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The Brussels Eurofi conference which took place on 3-4 December revealed overwhelming support for further steps towards European-wide supervisory integration and an upgrade of the three Lamfalussy Committees. The different and far-reaching proposals of European officials were backed by key market players.
“One of the major issues to emerge is in the field of supervision, where pressure is mounting for European supervisory arrangements to achieve greater convergence”, European Commissioner Almunia said. “We are highly aware that fragmentation of supervision must not become an obstacle to financial integration.”
On the background of the recent financial turmoil Almunia warned that cross border stability arrangements have not yet been really tested. “We have to deal with cross-border arrangements”, he said. “If we are too slow the consequences could be very severe.”
A similar warning came from ECB President Jean-Claude Trichet. “The level of cross-border co-operation and convergence attained is not yet sufficient”, he said. “Further progress in cross-border convergence and cooperation is of the essence.”
He underlined that the EU regulatory and supervisory policy process has not yet been sufficiently strengthened and called for an ‘overall institutional setting and political guidance for the pursuit of cross-border convergence and cooperation’. Reinforcing the role and operating mechanisms of the CEBS, improvement of the level of regulatory convergence, and cross-border arrangements between supervisors and central banks for the major EU banking groups are key issues for enhancement, he stated.
“Given that the lack of regulatory convergence represents a serious obstacle to enhancing supervisory convergence, progress towards more consistent EU banking rules is absolutely critical”, Trichet underlined. Supervisory colleges for the major EU groups should be committed to playing a pioneering role in developing enhanced processes for cross-border supervision, he stated.
The divergences in supervisory requirements and practices have to be reduced to a minimum, Mr Trichet said, “which means – to nothing”.
Most far-reaching were the proposals of Italian Finance Minister Padoa-Schioppa who warned that voluntary agreements proved incapable of ensuring an efficient area-wide supervisory teamwork during crises episodes.
Padoa-Schioppa proposed the Council to adopt ‘a single European rulebook, with its own supervision rules and standards, and an integrated supervision over cross-border market players, resting on a complete pooling of information and the enhancement of the powers of the college of supervisors and, within it, of the role of the lead group supervisor.’
In a letter sent end November to Mr dos Santos, chair of the ECOFIN Council, he stated: “The reality we must face is that in spite of the progress the system is still unable to effectively respond to the challenges of a globally integrated market. Common principles have been developed, but the convergence of day by day practice has lagged behind.”
The focus of work has to shift from meassures of fostering financial integration to actions needed to manage the integration that has already been achieved, he stated.
An alternative concept was introduced by Arthur Docters van Leeuwen, former chair of CESR, stating that the tasks have changed radically from (originally) minimum harmonisation to (nowadays) maximum harmonisation within the last years reflecting the market reality.
Most difficult issue of the process, he noted, is the delegation of powers. “This seems to be the Rubicon, that nobody wants to cross”, he said. However, “for some issues a single regulator or entity would be the best and most logic solution”, he noted.
As a possible solution to that dilemma, Mr van Leeuwen proposed a “Two-Velocity-System” similar to the introduction of the Euro. Along this concept, a limited number of countries can further harmonize or even unify their legislation, thereby avoiding difficult or even impossible negotiations at EU level.
Finally, European Commissioner McCreevy made clear that the potential negative effects of the subprime shake-up was greater than expected. “Insofar as supervision of EU financial institutions is concerned the current financial turmoil must be a wake-up call for everyone”, he said.
“In the light of recent events we do need to assess how well our response mechanism would work if say one of the 45 banks with cross border activities was in trouble”, he said. “I would hate to think what might have happened if Northern Rock had been a significant player in a number of Member States.”
He made clear that the “regulatory system based on national legislation for multinational banks is out of date”, stating that there is an ‘urgent need’ for more effective cooperation and coordination between supervisors.
However, “there is no chance that we would find agreement on an EU supervisory agency”, he said, although he “agrees strongly that we cannot let the present system continue as it is”.
McCreevy therefore called for a college of supervisors for each cross border banking group. “A
Statements from Regulators / Supervisors
Thomas Steffen, chair of CEIOPS, noted that progress has already been achieved in the current system. “It is a matter of the speed of the progress and how to make quicker progress”, he said. However, the progress achieved is still not sufficient to meet the high industry expectations, he said. To meet these new requirements which will have to combine quantitative and qualitative issues also to avoid doublification, a new legal framework is needed. “The supervisory concept within the Solvency II framework is too important to fail”, he underlined.
Danièle Nouy, chair of CEBS, noted that the concept of a lead supervisor already proved to work very well in a number of areas. However, it has to be defined what kind of supervisory convergence is intended, be it soft, vertical (group) or hard convergence. Mrs Nouy also called to introduce an automatic sunset clause for national discretions or other measures showing the transitional character of such discretions.
Eddy Wymersch, chair of CESR, draw a somewhat different picture for the securities sector. “Uniform regulation will never happen”, he said, “even if the rules are the same, the application will be different.” He underlined that CESR is a network based on a long history. What is needed is a uniform outcome, not uniform rules. Qualified Majority Vote is more an issue for the other two Committees of CEBS and CEIOPS, but not that much for CESR.
Philippe Jurgensen, Chairman of the Autorité de Contrôle des Assurances et des Mutuelles, criticised that the Solvency II lead supervision concept falls short at the moment when it becomes critical, i.e. when it comes to the issue of burden sharing.
Gérard Rameix, CEO of the AMF, called for further progress and to “climb another step” to overcome existing obstacles resulting from the decision making process and the budgetary situation of the Committees (in particular CESR). QMV and Comply-or-Explain are welcomed, but not sufficient to cope with market reality.
Sir Callum McCarthy, chair of the FSA, however criticised that the complexities of a lead supervisory concept are too far reaching. Finally, one could end up in a situation with 27 lead supervisors; he said and called the proposals made as too simplistic.
Final statements from various sides
Pervenche Beres, chair of EP ECON Committee, highly welcomed the proposal of Mr Padoa-Schioppa reminding to the urgent need to upgrade regulation with the existing 3L3 Committees to form a European Agency. She called on the Commission to come up by April 2008, the date of the next European Council, with a legislative proposal to upgrade the Committees. However, she noted, that the Commission hesitates to create new agencies. “Don’t ask the duck to prepare the Christmas meal”, she said.
Xavier Musca, President of the EFC, pointed to the lack of an integrated infrastructure. The three big questions remaining are how to build a network among and between the 3L3 Committees, Cross-border supervision and the concept of the lead supervisor, and cross-border crises solution. All these questions have to be tackled simultaneously. Ministers therefore have to draw the line of what falls into national and European responsibility respectively, and how to differentiate between small national, European and worldwide acting banks.
Josef Ackermann, Deutsche Bank, mentioned that crises prevention and crises solution are two of the most important issues to be discussed. He called for a change in the structure of financial supervision towards a European supervisory solution with a “supernational” character. Furthermore he reminding that one should not only think about a European supervisor for European-wide active banks, but also for a ‘global regulator’ for world-wide acting institutions.
Speech Almunia - Towards greater financial integration and stability in the EU
Speech Trichet - Enhancing the EU regulatory and supervisory framework
Speech McCreevy - Challenges to the further integration of EU financial markets