Let me start with a huge understatement: we are in very difficult times.

Transcription

1 Director-General Jörgen Holmquist Financial Services Roundtable Washington, 13 April 2009 EU-US cooperation in financial markets regulation in times of crisis Ladies and Gentlemen, Let me start with a huge understatement: we are in very difficult times. We are dealing with a terrible economic and financial crisis, affecting almost every aspect of our lives: factories are closing, jobs are lost, houses are being repossessed. Fire-fighting in financial markets and in the banking industry is far from over. But amidst this, a transatlantic consensus is emerging around two simple ideas: One: if we want a sustainable recovery, we have to re-engineer our financial systems. Two: no one, no single country can do it alone. Cooperation is essential. It will be a long process

2 This is not just about new rules, new supervisory competence, but about a new architecture. For more than seven years, EU and US financial regulators have been successfully cooperating through the Financial Markets Regulatory Dialogue. The list of successes is impressive. Conglomerates supervision; accounting equivalence; deregistration; to name but a few. But this financial crisis presents us with challenges of a whole different order of magnitude. Two questions: - Should EU-US cooperation still be a priority when citizens and politicians on both sides of the Atlantic are asking us, regulators, for urgent repair to our "domestic" financial systems? - Should bilateral EU-US cooperation still be our priority when many consider that only global solutions can tackle a global crisis? I have come to Washington and New York this week to outline the European Commission's ideas on financial markets reform, but doing this, I will also answer the two questions

3 1. Testing times for EU-US cooperation. The figures speak for themselves. More than 1.1 trillion dollars in writedowns in the financial sector worldwide. Of these, more than 650 billion dollars for US financial institutions and more than 280 billion dollars for European ones. And probably more to come. More impaired assets to be disclosed. Maybe more government assistance ahead on both sides of the Atlantic. 2 million jobs lost in the US during the last quarter of Possibly 4.5 million in the EU in The GDP forecasts are no better: in the US a fall of at least 2.6%. Around 3% in the EU. And every forecast ratchets the numbers down further. Household wealth destruction in the US so far ten and a half trillion dollars - is close to the wealth of all French households: twelve and a half trillion! There are two major consequences for our work and for our dialogue: First, because the financial sector lies at the very centre of the crisis, regulators are facing unprecedented scrutiny. Not only from shareholders and investors, but from the public at large

4 Beyond a small group of experts, - Who in the EU really thought hard about deposit insurance before Northern Rock? - Who in the US bothered about mark to market accounting before the collapse of some household names? - Who in the EU thought the relation between home and host supervisors was a key issue, before the Icelandic banks collapsed? - Who in the US worried about the holes in the supervisory net before Madoff? - Who on both sides of the Atlantic paid much political attention to the issue of excessive pay in financial institutions, or of poor incentives? Well, it seems that now everybody cares. All these subjects are part of a fiery political debate here and in Europe. They feature prominently in the speeches of President Obama. They dominate the agenda of many EU politicians seeking reelection this year

5 Our ambitious aim on both sides of the Atlantic is to re-build a sustainable financial system for the future. This will only be possible with a supporting public opinion and political will. Second: as a result of the political pressure, our priorities have changed. In the EU, as in the US, we have had to focus on our domestic agendas. With emergency solutions, help banks in the subprime, the post-lehman and the economic downturn shocks. Enhance the protection of our investors and our depositors. Impose discipline on institutions and market players. We have, in short, been inward-looking. And, as a result, our transatlantic cooperation has passed into less friendly waters. Mutual recognition and regulatory convergence were questioned. Remember the "London loophole" episode of last summer. The same hard questions were asked in Europe. Many are saying: why converge with the US when the US financial system caused the crisis and is not yet repaired? (By the way I don't agree with this analysis: we have to take responsibility in the EU for our problems in the financial markets obviously our regulatory and supervisory systems were not good enough)

6 To complicate things, our policy choices to tackle the crisis have not always been the same or even close. In the US, the debate on the financial crisis has so far mainly focused on the rescue packages, the bailouts and the fiscal stimuli. At EU level, the debate has also focused on what the former Managing Director of the IMF, Jacques de Larosière, calls regulatory and the supervisory repair. The timing on regulatory reform has been different. So, in a difficult context such as this one frustrations on both sides should come as no surprise. On your side, concerns have grown as we decided to move to regulate previously unregulated, or lightly regulated areas: rating agencies, credit default swaps market infrastructure or getting incentives right in the securitization markets. In all these sectors, US firms are globally active, even leaders. You were concerned about the impact of these European initiatives on their activity, on their business models, on possible extraterritorial effects. We were faced with hard choices, as you were when you passed Sarbanes Oxley. And we had to act quickly

7 On credit rating agencies and infrastructures for credit default swaps, we took the view that the role these institutions play in the financial system goes much beyond private interest. Both are "quasi public goods". Hence any major jurisdiction would want to apply its regulation and ensure oversight. Without, of course, discriminating on grounds of nationality. We believe that this diagnosis is shared at G20 level. On securitization, minds have focused on the quantitative retention clause and its possible impact on a fragile market. But everyone also agrees I believe - that a return to discipline was needed. And to achieve discipline you often need some simple, strong criteria. The consensus in the EU on this has been overwhelming. On all these issues, European politicians and citizens demanded that we get it right and plug the gaps. They wanted reassurance that Europe's regulatory system was water-tight. Besides the quantitative element, let us not forget what is perhaps more significant in our proposal on securitization, the new emphasis put on due diligence and transparency. We welcome the fact that the Basel Committee is now also focusing on this. On our side, we had our own frustrations with US authorities. There were several reasons: minds focused on the worsening crisis and dire domestic issues. Of course there was also the simple fact of a transition to a new administration

8 On auditing, progress on the US side to move towards satisfactory guarantees on cooperation with European audit oversight bodies has been slower than we would like. Rather than isolate the US, we were forced to call a Time Out on our process. But under our legislation we will need results before the end of this year. On reinsurance, we have longstanding concerns on the requirement for non-us companies to post collateral in every state in which they offer reinsurance. There has been welcome recognition amongst most US policy makers on both sides of the inequity of this. The National Association of Insurance Commissioners adopted the Reinsurance Regulatory Modernisation Framework Proposal in December. The proposal is far from perfect from our point of view but represents a significant step forward. The next step is implementation at State level, which we hope will happen promptly. I hope that you can understand our frustration here. This is of great importance to us and has gone on for very long. If properly designed and with adequate safeguards, mutual recognition of securities could be the ideal tool for global supervisory cooperation and exchange of information. It could help push international supervisory standards upwards. It could send the right signal at the right moment: that global supervisors can work together on a number of issues - again with the appropriate safeguards and can actually rely on each other. This is why we were disappointed that the process has been frozen for the time being

9 This is why we want to pursue with you our work in this area. The European Commission will hold an international roundtable on this topic before the end of the year. We hope we can count on strong US participation. So you have your frustrations with us and we have ours with you. Rather than get into a spiral of recrimination, we need to work together to resolve each others' concerns. I am confident that we can do this. What strikes me is that, even in these difficult times, we still have continued to make significant progress on many files. And not minor ones. 2. Our dialogue has kept on producing some remarkable results. Let me mention three. Accounting convergence Following the decision by the SEC to allow foreign issuers to file accounts under international accounting standards or IFRS without reconciliation to US standards, the EU was able to deliver on equivalence of US GAAP last December. We have always wanted this and it was not easy to achieve

10 This is a major success. This shows how much we can do together. And how much concrete benefit the dialogue can bring to our businesses on both sides of the Atlantic. I trust the US will continue to support convergence to one set of global accounting standards and will set a date when US firms can deploy them. Governance of standard setters Together with the Japanese FSA and IOSCO, the SEC and the European Commission have played a central role in the setting up of the Monitoring Board of the International Accounting body, the IASCF. This was far from easy. This new structure is a first, but essential step to enhance the accountability of the IASCF towards public authorities. This demonstrates how much we can impact global governance matters if we speak with one voice. Of course, further reforms will be needed, to ensure a sensible and mature relationship with public authorities in charge of financial stability. But we have taken a first important step together. I would also like to take this opportunity to thank our US counterparts for their support to achieve European Commission membership in the Financial Stability Forum. This was very important to us and much appreciated. G

11 From a regulatory point of view, the G20 roadmap is mainly an EU-US intellectual product. When the process started last November, it came as a comfort to us to see how much we had a common view both on the diagnosis of the causes of the crisis and on what is needed to tackle them. Since then, and as mentioned earlier, we have also become more ambitious on the need for further, more comprehensive reform. Because we share the same priorities for the future, the London summit was able to deliver a remarkable degree of consensus for global regulatory and supervisory repair. Beyond these achievements, let me now look to the future. How do we see our relationship moving forward? 3. A more complex, more demanding and more strategic relationship. The crisis shows the depth of the integration of our financial markets and our industries, on a daily basis

12 We should also not forget the economic fundamentals behind the Dialogue. Beyond financial markets, the transatlantic economy still generates, according to estimates, three and three-quarter billion dollars in commercial sales per year (or 12.5% of our combined GDPs), and employs up to 14 million workers on both sides of the Atlantic (the EU being the biggest foreign employer in the US and vice-versa). Even with a sharp drop in absolute terms, our combined capital markets still represent more than two-thirds of the global market capitalization. US firms continue to consider Europe as a crucial source of income, and the same is true for EU firms. Besides the figures, our dialogue is an essential tool to tackle the most dangerous by-product of the crisis, namely the rising risk of protectionism. The EU and the US have a special responsibility to set an example on this issue at global level. The spread of the financial crisis to the real economy has increased the pressure on our governments to take emergency measures to protect jobs and national industries

13 From the beginning of the crisis, the EU's commitment to fighting protectionism has been unwavering. And when it comes to capital movements, this extends not only to all EU Member States, but also to third countries. We will continue to ensure that the European Union Treaty provisions are respected. That the freedom of capital movement between EU Member States also applies to third countries. On the US side, our concerns on the "Buy American" provisions of the recovery plan have not disappeared. We appreciate the changes made to some proposals. But we will of course continue to follow this closely. It is an important issue for both our economies. We are also committed to the continuation of the EU-US Investment Dialogue. Our Dialogue is also important for financial stability. Agreeing on common standards, common approaches or cooperation mechanisms does not only help our firms, it is also our joint contribution to the stabilization of the global financial system. Far from weakening it, the G20 has strengthened our relationship

14 Just look at the progress achieved on issues where so many thought the international community would never agree on anything. Offshore centres. Regulation of hedge funds and private pools of capital. Remuneration and incentives. One area where we must work more is on transatlantic emergency mechanisms when major financial institutions are in difficulty. Another is to improve the way investors, depositors and policyholders are protected in the financial system. This is what we are expected to do on both sides of the Atlantic. But more protection does not have to mean more protectionism. To avoid regulatory arbitrage and actually improve the protection of our citizens, we will need to work together to strengthen regulatory standards globally. President Barroso gave a clear indication of where he wants to go last month by endorsing the conclusions of the de Larosière Report and presenting an ambitious agenda for financial markets reform. EU Heads of State and Government supported him last month. Between now and the end of the year, the intensity of the European Commission work programme in financial regulation will reach unprecedented levels. In line with the G20 priorities, our main objectives are: Strengthen the capital requirement regime; Provide the EU with a state of the art supervisory framework;

15 Regulate appropriately all parts of financial markets standard banking, hedge funds etc.; Reinforce the protection of consumers and small companies; Address pay and incentives; Make sanctions more deterrent, and Strengthen global cooperation. As a result, almost all sectors of the financial system will be touched. It is inevitable that a prominent part of our Financial Markets Regulatory Dialogue will focus on these issues, which are also concerns for you. On issues such as the review of the Basel framework, we are already working together. I would also of course mention our proposal to set up a European financial supervision system to strengthen the supervision of cross border firms, products and markets. And our proposal to create a systemic risk council, an approach very similar to what is currently being discussed in the US

16 On these, as on many other forthcoming proposals, we welcome your feedback and your input. And I am sure that we will find the same openness when you start implementing your own reform programme. Insufficient commitment to the dialogue on either side would simply not be understood by your and our investors and industry. But I also believe that the conditions for a healthy, successful EU-US relationship will remain the same. We should see it as a relationship of two good and cooperative neighbours admittedly with a shining sea between us - treating each other with mutual respect and affection. As equals. With symmetrical progress. And informality and personal contacts will remain essential. Political will even more so. Conclusion Let me conclude

17 This crisis makes international cooperation even more essential. Both multilateral and bilateral cooperation is important. And the most important bilateral cooperation is between the EU and the US the two biggest capital markets in the world. We agree on most subjects. This is clear from the G20 discussions where the EU and the US shared very similar positions on, for instance, supervision of financial markets. Our Financial Markets Regulatory Dialogue developed over the last seven years. It is now a "deep" dialogue, built on good mutual understanding. A very strong basis to build upon. We should continue to base our approach on open markets; on comparable legislation; on mutual recognition; and on symmetry. What the EU asks of the US, the US can ask of us on information sharing, on inspections and so on But there is of course a risk when we, on both sides of the Atlantic, have to put in place important changes in regulation and supervision. And have to do it quickly. The risk is that we will not give enough time or enough thought to informing and consulting each other

18 So we need to further deepen our successful Dialogue. In the Commission we are committed to do so and I am sure that the US authorities share this ambition. Thank you for your attention