Unfinished business – full integration

Two MEPs discuss the integration of European financial markets

By Ieke van den Burg

The European integration of financial markets is a big success. The Financial Services Action Plan (FSAP), presented by the European Commission in 1999, has resulted in real integration at the top of the wholesale, business to business market. Stock exchanges are merging, banking and insurance groups form large financial conglomerates.

Consolidation and increased capitalisation go hand in hand with the development of ever more complicated financial products. Besides the ‘simple’ and well known equities and bonds market, complex products such as credit risk derivatives evolve, about which even the most sophisticated financial regulators like the European Central Bank and the UK’s Financial Services Authority (FSA) admit that they do not completely understand and oversee the risks. Alternative investment via unregulated hedge funds and private equity funds is booming.

Is the patchwork of nationally and, often, still sector-wise fragmented financial supervisors in Europe able to cope with these rapid and dynamic developments? Are they prepared to deal with serious crises and collapses that will emanate across national and sector borders? Who is responsible for the protection of the Hungarian farmer with a bank account at the branch of an Austrian bank if the Vienna mother company gets in trouble? Will the Austrian central bank also bail out the concerned Hungarian clients, or will it point to the Budapest supervisor, who will undoubtedly object that it has not been able to oversee fully the risks and acts of the mother bank?

Such questions lead us to the issue of the architecture of European financial markets supervision. In the field of regulation the FSAP has streamlined and harmonised the rules all over Europe by an ambitious set of directives and regulations adopted in the last five years. The implementation and enforcement of this legislation in the member states though is pretty uneven. Some member states have strong independent cross-sector supervisory bodies with first class professionals and an advanced toolkit of instruments. Others are fragmented and lack the powers to really counteract systemic crises or financial fraud and misbehaviour. I fully support the European committees of securities, banking and pensions supervisors who co-operate intensely with the central banks to co-ordinate and converge prudential supervision. Some 20-25 large financial conglomerates in the European market incur the bulk of the systemic risks. They too would prefer to have a single contact-point and single reporting standards. Recent developments such as the upcoming mergers of stock exchanges and the possible creation of an alternative platform for securities trading by some investment banks call for stronger ex ante competition and behavioural supervision. If risks are not supervised adequately, consumers and other end-users such as small- and medium-sized enterprises and starting entrepreneurs will pay the price. Financial integration is about more than giant bonuses paid out in the City of London. We need to discuss a move from restricted co-operation within the European committees of supervisors towards a strong European system of supervisors. This would guarantee the input of all participants, whereas a continuing fragmented and unequal situation of large home supervisors and weak host supervisors would lack the necessary monitoring power. While good traditions of supervisory practices for local and regional players with a strong emphasis on consumer protection and education should continue, we need to act now to avoid financial crises of European proportion.

In my new report on the follow-up of the FSAP I hope to get support from my colleagues on the economic and monetary affairs committee to warn against those risks and to sketch the perspective of a stronger public grip on the risks in the financial markets, which might easily wash away the well acknowledged successes of the FSAP: market integration and lower costs of capital and financial transactions.

• Dutch Socialist MEP Ieke van den Burg is a member of the Parliament’s committee on economic and monetary affairs.

By Wolf Klinz

The integration of the European financial markets is a success story. Since the introduction of the Euro in 1998 and the adoption of the Financial Services Action Plan (FSAP) in 1999, Europe’s financial markets have become more integrated and cross-border trading and investments have risen substantially. Wholesale and retail investors can choose from a larger range of products and services at lower prices. Moreover, the EU has become more attractive for issuers and investors coming from outside Europe. Asian companies often decide to list at a European stock exchange in order to avoid the regulatory environment in the United States and to benefit from a more principles-based regulatory approach in Europe. In this context, better regulation is of high importance. Open consultations and impact assessments before any final legislation have proven to be useful.

However, fully integrated financial markets are not yet a reality. While substantial progress has been made in establishing a single market in wholesale financial services, there still remain several barriers to the integration of retail markets (for example high charges for cross-border card payments and difficulties in opening a bank account in another EU country). Reforms are needed in particular in the field of consumer protection, contract and civil law. Equally important are strong rules on supervision. Although a legal framework has been established in many sectors, the concrete implementation and supervisory practices differ from member state to member state. EU regulatory safeguards should aim at being state-of-the-art in order to contain systematic or institutional risks potentially resulting from rapidly changing market realities. In 2006, a crisis simulation exercise took place which demonstrated that we do not yet have the supervisory tools to cope effectively with a financial crisis.

Hence, member states will now have to work on the lessons learnt from this exercise. The responsibilities of the member state of origin and the host member state respectively have to be clarified and optimised. Co-operation between the supervisory authorities must be faster, more consistent and more productive from a European point of view and should thus contribute to the development of a European supervisory culture. In the long run, member states should establish an integrated system between supervisory authorities - similar to the European System of Central Banks (ESCB). In addition, the EU institutions should continue to debate on comitology reform and should take the necessary measures to develop cross-sectoral regulatory co-operation.

Financial crises also have an external dimension. At an international level, the EU has been seeking and still seeks to take a leading role in setting standards, for example in the field of accounting, auditing and capital requirements. The European Commission has developed a dialogue on financial markets with the US and is trying to extend the co-operation to include other countries such as Japan, China, Russia and India. The German presidency of the EU and its successors should try to give more emphasis to these dialogues.

If the EU wants to defend or regain its competitiveness with the US and other dynamic economic regions while preserving its high level of wealth, it has to commit itself to a true single market abolishing all excessively protectionist measures.

Integration of financial markets has to go along with more supervisory convergence, co-operation and efficient risk-management mechanisms. But European citizens should not draw the false conclusion that it is possible to regulate risk entirely out of the market. Market opportunities and risks are two sides of the same coin.

• German Liberal MEP Wolf Klinz is a member of Parliament’s committee on economic and monetary affairs.

Two MEPs discuss the integration of European financial markets