Brussels, 12th February 2009
Today, Czech Finance Minister and ECOFIN Council President Miroslav Kalousek took part in a meeting of the EP Committee on Economic and Monetary Affairs (ECON) with National Parliaments.
The theme of the meeting was: “The European Economy – What next?”
The Minister presented a paper on financial market regulation and the system of financial market supervision in light of the current financial crisis. He also touched on its possible causes.
In his speech the Minister stressed that the situation could not be stabilised without renewing trust in the financial markets. He firmly rejected the use of protectionist measures and highlighted cooperation leading to global standards, mutual recognition and open markets as the only alternative. He said that the G20 group offered a suitable platform for such cooperation.
Miroslav Kalousek also mentioned the main targets of the Czech Presidency in the field of financial markets regulation. The Presidency will seek consensus in three areas – the proposal for a Regulation on credit rating agencies, the Solvency II Directive concerning insurance undertakings and the Capital Requirements Directive regarding banks. The Czech Presidency will further focus on flaws within the regulatory framework and on the future orientation of the European financial markets and financial services where the principal subject is the organisation of the structure of financial supervision and reform of the international financial system.
Spokeswoman of the Ministry of Finance
Speech by Miroslav Kalousek, Minister od Finance, at ECON meeting with National Parliaments
Brussels, 12th February 2009
The Structure of Regulation and Supervision
Good morning, Ladies and Gentlemen,
I am honoured that I can be here with you today and that I can contribute to the debate on the regulation and supervision of the financial market in the context of the current financial and economic situation.
I would like to start with a few words on the causes of the financial crisis. I will then discuss the need to ensure global coordination in pursuit of the recovery and reform of the financial system. Finally, I hope to convince you that, at European level, the Czech Presidency is dealing with the current crisis responsibly, both in terms of legislation and in shaping the approach that will be followed in the coming years, especially in the field of financial market supervision.
Causes of the crisis
This is an extremely unstable period for the global financial system. It is essential that we comprehend what happened and why. Only then can we start looking for a way out.
Nevertheless, identifying the causes is quite a complex task. A number of factors which gradually evolved and influenced each other during the wide-ranging monetary and credit boom can be pinpointed as sources of such instability. These causes comprise not only several years of excessive liquidity in the markets, but also serious risk management failures which led to the excessive relaxation of risk assessment and the turning of a blind eye to the growing complexity of financial products. In addition, we have witnessed the current crisis spread across financial sectors, asset types as well as geographical regions. The sudden reining-in of market liquidity combined with certain pro-cyclical elements of prudential regulation and accounting rules, as well as excessive debt, culminated in a situation where the closure of positions became very difficult and expensive. This has almost caused the total collapse of the financial markets.
Finding the right political response to this complex challenge is very difficult. The European Union must therefore seize the opportunity and try to achieve a coordinated approach. As the impact of the financial crisis spills over from financial institutions into the real economy, we will have to face new challenges. Moreover, among the most important challenges is the ability of the markets to absorb new issues of government bonds, where the limits of fiscal interventions are already becoming apparent.
We must keep pushing on. We will do everything necessary to coordinate the way forward, both at European Union level and globally; and to restore confidence in the financial markets, which is imperative if we are to stabilise the financial situation.
Securing global coordination
Our financial markets and economies are becoming increasingly interlinked. For this reason, the only possible solution to the current complicated economic situation is global coordination. This does not mean that Europe must wait until an international consensus is reached before acting. On the contrary; Europe is obviously a leader in many areas. The challenge before us is to ensure that the solution, whatever form it takes, keeps Europe open and does not fragment the world markets.
Protectionist measures must be clearly rejected, since they would only worsen the situation. Our only option is to engage in cooperation leading to global standards, mutual recognition and the openness of the markets. This key message must be promoted not only within the EU, but also in negotiations with our international partners. For this reason, the Czech Prime Minister has called an extraordinary meeting of government representatives.
The G20 is the best possible platform for the global coordination I have mentioned. At the group’s first meeting last November, representatives of the G20 countries agreed on an action plan of both short- and medium-term measures to improve international financial regulation. Preparations for the next meeting, which is scheduled for 2 April this year, are in full swing. Four working groups have been set up to deal, among other things, with the new regulation and supervision of the global financial services market. The Czech Presidency will try to shape the common position of all EU Member States in readiness for all levels of G20 negotiations. The ECOFIN meeting on 10 March and the European Council meeting on 19 March will be crucial for the finalisation of the common EU position.
It is already clear that we agree on the need to increase transparency, expand regulation to encompass entities not yet subject to regulation, strengthen the resilience of the financial system through new prudential rules and accounting standards, improve the rules for remuneration at financial institutions, and ensure the greater resistance of OTC markets.
Yet we must not forget that before we start forming a new regulatory framework, the objective and purpose of such regulation should be clearly stated. In the medium and long term, the quality of regulation is much more important than the speed and number of implemented changes. These are very complex and technical issues that cannot be resolved easily and quickly. In this context, we should never forget that the unintended consequences of precipitous actions could cause other problems.
Hopefully we will bear this in mind when it comes to finalising the large number of legislative proposals that have been tabled. At this point, I would like to touch on those proposals briefly.
The Czech Presidency’s prime objective is to make maximum efforts to reach a consensus between the Council and the European Parliament in three priority areas before the end of April 2009: the regulation on credit rating agencies, the directive on the solvency of insurance companies and directives on the capital adequacy of banks.
The most complex problem, with both global and European repercussions, is the regulation on credit rating agencies. As the country holding the Presidency of the EU Council, we are keen to contribute to legislation that will work properly despite the global nature of the industry. Notwithstanding the multifaceted challenges and the very tight schedule, we are confident of reaching an agreement. With Solvency II, there is a clear challenge and great opportunity to set international standards in the regulation of insurance. I think we can all agree that, whatever the compromise, it must be sufficiently prudential. The review of the CRD is also a high priority as, all things considered, this is a good example of a specific legislative response to the crisis. We are confident of reaching a rapid agreement with the European Parliament on this review.
The negotiation of these three agendas is certainly a complex challenge. Therefore, I am delighted that I can announce to you today our first concrete success in the Regulation on cross-border payments in euro. Yesterday, the Council reached a consensus on a general approach guaranteeing legal certainty for banks and payment service providers in relation to the launch of direct debit within the Single Euro Payments Area (SEPA). Achieving a consensus among the Member States in this field was by no means easy. It is a huge step forward and I hope that the success achieved within the Council will be continued in negotiations with the European Parliament.
The Czech Presidency is also faced with political challenges. We must focus on the shortcomings of the regulatory framework that have emerged in relation to the crisis. Another priority for the Czech Presidency is to assess and update the roadmaps agreed by the ECOFIN Council and the principles approved by the European Council. In addition, we must consider the path we want the European financial market and services to take. The most important topics here, in addition to the regulatory issues which I have already mentioned with respect to the G20’s activities and which remain relevant for the European Union, are the organisation of the structure of financial supervision and reform of the international financial system.
The question of the European organisation of financial market supervision will be affected significantly by the output of the recently formed group headed by Mr de Larosière. This group's report on the reform of international financial architecture is due for publication at the end of February. We welcome the fact that intensive political debate on the topic of supervision can be opened and we hope it will no longer be confined to narrow, technical negotiations in the context of the sectoral directives.
We need an open and wide debate that will take into account the concerns of all stakeholders, and we are ready to devote half of the informal ECOFIN meeting in Prague to this matter. In the press and elsewhere many proposals on how to improve the supervisory framework are already circulating. The most interesting are aimed at strengthening the Lamfalussy level-three committees, establishing supervisory boards for all important cross-border financial groups, building a surveillance system similar to the European System of Central Banks, and setting up a European supervisory agency.
Although all of these interesting discussions on the supervisory architecture are important, we must not forget the associated deeper issues that need to be addressed ahead of or in conjunction with the problems of architecture. There are three such issues:
to ensure the adequate harmonisation not only of European law on financial services, but also the regulation of supervision itself,
to ensure that there is a legal framework and an agenda of financial stability to support the newly created architecture,
to have the assurance that national supervision is more efficient and that national supervisory bodies are ready for any changes at EU level.
I would like to develop these points.
The main factor in strengthening the stability and development of European financial markets, according to the Czech Presidency, lies in the harmonisation of supervision. There is currently no uniform system of penalties. Philosophical approaches to the supervision of financial market entities differ from country to country, as does the enforcement of existing rules. These differences could subsequently lead to regulatory arbitrage and threats to financial stability. Therefore, we should grasp the current opportunities and do our utmost to achieve concrete results in this field. We realise that we have a huge challenge before us, but we believe that effective measures are necessary here too.
Secondly, the crisis has shown that the current arrangements for crisis management and financial stability are not capable of handling serious cross-border shocks. We have to consider whether the "Memorandum of Understanding" we signed last year has been implemented properly and whether it has genuinely laid robust foundations for the future. Do our legal systems provide an adequate framework for asset transfer and crisis management?
The crisis has also revealed the great importance of a strong, independent supervisory body within each Member State. The fragmentation of domestic supervision could compromise financial stability just as much as the fragmentation of supervision at European Union level.
As you can see, there are many complex issues, and I admit that so far there have been no easy answers. I believe that discussions on surveillance will be very broad and that the April ECOFIN Council will not be the only opportunity for ministers to address this issue. It is too important a subject to have only one report or discussion devoted to it.
In conclusion, I would like to reiterate that the entire European Union has recently worked actively towards the adoption of a coordinated response to the financial crisis. We have made a lot of headway and we averted the worst of it last autumn. Nevertheless, new challenges are emerging. As part of our strategy to ensure financial stability, which was agreed last October, we are now discussing a common approach to bad assets. This is a very complicated issue, and therefore we are collaborating closely with the Commission and the European Central Bank to work out an optimal approach to the valuation of such assets and to the eligibility of institutions to participate in the rescue schemes. In all these cases, the Czech Presidency will endeavour to facilitate and accelerate the ongoing debate in order to achieve maximum consistency in the stabilisation of the economic and financial situation and to avoid negative side effects.
Thank you for your attention.
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