Luxembourg, 09/10/2007 (Agence Europe) - Meeting in Luxembourg on Tuesday 9 October, the EU finance ministers discussed the EU economic situation in the EU, three weeks ahead of their meeting in Porto, Portugal, to discuss the turmoil on the financial markets (see EUROPE 9503). Reiterating confidence about the European economy's capacity to weather the financial storm, the ministers discussed action to be taken to improve transparency on the markets and shore up financial stability in the event of collapse of a cross-border bank. They adopted a conclusions document introducing a roadmap for improving financial stability (see EUROPE 9517). The Portuguese presidency will report to the European Council, if EU heads of state decide to discuss financial stability at the Lisbon summit on 18-19 October.
The impact on the European economy of the financial crisis arising from the US subprime mortgage crisis is contingent on the duration and magnitude of the current turmoil, explained Fernando Teixeira dos Santos, Portugal's finance minister, following the ECOFIN Council. He said the risk reassessment process was still underway. He explained that ECOFIN's work, which is soon-to-be-launched, to come up with an institutional response to the turbulence on the financial markets would cover four main concerns, namely: increasing transparency on the financial markets and flagging up at-risk financial institutions; improving risk management, including liquidity risk management; seeing to what extent prudential supervisory management should be beefed up at EU level; and assessing the role of financial ratings agencies in the rating of complex financial instruments. EU Internal Market Commissioner Charlie McCreevy commented on management of the crisis, saying that the Council had simply accepted what had been agreed in Porto.
The ministers only changed a single paragraph in the draft conclusions document on improving financial stability. They changed a paragraph on the European Commission's powers with regard to state aid, inviting the European Commission to work with the member states to clarify the criteria under which a major
banking crisis would be deemed to be a 'serious disruption to the economy' under the EC Treaty and state aid rules. Teixeira dos Santos said the European Commission would clearly have powers to decide whether public crisis management interventions would be appropriate.
French ideas. Following on from the Franco-German joint statement calling for greater transparency on the financial markets (see EUROPE 94980, French Finance Minister Christine Lagarde put forward some practical moves in Luxembourg. She said it was necessary to improve transparency in the securitisation chain and to clarify responsibility in order to better supervise lenders, better understand risk and better identify the spread of risk. Securitisation is a technique to convert usually illiquid assets with predictable cashflows (like debt) into marketable securities which are then sold off on other financial markets. Securitisation has been accused of making financial information hard to follow, and for this reason France believes it would be useful to standardise securitisation products. Lagarde also called for special thought to be given to conflicts of interest that may arise at financial ratings agencies (credit rating agencies). Another area she suggested looking into was liquidity risk and revising prudential liquidity rules. She called for greater transparency of hedge funds through a voluntary hedge fund code of conduct.
Italy repeated its argument that European integration of policies governing the financial industry was lagging behind the development of the money markets in the EU. Italy's finance minister, Tommaso Padoa Schioppa, called for research into the functioning of prudential control and the regulations governing the industry, not only in order to ensure financial stability but also to keep down the costs for cross-border banks of abiding by the legislation. He said that banking institutions should make their opinions known. (mb)