Responding to the global credit crisis

Two MEPs discuss the European business climate.

Ieke van den Burg

The public debate on the credit crisis and its impact on the real economy has focused predominantly on monetary or fiscal tools for crisis intervention. But the lessons to be better prepared to prevent any further crises are just as important. European companies, employees and consumers need to be better protected against the damage that financial markets can inflict on the real economy. The laissez faire policy promoted by Internal Market Commissioner Charlie McCreevy is no longer appropriate. It is high time to act. I would propose to focus on three fields: more effective European-level supervision of major systemic risks, an enquiry into possible market dominance and conflicts of interests at the top of the market, and changes in corporate governance and remuneration package incentives.

Joseph Ackerman, CEO at Deutsche Bank, has called for a "holistic" approach to financial supervision. I have pushed for this approach in several reports in the European Parliament. The fragmented structure of national and sectoral supervision is clearly inadequate to keep up with the development of innovative financial products and services and the risks that they present. Informal co-operation and co-ordination is no longer sufficient to monitor the risks of the 30 or more large international financial conglomerates that dominate the EU market. Early warning is not enough. We need a European supervisor with oversight of global financial markets and with executive powers to act and prevent crises. The activities of financial institutions are very diverse and cross-sectoral and the extent of unregulated, 'over the counter' activities of banks, insurers and traders has seen an enormous increase. The more than 80 different supervisors throughout the 27 member states (including the UK's Financial Services Authority, as has been shown) lack sufficient oversight. Malcolm Knight of the Bank for International Settlements said in Davos that this "balkanisation of regulation" lies at the heart of the current financial crisis. National financial supervisors and central banks are not integrated, which results in a loss of efficiency and rapid response. Fragmentation also carries the risk of regulatory arbitrage and competition between member states.

This fragmented public overview is in sharp contrast with the extensive global overview available in the boardrooms of the large Wall Street investment banks. David Viniar, Goldman Sachs chief financial officer, has used many sources of information available in Goldman Sachs' dealing room, with its analysts and with its M&A company advisers all over the world, to create excellent third and fourth quarter results. As early as December 2006, Goldman Sachs decided to hedge the risks of a possible subprime crisis for its own trading positions. This poses questions about the solidity of the so-called Chinese Walls that investment banks claim to have established between their different activities. The suggestions that I made in my draft report on the follow up to the Financial Services Action Plan were weakened following lobbying by the London investment bankers. The information about Goldman Sachs inspired me to raise this issue again in a written question to the European Commission.

Better corporate governance is a third element that should help prevent excessive risk-taking and the lack of prudent and due diligence. There is a clear link between incentives for high bonuses and remuneration packages, and this risk-taking. Performance indicators based on quarterly results and volatile stock performance often lead to a perverse focus on the short term.

To make the financial markets a fair and efficient tool for economic growth and wealth for all, we must take the lead again and make sure that public oversight on stability and systemic risks, fair competition to prevent market dominance and conflicts of interests and remuneration packages that stimulate a long-term approach to investing and undertaking, will prevail over the profit-orientation of greedy financial engineers.

• Dutch Socialist (PES)_MEP Ieke van den Burg is a member of the Parliament's committee on economic and monetary affairs.

Alexander Radwan

At the moment we see a fast sequence of crises in financial markets. Some managers call these market corrections, suggesting that they might be a necessary inconvenience from time to time, and advise against quick political action. This is surprising. A natural market correction would not need taxpayers' money to avoid larger turbulences and their impacts on the real economy. In the case of the current crisis we see consequences of irresponsible acting of some managers. Public authorities have to serve as lenders of last resort to stabilise the 'autonomous' market.

Currently, an US-induced crisis affects Europe. But fortunately and thanks to the single European market, the national markets in the EU are not so dependent on the US as they were ten years ago and therefore are more stable in crises like these. In the coming years this will continue, while similar developments in Asia go on. This will help to shield the international system from quick global crises and their direct effects.

Europe has contributed to the stabilisation of the global financial system by implementing the Financial Service Action Plan from 1999. Discussion and co-ordination among the member states were necessary, and Europe acquired important experience in managing a common market and preserving the members states' individual market structure. This experience and should inform international debate, allowing Europe to help design the international economic development.

Europe also has to learn its lesson from the current crises and cope with recognisable shortfalls. Do the supervisory authorities exchange enough necessary information? Could a possible squeeze of a European major bank be handled fast and effectively? Do we need a last-resort European lender?

These questions should not be answered in haste and regulation is not always the best and only solution. Other mechanisms, like codes of conduct or indirect control by counterparts, might emerge as more user-friendly and effective methods. But to find them, discussion is sometimes necessary. We agree that measures have to be thought-out and evaluated in their consequences. But the inactivity we see at the moment from the finance ministers, Ecofin, and the European Commission is not a good example of well-considered action.

Rating agencies and hedge funds may be an example. The European Parliament requested in its Katiforis-report of early 2004 that the role of credit rating agencies be examined. Blamed for reacting too late on the dry-out of the subprime credits, the US president's working group, public prosecutors and the US Securities and Exchange Commission (SEC) are now examining agency and hedge funds in the US, while the European Commission is also considering measures. The same is true of hedge funds: the European Parliament asks for an ex-ante scrutiny of their risks but it seems that as long as we do not have a serious crisis and US-activities, the Commission will not work on this issue.

Financial markets and the system of norms that control them are the backbone of our economy, and therefore we need to find an alternative to the US model. At the moment we are more copying US guidelines _- for example, the convergence of International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles. The US has a major influence on IFRS through its representation on the International Accounting Standards Board, which is bargaining with the Securities and Exchange Council on the convergence of finished IFRS to the US GAAP. Europe has relinquished its influence and relies on a benevolent standard-setting body.

This is not the right approach to feed Europe's rich experience into a common economic framework. At the first opportunity we must make use of Europe's versatile and stable structure to build a new co-operation in financial market oversight. Europe can create a unique financial system that combines our strengths: subsidiary authorities that know their oversight subjects very well and effective monitoring of cross-border affiliated groups.

• German centre-right (EPP-ED) MEP Alexander Radwan is a member of Parliament's committee on economic and monetary affairs.

Two MEPs discuss the European business climate.