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Fears of a complete meltdown of the financial system that were prevalent in the fall of 2008 have dissipated, the report says, but we are still far from a normal situation and bad news continues to surface.
The report discusses the longer term consequences for competition and risk-taking incentive and makes recommendations to restore bank capital in the short term and provide for a competitive financial system subject to market discipline in the longer term.
The report draws on two characteristics arising from the current situation:
Ø First, the fundamental uncertainty about the value of assets and the solvency of many banks remains an issue causing illiquidity in important markets. The report therefore recommends that financial institutions could be given expanded possibilities to “carry backward” losses caused by write-downs in 2008 and 2009.
Ø Second, the current approach to the crisis is that authorities have not been sufficiently ruthless in closing down fundamentally insolvent institutions. An important reason why governments do not allow some banks to fail is that the distressed banks are “too big to fail” and that there are no procedures in place in Europe for closing down a bank without serious disruption of the financial system as discussed further below.
The four European Shadow Financial Regulatory Committee proposals are as follows:
1) Allow financial institutions to carry backward losses from write-downs for the years 2008 and 2009.
2) Implement binding rules for structured early intervention and insolvency procedures for banks and other systemically important financial institutions in Europe.
3) Make capital requirements for each financial institution depend on its contribution to systemic risk.
4) Raise the average capital requirement for banks to 15 percent over time.
The full statement is attached below