Brussels, 27/02/2008 (Agence Europe) - On Wednesday 27 February, Economic Affairs Commissioner Joaquin Almunia and Internal Market Commissioner Charlie McCreevy presented the European Commission's contribution in two issues ahead of the European Spring Council: on-going work at European level in financial stability, and the recommended Community approach on state sovereign funds (see EUROPE 9610). Next week, the Ecofin Council will adopt an interim report on financial market stability, and important stage in the Agenda for Financial Stability presented by the Slovenia Presidency at the start of the year (see EUROPE 9583).
Financial stability. In October 2007, Finance Ministers adopted a financial stability roadmap beginning work in areas such as improving transparency and the performance of financial markets, improvement of evaluation of complex financial products, strengthening requirements in prudential supervision (see EUROPE 9517 and 9519). “More than 40 action s have been identified by the Ecofin Council,” McCreevy said. Almunia said that, in March, European leaders should decide on the “the next steps and give the necessary impetus” to continue what has already been done. According to the Commission, the principles which will guide EU action on financial stability are: primary responsibility for risk management lies with the private sector; national regulatory and supervisory frameworks must be able to react to the rapid changes in markets and financial innovation; cooperation between national supervisory authorities must be increased in the EU and internationally.
The Commission believes that the roadmap is being implemented satisfactorily and deadlines are being met. To restore confidence in the financial markets, it is pressing financial institutions to be clear about their exposure to complex financial products affected by the turbulence in the markets. It has worked for the industry itself to draw up rules on the publication of exhaustive information on securitisation markets. To this end, eight European associations (EBF, CMSA, ICMA, EACB, ESBG, SIFMA, LIBA and ESF) committed themselves at the start of February to have tangible results on the transparency of information available to investors and regulators by June. In a half-veiled allusion to the nationalisation the Northern Rock bank announced by the UK, the Commission argued for minimum use of state aid so as not to create competition distortion on the market.
McCreevy also noted that he had asked the Committee of European Securities Regulators (CESR) to produce a specific report on the role and practices of financial rating agencies (see EUROPE 9498). He said that “We will not leave things unchanged” but did not suggest that the ratings agencies were totally responsible for the current turbulence. At the beginning of February, he had, however, called on the agencies to respond or be subject to a European legislative initiative (EUROPE 9598). The Commissioner also confirmed that the Commission was working on questions that had not been settled during adoption in 2005, with the directives on requirements on own funds (Basle 2). He explained that they would be seeing what they could do. The Commission will present a draft amendment for existing rules to tackle questions such as cooperation between control authorities in stressful period or management of liquidity, concentrations and securisation (EUROPE 9597). Finally, work on financial stability is expected to lead to the elaboration of a common analytical framework on systematic implications for a potential financial crisis.
Sovereign funds. The other communication adopted focuses on the EU's attitude to adopt on SWF. According to the Commission, the EU should remain open to investment of these funds which proved beneficial to the European economy. For forty years thee has not been any negative action from SWF on the contrary the investments have been the best they could have, declared Commissioner McCreevy, who added, “at the same time, we agree that it is not unreasonable that investors closely linked with national authorities or governments should follow some common principles on transparency and governance”. Mr Almunia explained that the increasing weight of SWF on financial markets equalled half the world's official reserves and could quadruple in ten years and this required more responsibility. This responsibility meant accepting SWF and adhering to an international code of conduct elaborated at the IMF and expected for the end of 2008. The Commission will be proposing the taking into account of several principles such as the publication of information on the portfolio of assets in a SWF or relations that SWF have with government authorities.
The Commission considers that there is not yet any reason to modify European legislation on regulating SWF. McCreevy said they already had a legal framework based on the free movement of capital. Due to the European treaty, restrictions to this free movement are possible for reasons linked to national security and public order. Almunia said that member states can apply restrictions in certain cases on foreign investment and “these restrictions to free movement of capital also apply to SWF”. Assets in SWF are mainly numbered in dollars. What will the risks be if they are converted into the European currency? Let the market decide on Euro-dollar rates, said the Commissioner for monetary affairs. Nevertheless, he did say that extreme volatility in these rates is unwelcome. (M.B.)