Download towards more responsibility and competitiveness in the european

European Commission
Internal Market and Services
Towards more responsibility
and competitiveness in the
European financial sector
© European Union, 2010
Reproduction is authorised provided the source is acknowledged.
Printed in Belgium
Towards more responsibility
and competitiveness in the
European financial sector
Table of contents
1. Introduction 4
2. A more stable financial system
2.1 Capital levels in financial institutions
2.2 Crisis management and resolution
2.3 Credit Rating Agencies
7
9
11
12
3. A properly supervised financial system
13
4. A more transparent financial system
16
4.1 Alternative investment funds 16
4.2 Derivatives 17
4.3 Short selling 20
4.4 Financial auditing and accounting
21
5. A more responsible financial system
21
5.1 Corporate governance and remuneration
22
5.2 Sanctions 24
6. A more consumer-friendly financial system
24
6.1 Consumer protection 24
6.2 Responsible lending
26
6.3 Financial inclusion and payments
26
6.4 Retail investment products
27
7. An international financial system 28
8. Conclusion 30
2
Dear fellow European citizen,
The financial crisis hit Europe very hard. Our economies and our
citizens are still suffering its consequences today. We cannot let
such a crisis happen again.
We need to learn all the lessons of the crisis. And put those
lessons learnt the hard way into action, as agreed by the leaders
of the biggest world economies, the G20, when they decided a
set of measures to build a safer, sounder and stronger financial
sector. Financial markets need to be at the service of the real
economy, and not the other way round.
I am determined that Europe will put into action all the
commitments made at the G20. And that is what this booklet is
about: it is our roadmap to meet those commitments. It explains
the measures already taken, what is currently being discussed
and what is still to come.
We are taking action in many areas - from supervising financial
institutions, to regulating complex financial products or
requiring banks to hold more capital. Our objectives though
are consistent: greater responsibility and greater transparency
across the board.
Michel BARNIER
Member of the European Commission in charge of Internal Market and Services
3
1. Introduction
The financial crisis that started in 2007 is the worst Europe has
faced since the 1930s. Originating primarily in the United States,
it proved to be highly contagious and complex, spreading
rapidly to other regions and countries.
Massive government spending was needed to stabilise our
banking systems, creating huge debts that current and future
generations will have to repay.
We are all experiencing the fall-out in the real economy.
Unemployment has increased and various Member States have
had to launch ambitious budgetary reforms due to gigantic
bailout operations, leading to concerns about the sustainability
of overall public finances.
The situation would have been much worse had governments,
central banks, the European institutions and other international
organisations not responded forcefully.
The crisis is not over, but we need to start rebuilding. We must
reform and find European solutions where they really have
added value.
4
Financial markets were at the heart of this crisis. They cannot
remain the same. We need to tackle the key causes of the crisis.
These include:
• an unstable and inadequately supervised financial system,
• opaque financial operations and products,
• irresponsibility in some financial institutions, who pursued
short-term profit, neglected risk management and paid
unjustifiable bonuses, and
• a financial system that overlooked the fact that it was
supposed to serve the real economy and society as a
whole, contributed to the creation of bubbles, and often
disregarded consumer interests.
The crisis was international and calls for an international
response. The principal forum for a coordinated global approach
is the G20, bringing together major advanced and emerging
economies. Europe has played a key role in driving forward the
G20 agenda, and is fully committed to implementing it.
As the crisis unfolded the importance of the EU dimension
became increasingly clear. The single market has been a driver
of growth, creating millions of jobs, and making Europe more
competitive and more efficient. We must continue to strengthen
the single market, avoid any protectionist tendencies and revert
to the principles of a social market economy which serves the
needs of our citizens and companies.
5
Impact of the crisis
The financial crisis triggered a deep and widespread
recession. Labour markets could not escape the downturn
either and unemployment rose in the EU. Public finances
were also severely hit, largely due to bank bail out operations.
As a result, the general government deficit has tripled in
recent years.
Real Gross Domestic Product (GDP)
Growth in the EU (2009)
-4.2%
Unemployment in the EU (Autumn 2010)
9.6%
General Government deficit in the EU
(2009, % of EU GDP)
6.8%
State aid for banks, including unused guarantees
(% of EU GDP)13%
6
2. A more stable financial system
The crisis showed how instability can spread from within the
financial system to the real economy and damage growth. It
demonstrated how problems in the US mortgage market can
impact lending and investment in Europe, and how the failure of
important segments of the banking sector and their subsequent
bailout can affect the daily lives of European citizens.
Global financial services regulation failed to prevent or
contain the crisis. This prompted a wide-ranging review of our
regulatory policy. In Europe a high level group chaired by Mr
Jacques de Larosière, the former governor of the Banque de
France, was asked to reflect critically on the existing regulatory
and supervisory arrangements and invited to make proposals to
strengthen European supervision of all financial sectors.
7
The de Larosière Group
In November 2008 the Commission mandated a high-level
group chaired by Mr Jacques de Larosière to make proposals
on how to organise the supervision of financial institutions
and markets in the EU; to strengthen European cooperation
on financial stability oversight; and to enable EU supervisors
to cooperate globally. The Group also analysed and presented
recommendations on regulating financial markets.
Its report, presented on 25 February 2009, set out a balanced
and pragmatic vision to take the European Union towards a
new regulatory agenda, stronger coordinated supervision
and effective crisis management procedures.
Building on the group’s recommendations the Commission
quickly developed proposals to establish a new European
financial supervisory system.
8
2.1 Capital levels in financial institutions
One of the key elements of our reform programme has been to
strengthen the resilience of the banking sector and prevent it
from generating losses which are then absorbed by taxpayers’
money.
To protect against failure banks are required to hold a minimum
level of their own financial resources, i.e. capital. This serves as
a buffer against potential losses, thereby protecting depositors
and ensuring financial stability.
The Commission has already tightened up some rules on
banking capital and will propose further legislative changes in
2011.
Determining how much capital is needed is a key challenge. If
the level is too low banks are unable to absorb potential losses.
If too high, then it may make lending to the real economy too
costly. The Commission’s upcoming proposals to increase bank
stability will, therefore, take due account of the needs of the
economy.
Banks should be able to face sudden requests for funds. New
liquidity requirements are being developed to strengthen their
ability to withstand stress and prevent the sudden outflow of
capital. They will reduce the risk of having too many short-term
liabilities and too many long-term investments.
These reforms will allow banks to regain their primary role of
lending money to the real economy and, thereby, help global
recovery.
9
A new supervisory framework will introduce risk-based
capital requirements for insurance companies and place
greater emphasis on risk management. The combination will
enable much closer supervision of developments in insurance
companies so that potential problems can be detected early on.
Figure: Write-downs (losses) in the financial
sector and capital injections
Evolution 2007 - 2010 Q1 (€ bn)
300
250
200
150
100
50
Prior
03
04
2007
01
02
03
2008
Loss - Worldwide
Loss - America
Loss - Europe
04
01
02
03
04
01
02
2009
2010
Capital injection - Worldwide
Capital injection - America
Capital injection - Europe
Cumulative (€ bn)
Loss
1,400
Capital injection
1,200
1,000
800
600
400
200
0
Worldwide
America
Europe
Asia
Source: Bloomberg and European Commission calculations. The graphs
above refer to capital injections from both private and public investors.
10
2.2 Crisis management and resolution
Various high profile banking failures during the crisis provided
clear evidence of the need for more robust crisis management
arrangements at the national level, as well as the imperative
of putting in place arrangements better able to cater for crossborder banking failures.
Without procedures to organise an orderly winding up of banks,
many countries felt obliged to bail out their banking sector.
State aid for banks represents 13% of Europe’s GDP.
The crisis clearly demonstrated that when problems hit one bank,
they can spread to the whole financial sector and well beyond
the borders of any one country. It showed that systems were not
in place to manage financial institutions facing difficulties. Very
few rules exist to determine what action should be taken, and by
which authorities, in the event of a banking crisis.
This is why the Commission will come forward with legislative
proposals. These will create a comprehensive crisis management
framework for banks and investment firms. The cost of a banking
crisis should be borne by shareholders, creditors and, ultimately,
by the whole banking sector through bank levies.
The proposals will be wide-ranging and aim to equip authorities
with common and effective ways of tackling bank crises as early
as possible, and to avoid costs for taxpayers.
11
2.3 Credit Rating Agencies
Credit Rating Agencies (CRAs) should provide independent
opinions on the safety of certain investments, assessing the
probability that companies or governments will be able to repay
their debt. The crisis showed that often CRAs failed to produce
sufficiently reliable ratings. This could be because of conflicts
of interest where they were being paid by the organisations
they rated. This, combined with a trusting approach by financial
institutions and investors, who often relied unquestioningly on
the CRAs’ opinion, resulted in credit being granted even if it was
not justified by fundamental economic principles. This market
failure contributed significantly to the financial crisis.
Against this background, legislation was adopted to ensure
better supervision and increased transparency in the credit
rating market. However, there are still strong concerns that users
rely too much on these ratings and do not carry out their own
proper assessments. The Commission is considering how to
address this. It is examining the reliance on ratings in general, the
impact which a small number of actors can have on European
markets, and special factors linked to sovereign debt ratings.
12
3. A properly supervised financial system
Strengthened rules are necessary, but not sufficient. Strict
supervision by competent authorities is essential. The crisis
has shown the results of failing to do so. Our nationally based
supervisory architecture has been overtaken by the integrated
and interconnected reality of today’s markets. Many financial
firms operate across borders. The crisis also exposed serious
deficiencies in the cooperation, coordination and trust between
national supervisors.
To address this the Commission proposed a package of
legislative measures to reform the existing EU supervisory
architecture by establishing three new European supervisory
authorities and a European Systemic Risk Board.
Adoption of these proposals in 2010 was a milestone for Europe.
The new supervisory architecture will contribute to a safer,
sounder, more transparent and responsible financial system,
working for the economy and society as a whole.
13
The New European supervisory architecture
From January 2011, the European Union will have three new
European Supervisory Authorities (ESAs) covering banking,
insurance, occupational pensions, as well as securities.
They will work in tandem with Member States’ supervisors to
combine nationally based supervision with strong European
coordination to foster harmonised rules and their strict and
coherent enforcement.
The ESAs will be able to:
• draw up specific rules for national authorities and
financial institutions,
• take action in emergencies, including banning certain
products,
• mediate and settle disputes between national
supervisors, and
• ensure the consistent application of EU law.
A European Systemic Risk Board (ESRB) will be established at
the same time to monitor and assess potential threats to the
stability of the overall financial system. It will provide early
warning of system-wide risks that may be building up and,
where necessary, issue recommendations to deal with these.
14
Figure: The new European supervisory
architecture
European Systemic Risk Board (ESRB)
European
Banking
Authority (EBA)
European
Insurance and
Occupational
Pensions
Authority
(EIOPA)
European
Securities
and Markets
Authority
(ESMA)
National supervisory authorities
15
4. A more transparent financial system
For too long complexity was an excuse for a lack of transparency;
and thereby a major cause of market instability. The crisis has
shown that no financial player, market or product should be
exempt from appropriate regulation and supervision. Current
rules should be strengthened to ensure proper and reliable
information on the way financial markets operate is provided to
supervisors, investors and the general public. Regulators should
also have the appropriate means to ensure oversight of the
sector.
4.1 Alternative investment funds
The financial crisis has underlined the extent to which alternative
investment funds, including hedge funds and private equity
firms, were vulnerable to a wide range of risks. Some of them
had developed a particular appetite for the complex and opaque
financial products that eventually triggered the crisis.
While these funds may not have been a prime source of
recent events, their activities amplified cyclical movements in
the market with real costs for wealth, economic growth and
employment. Their activities were not sufficiently transparent
and the associated risks not sufficiently addressed by the
existing regulatory and supervisory arrangements.
Recently agreed legislation corrects these faults and creates a
comprehensive set of tools to directly regulate and supervise
the alternative fund industry.
16
What is a hedge fund?
Hedge funds are collective investments encompassing a
wide range of different investment objectives, strategies,
styles, techniques and assets. They are typically open to
selected institutions and wealthy individuals only, and are
more flexible in terms of investment options or strategies
than more traditional collective investments.
4.2 Derivatives
Another important proposal focuses on derivatives. These are
financial instruments whose value depends on an underlying
commodity or security, e.g., the price of oil or grain or interest
rates and currency developments.
They can be used in various ways, including as insurance against
certain risks, or for investment or speculation.
The use of derivatives has grown exponentially over the last
decade. Most of this growth was driven by contracts which are
not traded on a formal exchange, i.e. ‘Over–the-Counter’ (OTC)
derivatives.
17
Figure: The size of derivatives markets ($ trn)
800
700
600
500
400
300
200
100
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Listed (all markets)
Listed (Europe)
OTC
Derivatives play an important role in the economy. But they also
concentrated risk in some financial institutions and amplified
it through the interconnections between our financial firms.
For example, the crisis was clearly linked to highly complex
derivatives based on bundles of thousands of good and bad US
mortgage loans.
At present little reliable information is available on what is
happening in derivatives markets. There are substantial risks of
losses if one party does not make the required payment when
due to another. Recent proposals from the Commission aim
to increase transparency and reduce risks. This will improve
financial stability.
High price volatility in commodity markets and speculation in
commodity derivatives has given rise to specific concerns which
call for additional measures.
18
Commodity derivatives
Commodity markets have received a lot of attention in recent
years due to the comparatively high price volatility of raw
materials such as food and oil. This has given rise to concerns
over the position of users and producers of comvmodities, in
particular developing countries dependent on their import.
While much of the volatility can be attributed to the growing
needs of developing economies and other factors affecting
supply and demand (notably natural disasters), many
commentators point to the impact of investor speculation.
Against this background, the Commission is assessing
concrete proposals to improve the integrity, oversight and
transparency of commodity trading, as well as a range of
measures to strengthen the functioning of physical markets.
19
4.3 Short selling
“Short selling” was extensively discussed during the crisis. This is
a technique used by investors who think the price of a security
will fall. They sell it without owning it, planning to buy it back at
a later stage at a lower price, thereby making a profit.
In normal times short selling may be beneficial for markets
and contribute to efficient pricing. But in some circumstances,
it can fuel downward prices, leading to disruptive markets and
systemic risks.
The Commission has tabled a proposal to increase transparency,
and make it easier for regulators to detect risks in the relevant
markets. In exceptional circumstances, supervisors will also have
the power to restrict or ban short selling.
20
4.4. Financial auditing and accounting
Several banks announced huge losses between 2007 and 2009
after being given a clean bill of health from auditors, who had
clearly failed in their duty to sound the alarm on unhealthy
companies. This raised issues about the regulation of audit
companies and the structure of the market, which is highly
concentrated, with four big global companies. The Commission
has launched a wide-ranging examination of auditing and its
contribution to increased financial stability. It will announce
follow-up measures during 2011.
In the wake of the financial crisis a number of international
accounting rules have been criticised. The Commission is now
working to reach a global agreement around one set of high
quality international accounting standards as a fundamental
building block for enhanced financial transparency.
5. A more responsible financial system
The financial sector has been dominated by immediate and
maximum profit. This led to all sorts of irresponsible short-term
behaviour. Longer-term interests were ignored. There was a lack
of responsibility and accountability.
21
5.1 Corporate governance and remuneration
Responsible practices are key to preventing short-termism and
excessive risk taking. Proper corporate governance can clearly
help to achieve this.
However, corporate governance within financial institutions has
been found wanting. Supervision and control of management
were insufficient. Risk management was weak. Inadequate
remuneration structures led to excessive risk taking and shorttermism. Many shareholders did not exercise sufficient control.
These weaknesses played a role in the crisis. Timely and effective
checks and balances can help prevent its repetition.
The EU has already introduced binding rules on compensation
practices which will apply to bonuses paid out for 2010.
It is also considering ways to:
•
•
•
•
increase the responsibility of boards,
enhance the supervision of senior management,
establish a sound risk culture at all levels within firms and
make additional changes to remuneration policies in order
to discourage excessive risk taking.
Further legislative initiatives, for example to increase the
responsibility of boards and improve the supervision of senior
management in financial institutions, are planned for 2011.
22
Remuneration in banks and investment firms
Recently agreed legislation requires banks and investment
firms to have sound remuneration policies in place that do
not trigger excessive risk taking and short-termism. From 1
January 2011, the provisions state that:
•
•
•
upfront cash bonus payments be capped at 20% to 30%
of total variable remuneration,
at least 40% of variable remuneration be deferred for at
least three to five years and
at least 50% of variable remuneration be in shares which
must be kept for a certain period.
23
5.2 Sanctions
Stiffer penalties can also help to ensure that financial services
providers bear full responsibility for their behaviour. But
sanctions differ widely across Member States and are sometimes
very low.
All national authorities should have appropriate minimum
sanctions at their disposal, including the possibility of imposing
fines which are sufficiently high to ensure deterrence. Sanctions
should also be applied effectively across Europe.
The Commission has suggested action be taken at EU level
to achieve greater convergence and sufficient deterrence of
national regimes. It will also propose to increase the powers of
supervisors to investigate and penalise market abuse, by, for
instance, setting a minimum amount for administrative fines.
These could be twice as high as any illegally obtained gain.
6. A more consumer-friendly financial system
One major lesson to be drawn from recent market developments
is the need to strengthen consumer protection and restore the
public’s confidence in financial markets. Consumers and other
end-users of financial services need to be closely involved in, and
consulted on, policy developments in this area. The Commission
is taking measures to achieve this, notably by creating an
advisory Financial Services User Group.
6.1 Consumer protection
The most visible effect of a bank failure is on its account holders.
They must have confidence that their savings are safe if we are to
24
prevent customers queuing in front of banks to withdraw their
savings. This confidence must apply wherever banks are located
in the Union.
A quick decision was taken in 2008, ensuring that every bank in
Europe will guarantee up to €100,000 for each depositor.
The Commission recently proposed to further harmonise and
simplify the protection of deposits, ensure faster payouts, and
improve the financing of deposit guarantee schemes, even in
situations involving several Member States.
This should, for example, address some of the issues that arose
with Icelandic banks, when more than 400,000 depositors in
the United Kingdom, Netherlands, Germany, Belgium and
elsewhere were unable to access their money for at least six
to eight weeks, while waiting for payments under the deposit
guarantee schemes.
25
Similar proposals have been tabled to ensure a minimum
of €50,000 protection for investors in investment products
beyond traditional deposits in the event of fraud or failure by an
investment company. In addition, the Commission is looking at
ways to improve guarantee schemes for policy holders when an
insurance undertaking is wound up.
6.2 Responsible lending
Credit plays an important role in our daily lives and economies.
For example, taking out a mortgage loan is one of life’s most
important financial decisions, committing customers for 20
years or more.
Lending is commonplace, but, in some cases, can become
unmanageable and lead to financial difficulties with potentially
serious consequences. Developments in mortgage markets
played a significant role in exacerbating the effects of the
financial crisis in several Member States, such as Spain, Ireland,
the United Kingdom, Latvia and Lithuania.
Against this background the Commission will propose legislation
on responsible lending and borrowing, ensuring that credit
products are appropriate for consumers’ needs and tailored to
their ability to repay.
This may be achieved by measures to ensure that all lenders
and intermediaries act in a fair, honest and professional manner,
before, during and after the lending transaction.
6.3. Financial inclusion and payments
There are still around 30 million adults in Europe without a
bank or payment account who cannot make use of electronic
payments, which are increasingly essential for everyday life.
26
The Commission has decided to table legislation granting a
universal right of access to a basic payment account for all EU
citizens and residents.
It has also been working with banks to facilitate payments in the
eurozone (known as a “Single European Payments Area“ (SEPA))
and is taking steps to speed up its completion.
6.4 Retail investment products
The retail investment market is largely dominated by so-called
“packaged retail investment products”. These are financial
products that typically combine exposure to various different
assets, such as shares, bonds and currencies.
However, they can be risky, difficult to compare and often
complex for retail investors to understand. Sellers of these
investments can face conflicts of interest since they are often
paid by the manufacturers rather than directly by customers.
Because of these difficulties, investors must have stronger
protection. They need better information about the products,
showing risks and costs more clearly and making comparisons
easier. They need to know they can trust that those selling to
them are acting in their best interest.
The Commission has decided to present proposals to improve
investor protection. These will ensure that all retail investors
are given a common, short, plainly worded, comparable and
understandable document when buying such products. These
proposals will be accompanied by further changes to rules on
the sale of financial instruments and insurance products.
In the aftermath of the financial crisis some investors lost a lot
of money in investment funds through fraud. This revealed
27
differences in the powers of national authorities to act to remedy
this. The Commission will introduce measures in 2011 to address
this problem.
7. An international financial system
Global financial markets require coordinated action by national
and regional regulators and supervisors.
The Commission is working to achieve a coherent international
approach by:
• participating actively in the G20 and the work of
international standard setting bodies,
• promoting international convergence, and
• developing bilateral discussions on regulatory and
supervisory matters with key partner countries.
The 2008 G20 Washington Summit confirmed that the most
effective response to the global crisis was a common roadmap
for reform to ensure a level playing field. Since then, the intensity
of international cooperation on financial regulation has been
stepped up.
An extensive agenda was developed with the aim of preventing
future crises, mainly by improving global regulation and
supervision. All major jurisdictions now need to implement
reforms and do so in a coherent manner.
The G20 Summit held in Seoul in November 2010 confirmed the
determination of the international community to fundamentally
repair the global financial system.
28
G20 and the Financial Stability Board
The G20 was established in 1999, in the wake of the 1997
Asian financial crisis, to bring together major advanced and
emerging economies to stabilise the global financial market.
To tackle the financial and economic crisis that spread around
the globe in 2008, the G20 members were called upon to
further strengthen international cooperation.
The Financial Stability Board, in which the Commission also
actively participates, oversees implementation of many
of the G20 commitments. It coordinates and promotes
implementation of effective regulatory, supervisory and
other financial sector policies.
29
8. Conclusion
The reform of the European financial sector outlined in this
booklet started in 2008.
All the measures to bring stability, transparency and
responsibility to the financial sector are planned to be in place
by the end of 2012.
They will shield our economies and societies from other major
financial disruptions and costs.
They will protect the interests of citizens, allowing them to
confidently engage with financial services providers.
They will allow the financial sector to contribute in a sustainable
way to future growth and job creation.
The Commission will continue to closely monitor practices and
behaviour in the financial services sector and will not hesitate to
propose measures when necessary.
Together with the Member States, European Parliament,
European Supervisory Authorities and national supervisors,
the Commission will work to constantly improve the safety,
soundness and efficiency of Europe’s financial system.
30
Key elements for a sounder and responsible
financial system
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31
32
Agreement reached in April 2009
Agreement reached in September 2010
Agreement reached in October 2010
Proposal adopted in September 2010
Proposal adopted in September 2010
European Supervision Package – creating new
European Supervisory Authorities and the
European Systemic Risk Board
Directive on Alternative Investment Fund
Managers – regulation among others hedge funds
and private equity firms
Derivatives – enhancing the transparency and
stability of Europe’s market infrastructure
Legislative measures on short selling/credit
default swaps - creating a harmonised framework
for coordinated EU action, increase transparency
and reduce risks.
Status
Regulation on Credit Rating Agencies (CRAs) –
introducing regulation and supervision of CRAs
Initiative
Key measures in response to the crisis
Proposal to be tabled in first half of 2011
Proposal to be tabled in first half of 2011
Proposal to be tabled in first half of 2011
Proposal to be tabled in the course of 2011
Revision of the Market Abuse Directive –
introducing stiffer penalties to ensure that
financial services providers bear full responsibility
for their behaviour
Review of the MiFID Directive - ensuring
more transparency in the trading of financial
instruments
Crisis management legislative proposal (including
bank resolution funds) – introducing common and
effective tools and powers to tackle bank crises at
the earliest possible moment, and avoid costs for
taxpayers
Legislation on corporate governance – introducing
timely and effective checks and balances within
financial institutions that can help preventing
future crises
For a complete overview of all initatives please consult:
http://ec.europa.eu/internal_market/finances/index_en.htm
Proposal to be tabled in the first quarter of 2011
Revision of the Capital Requirements Directive
(CRD4) – further enhancing the stability of the
banking sector by requiring more and better
quality bank capital
Notes
Notes
Notes
http://ec.europa.eu/internal_market
[email protected]
ec.europa.eu/youreurope
KM-32-10-567-EN-C
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