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David Wright (Deputy Director-General, DG Internal Market) chaired the panel devoted to ‘3L3 Convergence from Crisis’. He asked the 3L3 Chairs for their views on:
(i) lessons learned from the crisis (including the option of using contingent capital),
(iii) the Commission’s legislative proposals regarding the European Supervisory
Authorities (ESAs) and
(iv) the quality of current 3L3 co-ordination and EU convergence with global initiatives.
Regarding the lessons learned from the crisis, Eddy Wymeersch (Chairman of CESR) expressed concern over the risk of a resurgence of nationalism. This was, in his view, reinforced during the discussions in the Council over the mandate of the new ESAs regarding crisis co-ordination. It was important for national supervisors not to go backwards (by requiring, for example, through the so-called ‘Icelandic effect’, branches to be converted into subsidiaries), as the US was debating at the same time proposals for very strong regulators. Giovanni Carosio (Chairman of CEBS) said winding down some self-standing subsidiaries had some attractions, but could destroy economies of scale.
The alternative model was either to bail out a whole group or make it fail. It was important also to focus on burden sharing. Mr Wright commented that burden sharing was the EU’s ‘Achilles heel’, there being insufficient legal procedures in place to deal with a major institution in trouble. Mr Wright noted the EC’s public consultation, launched on 20th October 2009, on an EU framework for Cross-Border Crisis Management in the Banking Sector. Also, the IMF/G20 is currently looking at various options in this area. Carosio referred to the QIS exercise that CEBS was about to undertake to assess the impact of the capital proposals (to complement the existing Basel exercise). With regards to colleges, CEBS were about to publish for consultation its guidelines for the functioning of colleges and also its guidelines for the joint assessment and joint decision process of cross-border groups.
Gabriel Bernardino (Chairman of CEIOPS) commented that the insurance sector had, to some extent, weathered the crisis better than the banking sector. He added that the crisis had emphasised the need for the Solvency II regime, including improved governance and better risk assessment through use of internal models. A consistent approach was needed on the use of contingent capital and there were merits in the G20 approach to the quality of capital. A holistic perspective on risks was needed with a robust system of governance.
Patrick Brady (Chair of the Joint Committee on Financial Conglomerates) stated that there has been a resurgence of nationalism due to a lack of colleges/information-sharing. Mr Brady said contingent capital, in the context of bonds converted to equity in certain circumstances, would introduce greater risk assessment by bond holders. The role of institutional investors in the crisis should also be considered as they have a role in relation to board appointments, strategy and remuneration, amongst others.
Mr Wright asked the Chairs specifically for their views on whether, in ten years’ time, academics would say that weak governance systems were the main cause of the crisis and whether the crisis had also proved that banking supervision housed within a National Central Bank was a more efficient mechanism than on a stand-alone basis. Carosio,
Bernardino and Brady were all of the view that the crisis had many causes, not just poor governance arrangements, and it was impossible to say that one system of supervision (‘twin peaks’ or otherwise) achieved the required outcomes. Following a question from the audience regarding subsidiarisation (i.e. national governments ‘footing the bill’ due to the failure of colleges), all panellists expressed scepticism about the potential for burden sharing, arguing that group support simply created moral hazard. Wright commented that the Commission would not accept subsidiarisation as this was contrary to the provisions of the EC Treaty on freedom of establishment.
Regarding the Commission’s legislative proposals concerning the new ESAs, Wright asked Chairs for their views, in particular, on the proposal for binding mediation and adoption of individual decisions by ESAs addressed to financial institutions.
Wymeersch said the most problematic issue was enforcement. Experiences relating to IFRS disclosure and the Market Abuse Directive had shown there was inadequate implementation of EU rules by his members. The current system of ‘comply or explain’ Peer Reviews was not working. Decisions of the ESAs would have a direct effect on the national legal order, but these decisions would have no teeth if they were not accompanied by powers to impose fines or suspend voting rights. The only solution, therefore, was to actually allow ESAs to bring proceedings in national courts to require implementation.
Regarding the quality of current 3L3 co-ordination and EU convergence with global initiatives, Bernardino said that co-ordination was a process, and that time and experience would allow it to develop. It was inevitable, however, on certain issues that the 3L3 would have separate views. Carosio agreed with this. In most cases, he said, co-ordination was very much welcomed, but some issues would remain sectoral.
Regarding EU convergence with global initiatives, Wymeersch commented that the 3L3 should be allowed to attend the international the Commission’s regulatory dialogues; for example, its discussions with the SEC on credit rating agencies, as there were clearly diverging practices between the EU and the US.