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101209 Pc Nv EU Financial Regulatory Reform a Status Report

101209 Pc Nv EU Financial Regulatory Reform a Status Report

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ISSUE 2010/11DECEMBER 2010
EU FINANCIALREGULATORY REFORM:A STATUS REPORT
NICOLAS VÉRON
Highlights
The EU regulatory response to the crisis has been generally slower than inthe United States, for four main reasons: swifter financial crisis managementand resolution in the US; structural differences in legislative processes; theEU’s front-loading of institutional reform, most notably the creation of Euro-pean Supervisory Authorities; and the timetable of renewal of the EuropeanCommission in 2009-10.The EU has nevertheless initiated or completed significant regulatory initia-tives in terms of banking, market structures, private equity and hedgefunds, rating agencies and accounting.Major further challenges loom however, including ensuring a smooth start tothe activities of the newly created European authorities; creating a sustaina-ble framework for cross-border banking crisis management and resolution;and the gradual establishment of a consistent financial regulatory philoso-phy for the EU, to underpin market integration.This Policy Contribution was first published under the title
‘Some thoughts on EU financial reforms’ 
by the Brookings Institution, following the Brookings-HeinrichBöll Foundation Seminar
In the Wake of the Crisis: Macroeconomic Dilemmas andFinancial Regulation Challenges For Europe, America and the World
, held in Wash-ington DC on 1 December 2010. Brookings’ permission to republish is gratefullyacknowledged. Nicolas Véron (n.veron@bruegel.org) is a Senior Fellow at Bruegeland a Visiting Fellow at the Peterson Institute for International Economics.
Telephone
+32 2 227 4210info@bruegel.org
www.bruegel.org
BRUEGEL
POLICY
CONTRIBUTION
 
EU FINANCIAL REGULATORY REFORM:A STATUS REPORT
NICOLAS VÉRON,DECEMBER
wanting. As a consequence, EU stress tests havenot thus far performed the function of triage thatwould have effectively triggered the recapitalisa-tion and restructuring that are arguably indispen-sible to put the European banking system back ona sustainable track. A third wave of EU-wide stresstests is envisaged in early 2011.Needless to mention, in 2010 the sovereign creditcrisis that started in Greece and spread in the euroarea came in addition to the unresolved bankingcrisis. These two crises – sovereign and banking –have reinforced one another. The Greek crisisaccentuated the fragility of the banking system,but banking weakness also prevented the restruc-turing of Greek debt, which would arguably havebrought it to a prompt resolution. Conversely, theaggravation of the banking crisis in Ireland afterthe summer of 2010 played a key role in precipi-tating the Irish sovereign crisis in November. Sim-ilar concerns weigh very negatively on Spain. Bycomparison, the US ‘foreclosuregate’ has notresulted, at the time of writing, in a major disrup-tion of the US financial system. While there is vividdebate on the long-term sustainability of US publicfinances, this has not resulted in short-termfinancing concerns for the US government. Thebottom line is that the US was able to start its dis-cussion of financial regulatory reform in June2009, with the publication of a blueprint docu-ment by the executive branch, in an environmentthat was essentially post-financial crisis. By con-trast, the EU is still in the midst of a financial crisiseven as it has started a number of long-term finan-cial reform efforts.A second factor associated with the difference intiming is the difference in EU and US legislativeprocesses. In Washington, all issues of financialreform (except housing finance which was keptseparate, prompting vocal protests from many in
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BRUEGEL
POLICY
CONTRIBUTION
EU FINANCIAL REGULATORY REFORM: A STATUS REPORT
Nicolas Véron
WHEN MAKING A TRANSATLANTIC COMPARISON
of financial reforms, the first factor that should bementioned is the difference between the timesequence of reforms in the European Union andthe United States. The financial crisis startedsimultaneously on both sides of the Atlantic, withthe initial disruption of some financial market seg-ments in August 2007 and the major panicepisode of September-October 2008. But the EUand US are not at the same stage of policy reac-tion, and especially regulatory reform, now. Atleast four reasons can be identified for this.The first reason is the fact that beyond the firstweeks after the collapse of Lehman Brothers,financial crisis management has so far been, onthe whole, much simpler, swifter and more effec-tive in the US than in the EU. Specifically, thestress tests conducted by the US authorities in thelate winter and early spring of 2009, while cer-tainly far from flawless, triggered a significantrecapitalisation of those institutions at the core of the financial system, which in turn allowed sometrust to return to the US interbank market in spiteof numerous subsequent failures of smallerbanks.In the EU, the rebound in bank share prices thataccompanied the US stress tests also allowed anumber of banks to recapitalise under acceptableconditions, but these tended to be the relativelystronger ones, rather than those that most neededan overhaul of their balance sheet. A first wave of EU-wide stress tests, completed in September2009, had little if any measurable impact, as theresults were not disclosed to the public and notopen to external scrutiny. In a second wave of stress tests, completed in July 2010, results werepublished but their quality, and correspondinglythe consistency of the stress-testing processacross countries, was later found to be severely
 
the then-Republican congressional minority) werediscussed at federal level in the context of onesingle package of legislation, eventually namedafter Senator Christopher Dodd and Representa-tive Barney Frank. Even though the process wasdelayed by several months because of unforeseendevelopments in the discussion of the health carereform bill, it was eventually completed in July2010, little more than a year after the publicationof the Obama administration’s initial blueprint. Bycontrast, in Europe the relevant reform issueswere sliced and diced into a number of separatelegislative texts. A few of these were finalised asearly as 2009 (on harmonisation of deposit insur-ance regimes, registration of credit rating agen-cies, and a first revision of the CapitalRequirements Directive, known as CRD2), butmost are either under discussion or not even yetdrafted at the time of writing, including legislationon the organisation of markets for derivatives andsecurities, and on bank crisis management andresolution. Moreover, these multiple separatetexts at EU level are complemented by significant,and not always coordinated, legislative activity inmember states, on issues that would typically bediscussed at federal rather than state level in a UScontext. Examples include insolvency proceduresfor financial institutions and taxation of the finan-cial sector.A third contributing factor is the fact that in Europe,the reform of the financial supervisory architec-ture was given priority over most other agendaitems, while in the US it was granted much lessprominence than initially envisaged, for example,in the reform proposals floated by then-TreasurySecretary Hank Paulson in the spring of 2008. Thestarting points were markedly different on bothsides of the Atlantic. In the US, a system of spe-cialised federal financial supervisory andregulatory agencies has been in place since atleast the 1930s, including the Securities andExchange Commission, the Federal Deposit Insur-
03
BRUEGEL
POLICY
CONTRIBUTION
Nicolas Véron
EU FINANCIAL REGULATORY REFORM: A STATUS REPORT
ance Corporation, the Office of the Comptroller of the Currency and the prudential supervisoryduties of the Federal Reserve System. In the EU,while the European Commission plays a key role inthe legislative process, financial regulation andsupervision remained the remit of national author-ities, which only since the early 2000s started toregularly meet in EU-level committees (with asmall central secretariat but no ability to imposedecisions on their members). This situation wasperhaps workable in the broadly deregulatory erathat preceded the crisis, but became increasinglyseen as untenable when the crisis made Europe,like the US, embark on a drive towards reregula-tion of its financial system, which if carried out inan uncoordinated manner at national level wouldquickly have collided with the commitment to asingle financial market enshrined in the EU treaty.Thus, in February 2009, a high-level group chairedby Jacques de Larosière recommended the cre-ation of EU-level public financial oversight bodies.The corresponding legislation was given priority inthe legislative process and was eventuallyadopted in the early autumn of 2010. Thus, onJanuary 1, 2011, the EU will have a EuropeanBanking Authority (EBA), a European Securitiesand Markets Authority (ESMA), and a EuropeanInsurance and Occupational Pensions Authority(EIOPA), complemented by a European SystemicRisk Board. The first three (also known collectivelyas the European Supervisory Authorities) will eachbe established as an autonomous EU agency.Even though they start with limited powers andresources, these new actors can be expected toplay major roles in future EU financial regulatorydevelopments.A fourth factor may have been related to the timingof the renewal of the European Commission, whichwas delayed in 2009-10 by considerations relatedto the adoption and implementation of the LisbonTreaty, a matter essentially unrelated to the finan-cial and economic crisis. While the Obama
‘The three European Supervisory Authorities will each be established as an autonomous EUagency. Even though they start with limited powers and resources, these new actors can beexpected to play major roles in future EU financial regulatory developments.’ 

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