How should banks be regulated in future?

The deliberations started with an exchange of views with Giovanni Carosio, the new Chairman of the Committee of European Banking Supervisors (CEBS). He explained the priority areas of the Committee for 2010: the new European financial architecture, which was recommended by the European Commission (EC) with the objective to transform the CEBS into a European Agency (European Banking Authority EBA with seat in London) with increased powers; cooperation in the reform of the Capital Requirement Directive for banks within the scope of the Basel Committee on Banking Supervision until the end of the year; as well as working on a EU framework for cross-border crisis management in the banking sector. The new US proposals were at the centre of the discussions with the MEPs. The German MEP Udo Bullmann of the Social Democrats spoke of a great unrest in the capitals over banking regulations; no appropriate form had been found yet. Carosio commented that a separation between commercial banks and investment banks, as suggested by Obama, would not be the best way for Europe. A better solution would be to increase capital requirements. With regard to the question whether banks should not exceed a certain size, as they would become a systemic risk in case of insolvency, forcing the state to bail them out (“Too big to fail”), Carosio came out in favour of a model, where capital requirements would increase parallel to the bank growing. This approach would be better than to limit bank sizes.

“Banks do God's work on earth “

Following the initial exchange, MEPs debated amendments to Capital Requirement Directive with regard to trading book transactions, re-securitizations and the Supervisory Review of Remuneration Policies (CRD 3). The Parliamentary rapporteur Arlene McCarthy voiced general criticism. The EP and the EU would be lagging behind the debate; the EU should - as it did last year in case of the rating agencies - lead and not just react. The general problem would be that the capital adequacy of investment of the banks prior to the outbreak of the crisis, was at a historically low level of 3 percent. Events with regard to remuneration are also moving fast, as one could see by the examples of France, Great Britain and the Netherlands. Strong criticism came also from the Austrian EPP politician Othmar Karas. There were still many open questions. “We implement Basel II, talk about CRD 3, 4 and 5 and are always lagging behind the Basel Committee”, said Karas. Re-securitizations of the banks had to be underpinned with more capital. There should be no bonus without malus. The liberal MEP Wolf Klinz criticised that Europe and the USA would not act in a parallel fashion. He criticised the statement of Goldman Sachs CEO Lloyd Blankfein, according to whom “the banks do God’s work on earth” and would “have no social responsibility”.

Spanish Presidency for more economic-political coordination

An exchange of opinions with the Spanish Presidency was also on the agenda. Elena Salgado, the Spanish Deputy Prime Minister and Minister of Economy and Finance outlined the plans for the next 6 months in the economic sector. Better coordination of economic policies, ambitious exit strategies and new European financial architecture are all on the Spanish To-Do-List. With regard to the controversial proposal of the EC on hedge funds and private equity, the Spanish are aiming to reach an agreement between the Member States within the next weeks; the same applies to the Capital Requirement Directive CRD 3.

Parliament takes an active role on derivatives

New developments are also on the cards for derivatives. In expectation of the announced concrete draft proposal of the EC, the ECON is working on an initiative report. The rapporteur is the German EPP MEP Werner Langen. He once again explained the initial situation. One would differentiate between derivatives, which are traded on stock markets and those, which are not traded on stock markets (so-called “Over the Counter” or OTC derivatives). OTC derivatives would pose a particular problem as they were not subject to supervision. In June 2009, the trade volume with OTC derivatives was 605 trillion US$; that was 10 times the value of the gross world product, said Langen. Here too, international cooperation would be important. It is expected that the USA will introduce regulations by the middle of the year. The EU Member States are currently in the process of discussing technical details. Langen announced that the EP was planning to organise an extensive hearing prior to the submission of a legal text by the EC. The draft report of Langen on derivatives is expected for 22nd February. Amendment applications may be submitted until 1st March.