Sharon Bowles MEP

Regulatory and Supervisory Reform of EU Financial Institutions – What Next?

I will start by saying that we must show confidence in what we have done, not keep hinting that there is still some state of panic and that it will not work.

It is well known that the Parliament had stronger ambitions for the European Supervisory Authorities, but the final fusion of Parliament ambition with Council caution is one we must seize with enthusiasm and cooperation, and let the ESAs and ESRB get on with the tasks given to them without interference.

Legislative challenges remain, especially as we move more into the areas of greater jurisdictional challenge.

We have put in place an EU structure to deal with the fact that you can not integrate markets without following suit on supervision. The EU level was necessary but not sufficient - and so far the third country issues in legislation are fraught with controversy and show an inward rather than outward looking approach. Strong ESAs will be an important marker for setting the appropriate international outlook.

There are areas where we have not solved our jurisdictional issues within the EU. The culture of secrecy over information is exposed in the attitude of Member States towards stress testing and may not bode well for the level of data sharing envisaged in particular for the role of the ESRB - although the EBA is showing its mettle in this and has the Parliament's support. Legislation on cross border crisis management and banking resolution is being much slower to emerge than Parliament expected.

Problems in portability of collateral, cross border transfer of assets and differing bankruptcy rules are not new - we struggled with them on Solvency 2 and group support before the crisis, there were actual rather than just potential problems in the crisis, so they should not have gone to the back of the legislative queue. These are EU problems here that did not need to wait on international action.

The crisis has had three phases - the financial crisis, the economic crisis and the sovereign crisis. All three must be addressed not just the first, so we should get it clear in our minds that we are seeking three things: stability, integration and growth. They must go together and be dealt with together. Two out of three will not do.

Plenty of work is being addressed to stability - especially when it comes to prudential regulation.

Better integration is a requirement for Europe's place in the global market place. The EU still lags on competitiveness in several areas because we have not properly integrated our own single market in financial services. If we are not careful new regulation will bring more near monopolies and stifle competition.

Growth will be lost if we get the balance of measures aimed at stability and integration wrong, and as the current economic and sovereign situation demonstrates we ignore that connection at our peril. I am glad Commissioner Barnier recognised the importance of growth in his speech and the interaction with regulation.

The eventual consequences of the current round of financial regulation are not yet understood. New regulation is causing problems for long term investment, which in turn is having a macroeconomic effect. Commissioner Rehn, only two weeks ago I was explaining, at your consultation on project bonds for long term infrastructure, that it would not be quite as easy to find long term investors in insurance and pensions as was envisaged in the consultation document. Effects of Basle 3 had been spotted, but Solvency 2 and much else seemed not to have been noticed (as a short check-list I give you CRD2, AIFM and EMIR to join Basle 3 and Solvency 2 with IORPS and MiFID2 coming down the track).

Long term investment, both for infrastructure and other real economy issues is one of the most important issues that faces us. Given the economic situation that we are in it cannot be delayed and must be in the 'right now' rather than the 'what next' category. We urgently need to find ways to be more diverse.

One reason for problems is the sameness being brought about in particular by the concentration on sovereign debt for liquidity purposes. The sovereign debt crisis makes one question this in various ways, will it be as liquid, should we even be encouraging it anyway and linked to the latter is there enough to go round if insurance, CCPs and everything else is driven towards it? Will it perpetuate erroneous assumptions such as zero risk weighting for sovereign debt within a currency union? What has happened to diversity?

It all looks rather like a road network to me, where everything is travelling on a motorway that is so congested a single accident will bring it to a standstill and the relief roads appear to have been legislatively blocked off.

I have frequently raised the effect of zero risk weighting for sovereign bonds within the Eurozone, and its contribution to removing market discipline by giving lower spreads than there should have been. It also created perverse incentives during the crisis.

In the economic governance package that the Parliament voted just before Easter we included the potential use of varying risk weighting of Eurozone sovereign bonds as a macroeconomic tool. This is something that may need looking at too for CRD4. When seeking ways to discipline at the macroeconomic level, tools other than warnings and fines should be developed, and here there is a clear role for the ESRB both in formulation and recommending action. Market discipline can be swifter, bigger and more automatic than any fine ECOFIN might apply.

It takes time to complete analysis and I recognise some of these issues are being looked at. I also want to make it clear that looking to wider effects of legislation is not an excuse for weakness and carve outs that pander disproportionately to industry or national interests.

Turning to integration, this must go hand in hand with competition. There has been a lot of focus on harmful forms of competition and a race to the bottom in standards. Quite rightly attention has been given to setting appropriate standards and work needs to be done in particular in the area of accounting to ensure that standards are not avoided by allowing transfer into the shadow zone. However the good side of competition must not be dismissed. Competition gives the edge to avoid complacency; it promotes choice which leads to diversity and liquidity. Therefore targeting stability without including measures to uphold competition can be counterproductive, and the victim is growth and the general public good.

This is an issue in EMIR, it will be an issue in MiFID and it remains an issue in clearing and settlement as we have known for a long time.

Spanning stability and integration is the matter of indicators and data interrogation. Many of the indicators that are used in legislation, such as risk weightings and correlation factors, are just best guesses, albeit backed by experience. The danger is they creep into models and legislation and become overly fundamental for a best guess. Work on more rigorous principles is a priority. In supervision qualitative assessment and market intelligence is also crucial to a fuller understanding of what data has captured, and for earlier spotting of trends where statistical collection and analysis lags events by some time.

In the future real time tracking of flows in finance must become part of integrated global oversight. I know that work is being done in the ECB and in the US. Some rather pessimistic estimates given to me are that it will take 10 years. That is too long and we must have it in our sights now. Look at what can be tracked and switched on the internet using standard protocols. The same must be done for consolidating, tracking and managing financial data flows. So as we proceed with legislative reforms we must embed requirements for consistent global messaging standards and identifiers. There are parliamentary amendments tilting to this, but it needs a systematic approach at all stages.

Now I have already given several speeches covering supervisory architecture which are on the committee website so I will not repeat them, but to finish I will make four key points.

First: Accountability. I tried to address this in Solvency 2 with amendments creating liability for negligence following the findings of the enquiry into Equitable Life. This was pretty unanimously resisted by Member States - my own included -and the Pieter Paul case trotted out. Similar immunity will apply to the ESAs. When there is a mistake who gets punished? Answer nobody. The supervisory authorities have got off lightly over the crisis. If the ESAs are no good how do we discipline? Parliament at least wrote in a role so we can give an uncomfortable public hearing and publicity to problems, but we had to fight for that. Indeed this afternoon we have the final inaugural hearing of the vice chairs of the ESRB Mervyn King and Andrea Enria. The ESRB also reports confidentially to the bureau of the ECON committee for those matters that can not be public.

Second: The authorities are coming into life in a challenging time, including in their resources. This is of concern to the Parliament and we insist resources must be sufficient to match the tasks allocated. Inevitably there will be reliance on national authorities, and this should be seen as part of the glue that binds the system together for sharing knowledge and understanding. With limited resources for the ESAs, Parliament would regard it as a damaging and divisive step if national assistance is given grudgingly or accompanied by demands for payment.

Third: We should not demand action for action's sake. New intervention powers need to be treated carefully, a bad decision is not made good simply by making it fast or widespread. There is a difficult balance to reach between flexibility and nimbleness and applying a common rule book. Hands-on supervision is very important - it is no good just making swathes of regulations and expecting reporting to flag up all problems. Supervisors must be directly involved in the markets they supervise. Otherwise it is a recipe to ensure supervision is always behind the curve.

Finally: Cooperation between the ESAs is paramount. So the last thing we need is any turf wars - and in this I do not mean necessarily between the ESAs themselves but also between countries and institutions trying to tie tasks to one ESA or the other because it favours their vision. It is for just this reason the Parliament set high store by the joint committee, and successful, comprehensive cooperation is an important yardstick by which the Parliament will measure whether the structure has delivered as well as necessary when it comes to the review.

Thank you.