Ready for a long, hot summer?
By Lorraine Mallinder
European Voice
31.07.2008 / 00:00 CET
Just how well prepared is the EU for a financial crisis this summer?
Almost a year since the onset of the credit crunch, the EU remains worryingly unprepared for cross-border banking crises. With the near implosion of the US housing market this month, another summer meltdown cannot be excluded. Yet European policymakers appear content to adopt a business-as-usual approach to the holiday period, putting urgent reforms on hold until the end of summer.
Europe’s finance ministers have little to show for their ten months of crisis talks, beyond a loose consensus on the need to tighten national supervisory structures and agreement on the need for new laws on credit ratings and capital requirements – all of which are included in a ‘roadmap’ adopted at the end of last year. Wide divergences among member states have slowed down the reform process: Italy last year pushed for a permanent agency tasked with regulatory oversight and a common rulebook, for instance, while the UK, predictably, advocated a light-touch approach.
Andrej Bajuk, Slovenia’s finance minister, said earlier this year that it would be “incomprehensible to an EU citizen if he were to look at the ‘roadmap’ and see that some things will not be transformed into action until 2009”. Six months on, the EU’s regulatory defences remain inadequate despite fresh financial shocks, most notably the near-collapse this month of the US’ two largest mortgage lenders, ‘Fannie Mae’ and ‘Freddie Mac’. With investors on both sides of the Atlantic fleeing the banking sector, the prospects for this summer are not looking great.
Silos
EU regulators urgently need to broaden their knowledge of cross-border risk exposures and the impact of write-downs on capital positions, yet they continue to operate in silos. The Committee of European Securities Regulators (CESR), made up of market watchdogs from the EU’s 27 member states, appears ready to act, but awaits orders from higher powers. “We are driven by mandates from the [European] Commission,” says a CESR official. “The question is what do we do with banks like Deutsche Bank? How are such conglomerates supervised? Can we share supervising? Do we need more co-operation?”
Despite the evident volatility – even fragility – of global financial markets, no real answers are yet available. “It is quite clear no consensus has emerged for making significant changes to the current architecture,” says Nicolas Véron, a research fellow at Brussels-based think-tank Bruegel.
The French presidency of the Council of Ministers has made all the right noises, but appears content to bide its time on regulatory reform, focusing its immediate attention on macroeconomic policy (the strength of the euro being a prime concern). Granted, finance minister Christine Lagarde has proposed compromises aimed at ending regulatory power-struggles over cross-border supervision of insurance firms – under the Solvency II package – which could usefully feed into the banking sector. But there are no plans to break away from last year’s ‘roadmap’ and to hasten banking reforms.
Erratic
A French diplomat said that although markets were “erratic” and regulatory measures were “not sufficient”, the presidency was responding with a “long-term view”. “We will progress in stages towards better co-ordination between regulators,” she said.
The Commission, for its part, has no plans to increase its vigilance over the holiday period. “The system as it exists fulfils the need for the regulators to get together and exchange information and to deal with problems swiftly,” said an official.
The European Central Bank (ECB), which set the gold standard last year in its response to the sub-prime crisis, is pushing for a bigger supervisory role, showing signs of frustration with the persistent lack of regulatory clarity. Lorenzo Bini Smaghi, an executive board member of the ECB, last month bemoaned “deficiencies” in the way that risks are “identified and measured”. For now, however, the ECB lacks the legal authority to exert a gravitational pull on secretive national regulators.
Transparency
Transparency is the only real cure for current ills. Repeated cash injections of billions of euros may have played a major role in preventing liquidity markets from seizing up, but there is always a risk that markets could become addicted to the measures. They remain, however, Europe’s main line of defence. As financial markets plunge further into crisis, it can only be hoped that this summer will not be too long, or too hot.