Confidence
The Future Role of Securities Regulation in Europe
• Confidence is still severely shaken: how to rebuild it? • Approaches – Negative: putting blame, but all got it wrong – Positive: what to do to mend the system • No unique remedy, but multiple efforts – Emergency measures v. repairing the system
London, 28th April 2009 Eddy WYMEERSCH CHAIRMAN CESR
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Restoring Confidence • Government refinancing and bank rescue schemes: – What is the best method? • How to avoid more disruption? future costs • Effects on competition? State aid regime • Inflation ? • How to maintain sufficient financing of our economies v. deleveraging? • How to wind down state ownership?
Weaknesses in the Present System
• • • • • • • •
Weak risk management Too much leverage in general Too much profit driven: prop trading Risk enhancing remuneration Pro-cyclical accounting rules Liquidity provision Opacity in the markets An incoherent regulatory and supervisory system
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Weaknesses in the securities markets
Restoring the investors’ confidence
• The investor has not been sufficiently protected • Opacity in the markets and in the products: shadow banking • Build up of risks in the derivative esp. CDS market: documentation, transfer methods, price disclosure • Valuation is a core issue • Micro and macro to be better integrated
– Is the disclosure regime effective? – Professional investor v. retail: does it hold? – Misselling and conflicts of interest – Valuation : what can not be valued, should not be sold to the public
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Limit confidence risks
Weakness in the EU pattern
• What to do to avoid confidence risks – Intensify fraud detection: Madoff, Stanford a.o. – Market organisation to mitigate systemic risk • More transparency in all markets esp.OTC • Derivative markets: more standardisation, transparency • Legal Certainty Group: one legal regime • Post-trade information to be made available • CCP for continuous netting of positions • More STP in all sectors • Reduce settlement time: why T +3
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• Some harmonisation by directives but still considerable differences – differences in investor protection – differences in disclosure – regulatory arbitrage • Home host system has not delivered: too much reliance on non binding cooperation • Cooperation is weak: see short selling emergency rules
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Introduce a credible system of Regulation and Supervision
• The present system has proved its limits – Based on national competences: bottom up – Coordination by mutual recognition, home-host arrangements and cooperation
• Double supervision, or gaps in the system
– Fiscal support: no effective agreement on “burden sharing” is major weakness and prevents effective solutions – Regulatory competition leads to weakening the system, the protection of investors, and market confidence – Tax competition
– Has proved unsatisfactory: home-host system has not worked in the crisis: emergency action was ring fencing in some states; information flows are weak; cooperation to be improved;
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Why institutional reforms
Improve the present scheme
• Macro-micro relation: insufficient • “Shadow banking”: unsupervised fields • Wide national differences”: light touch” in UK, strict regulation in D., formal approach in Insurance • Widely different powers and enforcement • Cross border groups difficult to supervise • Regulatory arbitrage due to supervisory practices • International single voice
• • •
Many solutions possible: 4 models A. Improve the present cooperation scheme More room for the L. 3 Committees Soft instruments: name and shame, but too soft Colleges: in good times ok, not in bad times how do they work? who takes the decisions? on the basis of national, or overall interest?
increasing worldwide regulation: CRAs, HF, PEF, Short selling, unregulated product, ,accounting and auditing etc. need for adequate forum and strong European interpretation “United we stand, divided we fall”
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The previous attempt: Home-Host
Home-Host
• Home- Host : seemed logical
– how to allocate supervisory power: decentralised, subsidiarity – branches are legally part of the bank, subs are not: – in fact: both are managed on the same basis – hence: consolidated additional supervision – cooperation of supervisors would solve issues – no group supervision: colleges as tools of cooperation although without decision making power (except 129 CRD)
• Home supervisors complained about lack of powers on the group • Host supervisors are not satisfied – on information on the group as a whole – no effective instruments to react – parent companies disregarded the local interest for the groups interest: withdrawal of funds – CES states
• Home-Host has not delivered: reliance on home has proved fatal
- in crisis: little cooperation: no rules for emergency cases - ring fencing behind national border was the outcome - trust among national supervisors has suffered
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B. Extreme proposals
Centralisation in Securities
• Centralise it all v. Decentralise everything • Each is excessive: – Europe is too diverse to centralise fully – Decentralisation destroys the benefit of the internal market: rebuild cross border supervision with MOUs? Very costly and ineffective. Intermediate models are the only solution some centralisation but significant local involvement
• One single new EU Authority ? One institution or hub and spoke? “European SEC”? • Would necessarily rely on local offices • Would achieve identical regulation – But also identical application, in practice? – Loss of proximity, knowledge, expertise, language • Was proposed as longer term answer by Lamfalussy and de Larosière
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Centralisation in securities
Centralisation in Banking
• • • •
Very powerful body: danger to accountability Big bureaucracy: how many? Would there be synergies among supervisors? Unsolved items: – Treaty Change would be needed – Fiscal support issues remain open
• Centralisation of banking supervision at the ECB = basis Art 105 (6) • Insurance excluded • Not feasible for lack of fiscal support behind the ECB • Risk of Confusion of monetary role and prudential role: see Greenspan put. • Risk for confidence in monetary function • Systemic Risk Council
– identifies systemic developments and recommends corrective action – data feed from national supervisors – composition
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C. Intermediate forms: Supervisory colleges
Intermediate forms: colleges
• Cooperation among supervisors:
– See Colleges of supervisors – Comp. Delegation of responsibilities – Better adapted to prudential than to market supervision
• All supervisors should be equally strong, have the same arms and deploy them with the same vigour • Need to define what belongs to college and what not (compare Home-Host discussion) • Quite heavy procedures – very time consuming – in crisis situation, specially designed rules needed
• On the basis of binding agreements with a final decisive standpoint
– See art 129 CRD – Comp. solvency 2: binding decisions – Comp. CRD: more modest
• Risk of diversity between colleges: common rules needed • Not merely depending on willingness to cooperate
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D. de Larosière proposals
de Larosière proposals: institutional
• “Common rulemaking, local supervision” • Effective, day-to-day supervision remains local – proximity, language, knowledge of local or specific features – decisions remain subject to local rules and procedures, e.g. judicial review – maintaining some local discretion in the application of the rules – use of colleges for systemic groups and other matters – fear of lack of fiscal backing is main reason
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• Creation of new Authorities ( Ex Level 3 Committees) for B, I, S.= Agencies ? • Based on the existing cooperative structure • In charge of developing common rules of the L. 3 type • Mainly within the ambit of directives, but also as part of existing cooperation • Level 1 and L.2 remain unchanged: right of initiative of the Comm.
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de Larosière proposals
de Larosière proposals
• The authorities would adopt L.3 ” rules” – today: recommendations, guidance, interpretations are developed on a “comply or explain” basis – in the future: would be “binding” on the supervisors – all supervisors would be bound to adopt the same technical rules, and implement them in the same manner
• Enforcement: – Peer review: authority will verify implementation in national legal system – If not: pressure on that member “name and shame” – If not: ? substitution of decisions • L.4: Commission enforcement action – Political process • Important role for colleges
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Main points of discussion
Next steps
• Political will? Most agree on the principle, but the conditions and details are still open • One, two or three authorities? Not for now! • Binding powers: how far does it go? Includes decisions on individual cases? Can one separate facts and application of the rule?
– 75% does not trigger fiscal support
• • • • • •
Proposal in general approved at European Council Finance Ministers: April 4, May 5 and June 9 Mid May: Commission proposals European Council: June 18-19 Elections for European Parliament: June 7 Preparation ready for Sept-Oct.: discussion in Council and Parliament
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Mediation role with respect to deficiencies regulation: “binding” but with due process
in
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