications of a financial crisis, and common practical guidelines for crisis management in line with the ECOFIN conclusions of 9 October 2007. Second, considering the increasing inter-linkages between financial sectors, the securities market, insurance and occupational pension supervisors have agreed to join the new Memorandum, thereby acknowledging that the involvement of a broader range of authorities is necessary.

3. The Memorandum defines practical procedures for the involvement of all relevant parties in a crisis situation, based on the existing legal responsibilities and building on existing networks of authorities. The Memorandum defines co-ordination mechanisms, including the identification of a national co-ordinating authority and a cross-border co-ordinating authority. As a rule, the cross-border co-ordinator is one of the authorities of a financial group's home-country.

4. The co-operation at a cross-border level can be enhanced further by the establishment of Cross-Border Stability Groups to focus on the issues relating to potential problems in specific firms, markets or infrastructures that are significant for all members of the group.

5. The Memorandum stipulates that sufficient cross-border procedures in normal times between all relevant authorities are put in place to enhance the availability of tools for crisis management; to ensure that decision-making processes are in place for co-ordinating action between countries; and to ensure preparedness for financial crisis situations, including in light of the potential need to share financial burden between Member States.

6. Taking into account the global nature of the financial markets and the need for broader international efforts in preserving financial stability, the Memorandum can also provide the basis for international co-operation between authorities; and it can be extended to include third country authorities when necessary.

7. Following the signing of the Memorandum and the positive experiences with the crisis simulation exercises carried out to date, a new EU wide crisis simulation exercise will be carried out in 2009 to test the procedures set out in the Memorandum and the use of tools for cross-border crisis management.

8. The Memorandum is a non-legally binding instrument for setting out practical arrangements aimed at promoting co-operation between authorities in crisis or potential crisis situations without overriding their respective institutional responsibilities or restricting their capacity for independent and timely decision-making in their respective fields of competence, notably with regard to the conduct of day-to-day tasks of relevant authorities, as set out in national and Community legislation. The Memorandum is based on the current institutional and legislative framework but does not preclude any possible changes to the current framework in the future

III. EU financial markets infrastructures

The Ministers and Governors discussed progress with actions aimed at improving the infrastructure for clearing and settlement for securities transactions with a view to ensuring that securities can be exchanged as efficiently and safely as possible within the EU. Overall, Ministers considered that while substantial progress has been made both by the private and the public sector, efforts must be continued as follows:

1. All the three pillars of the code of conduct signed by the clearing and settlement industry in November 2006 have been put in operation which has injected momentum in the market. The positive impacts to date are reflected most visibly in improved price transparency and a decrease in post-trading fees. There is a need to ensure that the benefits of the code are also transmitted to retail investors.

2. Despite the actions taken to date to remove the so called 'Giovannini barriers', enhanced efforts will be needed, especially to abolish the legal and fiscal barriers for an integrated clearing and settlement market in the EU. To this end, the ongoing technical work is expected to results in precise roadmap for actions to ensure swift progress in this area;

3. The Ministers and Governors also agreed on a way forward for enhancing the consistency of 'safety and soundness' requirements for the post-trading system in the EU. The Ministers invited CESR together with the ESCB to develop recommendations to the authorities for common practices.

Ministers and Governors agreed to monitor developments in these areas closely, including with a view to assess the need for further actions if results are not satisfactory. The Ecofin will return to these issues in greater detail at its meeting on 3 June.

© Graham Bishop