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The European Council discussed the recent turmoil in international financial markets and measures to respond to it and prevent such crises in the future. The Euorpean Council also addressed the future of sovereign wealth funds.
The European Council stressed that immediate disclosure of risks and losses of banks and other financial institutions is essential to restore confidence in financial markets. It called upon the Economic and Financial Affairs Council (ECOFIN) to focus on the following four areas when taking regulatory and supervisory actions:
- enhancement of transparency for investors, markets and regulators;
- improvement of valuation standards, in particular the valuation of illiquid assets;
- reinforcement of the prudential framework and risk management in the financial sector; and
- improvement of market functioning, including the role of ratings agencies.
The European Council urged ECOFIN to undertake speedy implementation of the work programme agreed upon in autumn 2007, according to which by spring 2008 progress should be made in the area of financial supervision and the management of cross-border financial crisis situations. It also stressed the need to develop a crisis alert and early warning system. Considering the need to reach a global solution for many of the outstanding issues, close cooperation is required with international standard-setting bodies.
The European Council agreed that sovereign wealth funds have proved to be very useful so far; however, there are certain concerns associated with them, particularly as regards new funds with less transparent investment strategies and objectives. The EuropeanCouncil agreed that a common European approach based on uniform principles should be developed, and supported the agreement on an international voluntary code of conduct for those funds.
Presidency conclusion:
THE STABILITY OF FINANCIAL MARKETS
30. The European Council endorses the interim report by the Council (ECOFIN) on financial market stability. While conditions in the international financial system remain fragile, some adjustments in follow-up to the turmoil have already taken place in financial markets since last autumn as the European Central Bank, national and EU authorities and financial institutions have acted to stabilise the situation.
31. Prompt and full disclosure of exposures to distressed assets and off-balance-sheet vehicles and/or of losses by banks and other financial institutions is essential. Improvements are needed to the prudential framework and the risk management of individual institutions, in an environment of constant financial innovation which has underscored new challenges for crisis prevention and financial supervision at national, EU and global level.
32. In responding to the turmoil, the European Council agrees that while primary responsibility is with the private sector, authorities in the EU stand ready to take regulatory and supervisory actions where necessary. Policy action should focus on four areas:
− enhancing transparency for investors, markets and regulators, in particular on exposure to structured products and off-balance-sheet vehicles;
− improving valuation standards, in particular for illiquid assets;
− reinforcing the prudential framework and risk management in the financial sector, through reviewing a number of areas of the Capital Requirements Directive (CRD), and the enhancement of the management of liquidity risk. The Council encourages the Commission to proceed with consultations and to put forward its proposal by September 2008 and underlines the importance of striving for an agreement between the Council, the European Parliament and the Commission by April 2009 on the necessary regulatory changes; and
− improving market functioning and incentive structure, including the role of credit-rating agencies on which the EU stands ready to consider regulatory alternatives if market participants do not rapidly address these issues.
33. The current turmoil has highlighted the need for further strengthening of the financial stability framework, through enhanced prudential supervision and improved tools for financial crisis management. The European Council invites the Council (ECOFIN) to swiftly and completely implement the programme of work agreed in Autumn 2007; this encompasses further progress in Spring 2008 on:
− financial supervision, where main issues include improvements to and convergence of key supervisory rules and standards; convergence of regulatory/financial reporting, with a view to supervision of cross-border groups; clarification of the relationship between home and host authorities appropriately reflecting their competences and responsibilities, including balanced exchange of information; the role of colleges of supervisors and improvement of the functioning of Supervisory Committees; and consideration of inclusion of an EU dimension in the mandates of national supervisors to facilitate convergence and cooperation;
− the management of cross-border financial crisis situations, tools and procedures should be enhanced and, as a first step, a new Memorandum of Understanding on cross-border cooperation between the relevant authorities is expected to be signed in Spring 2008. On the basis of further work by mid-2008, the Council should also scrutinise the functioning of deposit guarantee schemes.
34. In addition, early warning systems at the EU and international level should be enhanced, including by strengthening the role of the IMF in oversight of macro-financial stability. On financial markets' stability issues, the EU should work in close cooperation with its international partners in the relevant fora.
35. The European Council invites the Council to continue to give high priority to these issues in the coming months, with a major review of progress in April 2008, and to monitor closely the situation so as to react swiftly to possible adverse developments. The European Council will come back to these issues as appropriate and at the latest in Autumn 2008.
36. The European Council welcomes the Commission Communication on Sovereign Wealth Funds (SWFs). The European Union is committed to an open global investment environment based on the free movement of capital and the effective functioning of global capital markets. SWFs have so far played a very useful role as capital and liquidity providers with long-term investment perspective. However, the emergence of new players with a limited transparency regarding their investment strategy and objectives has raised some concerns relating to potential non-commercial practices. The demarcation between SWF and other entities is not always clear cut. The European Council agrees on the need for a common European approach taking into account national prerogatives, in line with the five principles proposed by the Commission, namely: commitment to an open investment environment; support for ongoing work in the IMF and the OECD; use of national and EU instruments if necessary; respect for EC Treaty obligations and international commitments; proportionality and transparency. The European Council supports the objective of agreeing at international level on a voluntary Code of Conduct for SWFs and defining principles for recipient countries at international level. The EU should aim to give coordinated input to this ongoing debate, and invites the Commission and the Council to continue work along these lines.