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“The risk of a spill-over to the real economy is more likely to materialise”, the interim report to the European Council finds. “The uncertainty about the scale and distribution of further losses overall remains. At the same time, indications of contagion have started to appear in other credit markets.”
The interim report summarizes the main developments in the financial markets since October 2007 and the EU key priorities in enhancing financial stability, taking into account the global context.
The report states that policy responses to the turmoil should focus on the key underpinnings of efficient and stable financial markets, i.e. quality and availability of information and relevant statistics, incentives, robust asset valuation and risk management.
To restore confidence and promote the functioning of the markets, it is essential that the financial industry comes forth quickly with its own initiatives, including self-regulatory action where appropriate, in particular in view of enhancing transparency, improving asset valuation and the functioning of non-organised debt markets as well as clarifying the role, governance and accountability of credit rating agencies.
To enhance transparency for investors, markets and regulators the report calls in the very short term for prompt and full disclosure of exposures to distressed assets and offbalance sheet vehicles. Also, a CEBS survey is investigating the disclosure of information by banks.
The industry in the EU has already committed to undertake several steps to enhance transparency and disclosure, including:
- the development of guidelines on securitisation disclosure, to be published by the end of June 2008;
- a periodic reporting of information to the market on a range of instruments, focusing on their primary market activity but also including some summary data on secondary market activity; and,
- information towards investors
To improve valuation standards a first assessment by the EU Supervisory Committees and the audit and accounting profession on valuation standards should be completed before summer.
It is also recommended to review a number of areas of the Capital Requirements Directive. An agreement with the European Parliament has to be agreed before April 2009. The Commission will put forward its proposal by September 2008.
The report also warns rating agencies that, if market participants prove unable or unwilling, the EU stands ready to consider regulatory alternatives.
By-mid 2008, the incentive structures of asset managers and executives of financial entities should be carefully examined.
By May 2008 the financial stability framework should be strengthened. Measures include:
i) Financial supervision of cross-border financial groups, in particular
- the convergence of key supervisory rules and standards (including on data sharing among across EU authorities, convergence of regulatory/financial reporting);
- clarification of relationship between home-host authorities and the role of colleges of supervisors; and
- improvement of the functioning of the EU Supervisory Committees.
Consideration is also being given to the inclusion of an EU dimension in the mandates of national supervisors to facilitate convergence and cooperation.
(ii) Financial Crisis management
- Tools and procedures for financial crisis management must be enhanced to allow for effective crisis resolution building on common principles. A Memorandum of Understanding in planned for Spring 2008
- On the basis of further work by the Commission, FSC and EFC by mid-2008, the Ecofin will assess the functioning of the deposit guarantee schemes in the EU
- improve liquidity in the markets by putting forward a proposal for extending the scope of the Financial Collateral Arrangements Directive to include credit claims provided as collateral; examining possible barriers to the use of key tools in cross-border crisis management, in particular to the cross-border transfer of assets; and analysing the feasibility to review the cross-border winding-up proceedings for banking groups.