The EU´s changing capital market
Opening Remarks by Jochen Sanio President of the Federal Financial Supervisory Authority (BaFin) at the European Financial Forum – Wilton Park Conference on 30 November – 1 December 2007
- Datum:
- 01. Dezember 2007
- Ort:
- Wilton Park
- Redner:
- Jochen Sanio
Check against delivery!
Thank you very much indeed, Mr Hopkinson, for your kind introduction.
Ladies and Gentlemen
One of the most successful crisis managers of the 20th century said that the main qualifications for political office were “the ability to foretell what is going to happen tomorrow, next week, next month, next year. And to have the ability afterwards to explain why it didn’t”.
You and I, who are repeatedly having to prove ourselves as crisis managers on the financial markets – I know what I am talking about - know how profoundly true that statement is. The man summed it up beautifully. But it is to his powers of organisation, his breadth of vision and his knowledge of the value of tradition that we owe not only this groundbreaking insight
but also the philosophy, the spirit and the style of Wilton Park. His name, as you will have guessed: Sir Winston Churchill.
It is a great honour for me to be allowed to be the Chairman of the 2007 Financial Summit. To do so at a time when the spectre of the subprime crisis is stalking the global financial markets makes this task both a challenge and a duty for me. For at this troubled period in time it is all too clear that it is high time to come up with fresh ideas and to ditch surplus baggage, to cast off many of the ideas of which we have grown so fond but which in the light of recent events have proved outdated. I am confident, indeed certain, that we will succeed in this. For I reckon we can count on the blessing of Churchill, perhaps the most successful crisis manager of recent history, Churchill, the founding father of Wilton Park, whose 133rd birthday it would have been this very day.
He also left us another important insight. “For myself”, he said, “I am an optimist – it does not seem to be much use being anything else.”
Ladies and Gentlemen, our topic for discussion is “Competing in a global market place”. In any sort of competition there are failures and successes – and one can learn from both. To try to abolish failure altogether would therefore be foolish. For that reason, government-funded rescue plans must be carefully thought-out and well-founded, for as free insurance they reward recklessness and foster excessive expectations, the fulfilment of which mean a mortgage on the future. In such cases it’s completely innocent third parties that have to foot the bill.
My guiding principle in the subprime crisis was therefore to seek a purely private solution first. That’s precisely what the FSA did. But as we all know, a private solution to the Northern Rock problem proved just as impossible as it did in the case of IKB. Without bold supervisory intervention a house fire could easily have reduced a whole city to ashes. While retail customers were fortunately not endangered in Germany, cases such as Northern Rock raise serious deposit protection issues. The EU has only just begun to work on these issues.
The small-state parochialism dating from the Middle Ages, which still prevails to this day in Europe in these areas, would probably worth a Wilton Park Conference of its own. What concerns me here today is another question – How in future can we regulators prevent banks’ risk management systems failing as dramatically as we are seeing them do in the subprime crisis all round the world?
One answer to this question is Basel II. Up to now our supervision has been based mainly on purely quantitative measurements. This means that on markets that are moving at the speed of light proper supervision is just not possible. Less than ever these days are we regulators able to claim that we can swallow a few figures passed on to us by the banks, regurgitate the amount of capital that is adequate to cover their risks, and relax. For that reason Basel II and consequently its EU version, the Capital Requirements Directive, insist on qualitative measurements, especially under Pillar 2, risk management. With good risk management banks can earn reductions on their minimum capital requirements, i.e. under Pillar 1. We are primed and ready to go and are determined to subject banks’ risk management to rigorous examination. And Churchill has something useful to say here too: “However beautiful the strategy, you should occasionally look at the results.”
I have another, second, answer to the question of how we can prevent the complete breakdown of risk management systems in future. We shall be looking even more closely at the inner workings of the credit rating agencies. Too much has gone wrong on this front in the past few years; I need only remind you of Parmalat and most recently, of course, the subprime crisis as well. In the spring of 2005 IOSCO published its Fundamentals for Codes of Conduct for CRAs, and a few weeks ago we started further work on the subject. In early October CESR created a high level task force which will consider possible answers to the subprime crisis. While we are working our way through our agenda up to midday tomorrow, we shall have many opportunities to delve into these issues from various perspectives.
Competition is not only a subject that worries companies and determines whether they live or die. Financial markets also compete with one another – for the favour of companies. The latter are not unnaturally interested not least in the regulatory costs when it comes to deciding between more than one possible financial centre. Over-regulation is a charge that has repeatedly been heard from issuers on both sides of the Atlantic for years. While it is the CRD, MiFID and the Transparency Directive that have been making feelings run high in the Old World, in the New World it is the Sarbanes-Oxley Act. All this is costing financial industries both here and there a great deal of money. Issuers that are listed in both the USA and the EU in particular can tell you a thing or two about that.
The US government is afraid that the SEC’s increasingly fatter rulebook might in the end become a competitive disadvantage and is currently preparing a comprehensive review of all US capital market legislation. The cold wind of competition is blowing there – and is also making the EU Commission shiver as well. Just over two years ago it launched “better regulation” as the leitmotif of a new era of European financial market regulation. That means less new law, but in return consolidation and uniformly consistent application of existing law, all with the objective of reducing the burden of regulatory costs for the industry. We shall be taking a close look at these exciting developments on both sides of the Atlantic on Panel 1.
“Better regulation”, Ladies and Gentlemen – that also means consistent rules for financial products and their marketing. The main issue here is consumer protection which, as we all know, all too often gets trampled underfoot in the competition between companies, which is why there is a great need for legislation on this front. And the legislation has, not to put too fine a point on it, fallen between two stools: either it lets the financial industry market risk-free but bland products – such as the good old UCITS Directive; or it obliges it to inform the consumer of all the risks in minute detail – such as the MiFID and Insurance Intermediaries Directive model. It is immediately obvious that the co existence of two regulatory philosophies is not ideal: product regulation is frequently regarded as an invitation to regulatory arbitrage. Take the example of hedge fund certificates. And European marketing rules, which only provide for minimum harmonisation, are an open invitation to gold-plating, which is an impediment to cross-border trade. The Commission has recognised all this and is trying to come up with solutions. And that’s what we’ll be trying to do as well on Panel 2.
The work of the three breakout groups is also dominated entirely by the subject of competition. For reasons of time, I’d like to leave the details to the Chairmen of the groups, who will be telling us all about these exciting topics immediately after the photo shoot. I wish I could be in all the Groups at the same time.
The high esteem in which Wiston House is held internationally is based not least on its excellent cuisine and its outstandingly well-stocked bar. Nevertheless, we want to get back down to work again early tomorrow morning at 8:45. For the mutual recognition projects that have been started at government level in the past few months have the potential to go down as milestones in financial history. I am especially pleased that Germany’s Chancellor Merkel has made an important contribution to this process.
As we know, in April 2005 the US SEC published its road-map for the recognition of IFRS. This was followed in June 2007 by a rule proposal that caused quite a stir, whereby from 2009 issuers can dispense with the expensive reconciliation provided they are fully IFRS-compliant – i.e. follow the IASB standards 100 percent. As you know, that is not possible for EU issuers at present, since the EU has approved IFRS only with certain exceptions. And on 15 November this year the SEC actually adopted these rules as well. Two years ago hardly anyone would have expected such a move. So what barriers still exist now? And how can we remove them? Will the EU move towards the IASB, or will the SEC need to take further action? More on that tomorrow on Panel 5.
But financial reporting is not the only field in which the subject of mutual recognition of
regulatory standards is in vogue. Late last year Ethiopis Tafara and Robert Peterson of the US SEC, writing in the Harvard International Law Journal, proposed gradual recognition of the European and US regulatory regimes. Although they were merely flying a kite, the idea immediately won huge applause all around the world. There are a lot of things that now point towards our soon being able to start work and compare regulatory systems in specific terms. The IOSCO Objectives and Principles of Securities Regulation might serve as a benchmark. They are drafted in an abstract enough way to record and compare the different legal instruments and regulatory cultures from a functional perspective.
But for some years now abstract principles have also been coming into fashion in national regulatory law as well, because many regulators recognise that sharply defined rules mean that it is frequently impossible for them to keep up with the speed of market developments. Basel II is really based on the idea of principle-based supervision. I would have preferred it if the EU implementation by way of the CRD had also followed this new regulatory paradigm more, instead of degenerating into a well-nigh unreadable monster legal tome. On the other hand, the principle-based approach has been put into practice especially firmly by the FSA in the UK. Other authorities, including the AFM in the Netherlands, the ASIC in Australia and BaFin, my authority, have followed it in many respects. At the other end of the spectrum we have the traditional rule-based approach à la US model. This is another case of regulatory competition in action. We shall be weighing up the strengths and weaknesses of both philosophies on Panel 6 and asking which of the two is the better able to cope with the challenges of the global marketplace.
As we all know, links between exchanges have been becoming stronger for quite some time now: the mergers between the NYSE and Euronext and between Eurex and the ISE and the cooperation agreement between the NYSE and the Tokyo Stock Exchange are the most prominent examples of ever closer cooperation between the marketplaces of this world. What effect will this have on securities trading overall? Have legislators and regulators done enough to unleash the – hopefully – welfare-enhancing powers of competition? The last Panel will deal with this highly topical development.
Ladies and Gentlemen, after an election campaign speech Winston Churchill was asked by a member of the Temperance League what he intended to do about his, according to her, excessive consumption of alcohol. He replied laconically: “So little time, so much to do”.
With this in mind, I now declare the Wilton Park 2007 Summit open.