09 May 2008

ECON study: Financial Supervision and Crisis Management in the EU

Financial regulation and crisis management have not kept pace with changes in the structure of financial markets, a study commissioned by the ECON committee says. A lack of focus on the changing systemic characteristics of the financial system is a signif

Financial regulation and crisis management have not kept pace with changes in the structure of financial markets, a study commissioned by the ECON committee says. A lack of focus on the changing systemic characteristics of the financial system is a significant characteristic of Basel 2 and of the Capital Requirements Directive.

 

The study calls for a new approach to the content and structure of regulation, supervision and crisis management that should include a greater differentiation between individual and systemic risks. It proposes that the Working Committee on Financial Conglomerates should be given the role of supporting member state supervisors in monitoring and coordinating supervisory activities over the twenty or so systemically relevant, largest banking and financial groups in Europe.

 

Further recommendations of the study include:

There should be a legal device to enable banks to be taken into public administration. This approach would add significantly to the protection of depositors, and provide a further means for dealing with systemic crises.

 

Banking regulation should introduce contra-cyclical capital charges, and banks should be subject to Common stress tests.

 

The study also recommends that the arranger of CDO should be required to retain a proportion of any CDO on its own balance sheet.

 

Banks’ liabilities to SIVs should be recognised on their balance sheets, and hence in their regulatory capital.

 

Credit rating agencies should be required to establish a common vocabulary, clarifying the meaning and content of credit ratings, and should also establish a new Self-Regulatory Organisation.

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