mrs adriana holtslag-alvarez, visiting lecturer on financial services, eipa eipa 2010 © european...

Mrs Adriana Holtslag-Alvarez, Visiting Lecturer on Financial Services, EIPA EIPA 2010©

European Institute of Public Administration - Institut européen d’administration publique

Regulation of Financial Services

Mrs Adriana Holtslag-Alvarez, Senior Visiting Lecturer, EIPA

EIPA 2010 - WWW.EIPA.EU

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Benefits , Dangers, Contradictions and Failures

International Centre for Parliamentary Studies

4th Annual Regulatory Affairs Symposium 2012

Tuesday 27th and Wednesday 28th March 2012

“Being an Effective Regulator in Challenging Times”


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Case Study: Financial Services

What is the role of financial services firms? Such as : Banks, insurance, securities and

hybrid firms

Intermediation crucial to the economy

How to define the quality of capital?

Causes of the financial crisis?


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Case Study: Financial Services

Why regulate? What to regulate? By whom? Who will apply new rules? And who will comply? And check compliance? Role of Supervisors Role of EU Role of national authorities of 27 Member States


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Global regulation

Financial services uniquely cross border 2008/2009 Financial crisis Search for solutions What went wrong so what needs to be fixed? Who will do what? Define goals Delineate topics and issues


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When the sub-prime crisis struck

Years of downturn: loss of investors’ confidence

Blockage of credit markets: liquidity more like an arid desert

Stock markets spiral up and down: what are the economics of this?

Banks are in the docket: fair to accuse them alone?

Lack of cooperation of supervisors blamed

Lack of effective transatlantic cooperation

Knee jerk reactions all round.

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Crisis : the Commission stated

We can no longer rely on wholesale financial markets to look after their own long-term interests.

We can no longer rely on empty assertions that if nothing has gone wrong so far in a particular sector as evidence that nothing will. Sub-prime has taught us that.

We can no longer rely on outmoded notions of national regulation and supervision.

We made rapid assessments of Member State bank rescue schemes. Or: State aid allowed.


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Plethora of responses

EU : European Commission Council of Ministers and European Parliament ECB Basel: BCBS – Basel norms for capital ratios FSB = Financial Stability Board United States – Dodd Frank

Bilateral and Multilateral = G 3, 4, 5, 6, 7 ... G20 IMF and World Bank Multilateral response : difficult to channel


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Europe = European Union = Single Market

Single market requires Single rule book?

Consistency with global reforms?

Effectiveness and fairness of new regulatory framework?


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Single Market: (main) goal of the European Union

Four freedoms: goods, services, establishment, capital Single market was doing well in the 90’s Just not for financial services Lack of capital movements ECJ was doing its part in liberalising market RATIO for new regulation: Need to create single market for financial services:

wholesale and retail FSAP: Financial Services Action Plan was born end of

the 90’s


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Building Blocks of the Single Market for Financial Services:

Home country control in supervision

(= supervision by authorities of MS of origin)

Mutual recognition of equivalence: the EU passport

Minimum Harmonisation of key regulatory protections

Co-ordination between host and home State authorities (no single / central enforcement agencies


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Do all 27 EU Member States have the same objectives?

Not all regulators – their goal is to reduce risk

Not all supervisors – nationally oriented (home country control !!)

Not all Member States – protectionist tendencies

Not all market players – each large firm has owncarve outs and niches….

What Single Market?


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White Paper of Dec. 2005

Set out the Financial Services Policy for 2005 – 2010 An internal market is a properly integrated market:

efficient and competitive

OBJECTIVES: To achieve high degree of integration Consolidate what had been done Remove remaining barriers Implement, enforce, evaluate existing legislation Enhance supervisory cooperation and convergence…


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The Commission followed a

“better regulation” approach

thorough impact assessment

extensive consultation

BETTER REGULATION


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Extensive revision of financial services

sectoral legislation:

- Traditional EU rule making

- Lamfalussy Procedure

- New levels of “technical” input

- New ESA’s

BETTER REGULATION


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The Lamfalussy structure:

EBC¹

Commission Parliament

EIOPC¹ ESC¹ FCC¹

Enforcement

Commission

Council

CEIOPS³ CESR³

L1

L2

L3

L4

CEBS²

EBC = European Banking Committee

EIOPC = European Insurance and Occupational Pensions Committee

ESC = European Securities Committee

FCC = Financial Conglomerates Committee

CEIOPS = Committee of European Insurance and Occupational Pensions Supervisors

CESR = Committee of European Securities Regulators

¹ Finance ministries

² Supervisors and Central Banks

³ Supervisors

Legislation

Implementing details

Convergence


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New Powers

- Additional technical powers:

- Draft technical standards – work towards common rulebook

- Exchange of information and settle disputes- So: Co-ordinated approach


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The new EU supervisory architecture

Two independent and complementary pillars:

European Systemic Risk Board (ESRB)- macro-prudential supervision

European System of Financial Supervisors (ESFS)- micro-prudential supervision

ESFS:Level 3 Committees (CEBS, CESR, CEIOPS) are now:

European Supervisory Authorities (ESAs), namely the EBA, ESMA and EIOPA

Cross-sectoral co-operation via the Joint Committee


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Common European Rulebook

The new authorities’ role:

- Developing technical standards- Interpretative guidelines so national authorities can take a decision

However:Technical standards become binding law after endorsement by the European Commission


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202020

EBA Regulatory Tasks


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ESFS and ESAs - 3 independent Authoritiesworking together in a network of supervisors

EIOPA ESMA

EBA

Joint Committee

NSA

NSA

NSA

NSA

NSA

NSA

NSA

NSA

EIOPA ESMA

EBA

Joint Committee

NSA

NSA

NSA

NSA

NSA

NSA

NSA

NSA

NSA


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G20 Commitments : Progress table

What areas are covered? And also by FSB…..

Capital Framework (New CRD4) implements Basel III Accounting standards Remuneration and compensation Management of counterparty risk Insurance (overall issues): Solvency II Derivatives (Mifid review, MAD review, transparency

and clearing issues) SIFIs: European Crisis Resolution Framework


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G20 Commitments : Progress table

What areas are covered?

Strengthening Corporate Governance Consumer’s interests: how to educate them? Deposit Insurance – new proposal Credit Rating Agencies (CRAs) Hedge Funds and private equity

As well as the regulatory and supervisory system: European Systemic Risk Council and European System of Financial Supervisors.


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What new theme to address?

Recent consultation on Shadow Banking These are poorly or non regulated entities/activities MMF – money market funds, Securitisation, Securities

lending, hedge funds, etc Represent 25-30% of the world’s financial sector = 46 Trillion Euros Posing very high risks such as runs due to short term

funding, build up of high hidden leverage, credit bubbles, and possible contagion into the “regulated” sector

Most probably: circumvention of rules and regulatory arbitrage


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and where are we heading?

Fiercer competition More sophisticated consumers Increased regulation at global level

BUT for sure: at least part of the financial services industry will take on a new shape


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Challenges and Trends

Shift away from principles based regulation Back to rules based framework regulation Regulators must cooperate globally Consolidation process: in-country or cross-border Regulation creates level playing field (does it?) Helping consumers by teaching financial literacy


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The costs of compliance: price tag for financial firms

Corporate Governance catalyst: focus on risk management - and concern of a more “aggressive regulator” , hands on strategy to supervision…..

CSR and increasing environmental awareness (the crisis did not make these go away!)

More need of long term thinking: ethical investments as part of risk management

Challenges and Trends


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- Zen Buddhism and the Art of Financial Regulation- How to meditate while you regulate- Or: how to regulate while you meditate

Alternatively: what can be done to prevent this from happening again?


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Conclusions (or more questions)

All current efforts are carefully scrutinized by banks Unity of purpose is not evident: EU- US divide Complex market, complex products: simplification? Back to core banking? F.i.’s should provide products people can trust Thus: restore trust in banking and financial services New views on moral hazard and role of public sector Risk of future crisis: cannot regulate for the unknown


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So where are the future weaknesses?

What and where is the unknown ? Where is the next financial crisis? Why is implementation such a problem? Are the regulators and supervisors staffed adequately? Is there sufficient funding? Who can pay the best lobbyists? What and whose interests are being represented? Issue of transparency: produce the data that allows the

regulator to really compare relative risk and see the real weaknesses.

mrs adriana holtslag-alvarez, visiting lecturer on financial services, eipa eipa 2010 © european...

Documents

financial serviceswhat

financial serviceswhy

wholesale financial

financial services action

single marketsingle

market players

capitalsingle market

eu member states