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BackLast week, the European Parliament in Strasbourg adopted an important document, which is supposed to ensure that the events prior to the outbreak of the financial crisis do not repeat themselves. This concerns banks that are among the major triggers of the financial and economic crisis and which have succeeded in avoiding the already very generous and thinned out supervisory rules by building “creative” constructions, thereby causing one of the most severe economic and social crises of the post-war era. There is indeed a lot at stake under the abridged title Change of the “Capital Requirements Directive” (CRD).
Cobbled together (too) quickly: new Directive will soon need to be revised again
The changes of the CRD, based on a report of Othmar Karas (EPP-ED, AT), which have now been adopted in the plenary assembly of the Parliament, will neither alleviate the impact of the crisis nor will the last word in this matter have been spoken. The draft of the Commission originates in fact from the beginning of October 2008 and is therefore not a direct reaction of the Commission to the breakout of the financial crisis, whose full dimensions it had not recognized by this time. Only the full impact of the crisis turned an already ongoing “routine” revision of two previous Directives into a welcome product for the Commission to signal to the public its speed in dealing with the crisis. Due to the fact that the Directive, even if it has now been adopted, has still to be adopted by the Member States, one cannot expect the Directive coming into force before 2011. It will at best be an element to improve the avoidance of future crises. Added to this is the fact that a whole number of “review clauses” has already at this point been built into the new CRD, which would indicate that it in all probability has to be changed or amended in some important points.
Bank supervision - not really a great success
Nevertheless the text deals with some important points: it concerns the future supervision of banks. What has been demonstrated before and during the crisis is the fact that the supervision of major banks cannot be successful if the Member States only keep watch in their own backyard and do not exchange any information with the supervisory authorities of other Member States, whilst the banks have long been involved in cross-border activities. The supervision of the banks must therefore be clearly Europeanised. The present adoption therefore also recommends “supervisory colleges, in which the national authorities should work closer together. It remains doubtful what would happen if the authorities involved in these councils would disagree. This question is simply ignored by the current draft, which just asks the Commission to submit recommendations.
At last rules for large exposures
Another important point concerns the regulation of large exposures. If a bank lends a customer an amount that is too high, it will begin to struggle if the customer suddenly goes under. It is characteristic for the deregulation craze of the past decades, which also had been considerably promoted by the Commission and many Member States under the motto “Completion of the Internal Market”, that this simple fact would only now lead to consequences. In future, a bank may not lend more than 25 percent of its own funds to individual customers, whereby EUR 150 million is the absolute upper limit in any circumstance.
Triggers of the financial crisis so far completely unregulated
“Obligations to exercise due diligence” shall now also be prescribed for the by now notorious “securitizations”. A coy reference to the fact that until now no diligence has been exercised and that in reality there were absolutely no rules for this sector, which had such an impact on the financial crisis. At first glance this is a relatively simple idea: various types of debt are thrown together, bundled and sold as a security. For decades the financial jugglers became increasingly more ingenious, the constructions more and more ludicrous, the amounts involved progressively more gigantic. This system seemed to work for a long time because greed made investors believe that it would. There were no rules, and anybody demanding them would have been laughed at during the heyday of the deregulation ideology. Today, we know that in the end nobody had been any longer in a position to check whether the debts, which were thrown together and sold, were indeed based on actual securities and real values. Many, however, were aware of the fact and those, who - such as the rating agencies - pretended to know and issued papers with a “clean bill of health”, have failed. In the meantime, the Member States and the Parliament have at last imposed binding rules on the rating agencies; with respect to securitizations, they have now asked the Commission to put forward additional recommendations by the end of the year.
Retention in case of securitizations: clearly too little for Germany
One point, which remained controversial to the end, concerns yet another aspect of securitizations. Banks, selling securitized products shall in future keep 5 percent of the entire value of the securitized exposure as retention on their own balance sheets. This shall motivate the financial institutes to consider a situation more careful before selling any bundled products the risk of which they may not be sufficiently aware of. In its first draft, the Commission had recommended 15 percent and Germany even 20 percent. In the end, the financial industry managed to successfully spur their lobby machine into action and managed to beat 20 percent down to 5 percent. One reason why this regulation was met with opposition by the German MEPs and resulted in the rejection of the Report by the Germans. In the end and in spite of this, the Karas Report was accepted with 454 Yes votes, 106 votes against and 25 abstentions.
All in all a long overdue step in the right direction that, however, comes far too late and will not help the working population in their current difficult situation; it does, however, make painfully clear what happens when one believes that it is best that politicians leave the markets to themselves.
The changes of the CRD, based on a report of Othmar Karas (EPP-ED, AT), which have now been adopted in the plenary assembly of the Parliament, will neither alleviate the impact of the crisis nor will the last word in this matter have been spoken. The draft of the Commission originates in fact from the beginning of October 2008 and is therefore not a direct reaction of the Commission to the breakout of the financial crisis, whose full dimensions it had not recognized by this time. Only the full impact of the crisis turned an already ongoing “routine” revision of two previous Directives into a welcome product for the Commission to signal to the public its speed in dealing with the crisis. Due to the fact that the Directive, even if it has now been adopted, has still to be adopted by the Member States, one cannot expect the Directive coming into force before 2011. It will at best be an element to improve the avoidance of future crises. Added to this is the fact that a whole number of “review clauses” has already at this point been built into the new CRD, which would indicate that it in all probability has to be changed or amended in some important points.
Bank supervision - not really a great success
Nevertheless the text deals with some important points: it concerns the future supervision of banks. What has been demonstrated before and during the crisis is the fact that the supervision of major banks cannot be successful if the Member States only keep watch in their own backyard and do not exchange any information with the supervisory authorities of other Member States, whilst the banks have long been involved in cross-border activities. The supervision of the banks must therefore be clearly Europeanised. The present adoption therefore also recommends “supervisory colleges, in which the national authorities should work closer together. It remains doubtful what would happen if the authorities involved in these councils would disagree. This question is simply ignored by the current draft, which just asks the Commission to submit recommendations.
At last rules for large exposures
Another important point concerns the regulation of large exposures. If a bank lends a customer an amount that is too high, it will begin to struggle if the customer suddenly goes under. It is characteristic for the deregulation craze of the past decades, which also had been considerably promoted by the Commission and many Member States under the motto “Completion of the Internal Market”, that this simple fact would only now lead to consequences. In future, a bank may not lend more than 25 percent of its own funds to individual customers, whereby EUR 150 million is the absolute upper limit in any circumstance.
Triggers of the financial crisis so far completely unregulated
“Obligations to exercise due diligence” shall now also be prescribed for the by now notorious “securitizations”. A coy reference to the fact that until now no diligence has been exercised and that in reality there were absolutely no rules for this sector, which had such an impact on the financial crisis. At first glance this is a relatively simple idea: various types of debt are thrown together, bundled and sold as a security. For decades the financial jugglers became increasingly more ingenious, the constructions more and more ludicrous, the amounts involved progressively more gigantic. This system seemed to work for a long time because greed made investors believe that it would. There were no rules, and anybody demanding them would have been laughed at during the heyday of the deregulation ideology. Today, we know that in the end nobody had been any longer in a position to check whether the debts, which were thrown together and sold, were indeed based on actual securities and real values. Many, however, were aware of the fact and those, who - such as the rating agencies - pretended to know and issued papers with a “clean bill of health”, have failed. In the meantime, the Member States and the Parliament have at last imposed binding rules on the rating agencies; with respect to securitizations, they have now asked the Commission to put forward additional recommendations by the end of the year.
Retention in case of securitizations: clearly too little for Germany
One point, which remained controversial to the end, concerns yet another aspect of securitizations. Banks, selling securitized products shall in future keep 5 percent of the entire value of the securitized exposure as retention on their own balance sheets. This shall motivate the financial institutes to consider a situation more careful before selling any bundled products the risk of which they may not be sufficiently aware of. In its first draft, the Commission had recommended 15 percent and Germany even 20 percent. In the end, the financial industry managed to successfully spur their lobby machine into action and managed to beat 20 percent down to 5 percent. One reason why this regulation was met with opposition by the German MEPs and resulted in the rejection of the Report by the Germans. In the end and in spite of this, the Karas Report was accepted with 454 Yes votes, 106 votes against and 25 abstentions.
All in all a long overdue step in the right direction that, however, comes far too late and will not help the working population in their current difficult situation; it does, however, make painfully clear what happens when one believes that it is best that politicians leave the markets to themselves.