European Institute of Public Administration - Institut européen d’administration publique
Regulation of Financial Services
Mrs Adriana Holtslag-Alvarez, Senior Visiting Lecturer, EIPA
Mrs Adriana Holtslag-Alvarez, Visiting Lecturer on Financial Services, EIPA
© EIPA 2010
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
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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
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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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What Single Market?
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 own
carve outs and niches….
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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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BETTER REGULATION
The Commission followed a
 “better regulation” approach
 thorough impact assessment
 extensive consultation
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BETTER REGULATION
Extensive revision of financial services
sectoral legislation:
- Traditional EU rule making
- Lamfalussy Procedure
- New levels of “technical” input
- New ESA’s
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The Lamfalussy structure:
Council
Commission
Parliament
L1
Legislation
EBC¹
EIOPC¹
ESC¹
FCC¹
L2
Implementing details
CEBS²
CEIOPS³
CESR³
L3
Convergence
L4
Enforcement
Commission
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
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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)- macroprudential 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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EBA Regulatory Tasks
Common rulebook
Maximum harmonisation
...but proportionate to different financial institutions
EU Commission
Sectoral Directives
EBA
‘Implementing legislation’
EBA
provide advice
EBA issuing guidelines and
recommendations (as before)
Developing draft binding
technical standards
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20
20
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ESFS and ESAs - 3 independent Authorities
working together in a network of supervisors
NSA
NSA
EBA
NSA
NSA
NSA
Joint
Committee
NSA
EIOPA
ESMA
NSA
NSA
NSA
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G20 Commitments : Progress table
What areas are covered? And also by FSB…..
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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?
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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
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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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Challenges and Trends
 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
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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)
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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?
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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.
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Discussion time
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