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The key lesson of the crisis, one sadly confirmed by the recent Libor scandal, is that self-regulation and light-touch supervision just do not work in the financial sector. Without adequate rules and careful policing, the interests of individuals and those of the system will invariably diverge. Left to its own devices, the market will self-destruct.
Under a mandate from the EU heads of states and governments, the European Commission will shortly unveil proposals for the creation of a Europe-wide supervisory system for banks. This new supervisor is widely expected to be housed at the European Central Bank.
Setting up such a system will be no simple undertaking and doing so within a reasonable timeframe will require not just hard work but also courage, for it implies a big step towards more European integration - a genuine transfer of sovereignty and a significant strengthening of European institutions.
It is crucial that the new system be truly effective, not just a façade. We must eschew yesterday's light-touch approach for good and endow this supervisor with real and clearly defined responsibilities, coercive powers and adequate resources. This also means that it should focus its direct oversight on those banks that can pose a systemic risk at a European level. This is not just in line with the tested principle of subsidiarity. It is also common sense; we cannot expect a European watchdog to supervise directly all of the region's lenders - 6,000 in the eurozone alone - effectively.
In addition, if the supervisor is to reside at the ECB, decision-making in supervisory and monetary policy matters should be strictly separated so as to pre-empt conflicts of interests between the central bank's supervisory and monetary mandates. The presence of such a Chinese wall would also make it easier for EU members that do not use the euro to participate in the supervisory system, thereby protecting the coherence of the single market.
Crucially, it would endow the supervisor with the necessary degree of accountability to the European Parliament and Council, with no additional risk to the independence of the ECB in monetary matters.
A supervisor, of course, can only be as good as the rules it enforces. Work on equipping the EU with a single financial market rule book is far more advanced than that on setting up an EU-wide supervisor. But we are not quite done yet. Indeed, the centrepiece of the rule book - the translation of the Basel III capital requirements for banks into European law, also known as CRD IV - is still being negotiated between the Member States and the European parliament.
I think the final compromise should give national authorities some discretion in imposing capital surcharges on systemically relevant banks beyond the requirements of Basel III - as the G2O members have already agreed to do for globally systemic banks.
I also support the suggestion of the MEPs to embed common language on variable pay into the CRD IV Directive. Immediate cash bonuses for top bank executives should not exceed their fixed pay. And why not give a large quorum of shareholders the last say on setting these executives' long-term variable pay as soon as it exceeds a given level?
Just as we need to set incentives for managers to act in the long-term interest of their banks, we must set the right incentives for the creditors and shareholders that finance banks.
This was the goal of the German law on bank restructuring introduced in 2010 and of the EU Directive, now under discussion, which should allow failed banks to be wound up at no cost to European taxpayers.
Bail-in instruments and mandatory haircuts should make this possible and ensure that banks' financiers price the risks of their investments realistically. Entry into force of these instruments, currently set for 2018, should be brought forward to 2015.
After Lehman Brothers' collapse, the international community agreed not to let another systemically relevant bank fail. This was the wise decision at the time. But we have to move further. Only if it equips itself with a credible supervisor and strong rules will Europe ensure that its taxpayers are adequately protected against such failures.