The Financial Crisis and the EU Policy Responses Marie Donnay European Commission – DG Ecfin – Unit C4 The views expressed in this presentation do not

The Financial Crisis The Financial Crisis and the EU Policy and the EU Policy

ResponsesResponses

Marie DonnayMarie DonnayEuropean Commission – DG Ecfin – European Commission – DG Ecfin –

Unit C4Unit C4

The views expressed in this presentation do not The views expressed in this presentation do not necessarily represent those of the European necessarily represent those of the European

Commission.Commission.

2

Outline of this Outline of this presentationpresentation

The crisisThe crisis ChronologyChronology Origin and root causes of the crisis Origin and root causes of the crisis

EU policy responsesEU policy responses Central banks interventionsCentral banks interventions Coordinating Member StatesCoordinating Member States Regulatory responses Regulatory responses Application of state aid rulesApplication of state aid rules Stimulating the real economyStimulating the real economy

Consistency with international reactions Consistency with international reactions (if time allows)(if time allows)

3

The crisisThe crisis

4




Consistency with international reactionsConsistency with international reactions

5

ChronologyChronology

6





7

Origin of the crisis, what Origin of the crisis, what went wrong?went wrong?

Very early in the crisis the following Very early in the crisis the following observations have been made and lead to observations have been made and lead to policy answers:policy answers: Fundamental mismatch: medium-term, illiquid and hard-Fundamental mismatch: medium-term, illiquid and hard-

to-value assets such as credit securities were being to-value assets such as credit securities were being funded by very short-term money market securities.funded by very short-term money market securities.

Absence of accurate and timely information on the Absence of accurate and timely information on the exposures to credit risks undermine investors’ confidence exposures to credit risks undermine investors’ confidence (including off balance sheet and indirect through credit (including off balance sheet and indirect through credit lines to SIVs).lines to SIVs).

How to ensure valuation of an illiquid asset? Difficulty to How to ensure valuation of an illiquid asset? Difficulty to provide a reliable market price.provide a reliable market price.

Discipline in the transfer of risk off balance sheets of Discipline in the transfer of risk off balance sheets of credit institutions, questioning of the “originate and credit institutions, questioning of the “originate and distribute model” (securitization process).distribute model” (securitization process).

Regulatory arbitrage?, liquidity risk management?Regulatory arbitrage?, liquidity risk management? Herding behaviour: losses were magnified as many Herding behaviour: losses were magnified as many

participants tried to exit similar positions simultaneously.participants tried to exit similar positions simultaneously. Role played by rating agencies (incentive structure, Role played by rating agencies (incentive structure,

conflict of interest, rating methods).conflict of interest, rating methods).

8

Origin of the crisis, what Origin of the crisis, what went wrong?went wrong?

Widespread consensus on root causes:Widespread consensus on root causes:

1.1. Ample liquidity; global imbalances; Ample liquidity; global imbalances; search for yield; increasing leveragesearch for yield; increasing leverage

2.2. Financial innovation gone astrayFinancial innovation gone astray

3.3. Excessive pro-cyclicalityExcessive pro-cyclicality

4.4. Flawed incentives structureFlawed incentives structure

5.5. Poor risk managementPoor risk management

6.6. Supervisory deficienciesSupervisory deficiencies

7.7. International governance deficienciesInternational governance deficiencies

EU Policy EU Policy ResponsesResponses

10





11





Coordinated EU Coordinated EU responseresponse

Summit of European G 8 members Summit of European G 8 members (4 Oct.)(4 Oct.)

Ecofin conclusions (7 Oct.)Ecofin conclusions (7 Oct.)« « We agree to coordinate closely in our actions and to We agree to coordinate closely in our actions and to

take into consideration potential cross-border effects take into consideration potential cross-border effects of national decisions. We agree that public intervention of national decisions. We agree that public intervention has to be decided at national level in a coordinated has to be decided at national level in a coordinated framework. »framework. »

EA agreement (12 Oct.): EA agreement (12 Oct.): coordinated coordinated approach aiming at:approach aiming at:

i.i. Ensure appropriate liquidity conditions.Ensure appropriate liquidity conditions.

ii.ii. Facilitate longer maturity funding. Facilitate longer maturity funding.

iii.iii. Allow the provision of additional capital. Allow the provision of additional capital.

iv.iv. Commit to recapitalize distressed banks.Commit to recapitalize distressed banks.

v.v. Apply accounting rules more flexibly. Apply accounting rules more flexibly.

vi.vi. Enhanced cooperation and information exchange.Enhanced cooperation and information exchange.

Coordinated EU Coordinated EU responseresponse

European Council (15/16 Oct.)

i. Endorses the 12 October principles. ii. Commits to preserve financial stability with

measures to protect taxpayers, accountability executives and

shareholders protect other legitimate interests

iii. Supports speedy and flexible European rules.

iv. Establishes a “financial crisis cell”. v. Welcomes the setting up of a high-level

group by the Commission to strengthen supervision.

14


The crisisThe crisis ChronologyChronology Origin and root causes of the crisis Origin and root causes of the crisis Crisis in figures and financial-economic Crisis in figures and financial-economic

outlookoutlook EU policy responsesEU policy responses

Central banks interventionsCentral banks interventions Coordinating Member StatesCoordinating Member States Regulatory responses Regulatory responses Application of state aid rulesApplication of state aid rules Stimulating the real economyStimulating the real economy


15

Regulatory response: Ecofin Regulatory response: Ecofin roadmapsroadmaps ECOFIN agreed roadmaps of actionsECOFIN agreed roadmaps of actions

““On actions taken in response to the financial turmoil” On actions taken in response to the financial turmoil” (Oct. 2007)(Oct. 2007)

““Strengthening EU arrangements for financial stability” Strengthening EU arrangements for financial stability” (Oct. 2007(Oct. 2007

““Review of the Lamfalussy process” (Dec. 2007)Review of the Lamfalussy process” (Dec. 2007) Update on the three roadmaps: Ecofin May 2008Update on the three roadmaps: Ecofin May 2008

Roadmap in response to the financial turmoil Roadmap in response to the financial turmoil focuses of 4 key areasfocuses of 4 key areas TransparencyTransparency (adequacy of disclosure of banks' (adequacy of disclosure of banks'

exposures relating to securitisation and Special Purpose exposures relating to securitisation and Special Purpose Vehicles).Vehicles).

Valuation standardsValuation standards (valuation of illiquid assets and asset (valuation of illiquid assets and asset valuation standards used by non-bank investors).valuation standards used by non-bank investors).

Prudential framework, risk management and supervision.Prudential framework, risk management and supervision. Market functioningMarket functioning (credit rating agencies, securitisation (credit rating agencies, securitisation

models, non-regulated debt markets and the mis-selling models, non-regulated debt markets and the mis-selling of mortgage credit). of mortgage credit).

16

Regulatory response: Regulatory response: Ongoing workOngoing work Accounting: Reclassification of financial Accounting: Reclassification of financial

instruments from the trading book to the banking instruments from the trading book to the banking bookbook

Capital Requirements Directive: Improving the Capital Requirements Directive: Improving the management of large exposures, supervision of management of large exposures, supervision of cross-border banking groups , quality of banks' cross-border banking groups , quality of banks' capital, liquidity risk management and risk capital, liquidity risk management and risk management for securitised products management for securitised products

Deposit Guarantee Schemes: Gradual increase of Deposit Guarantee Schemes: Gradual increase of minimum level of coverage from €20000 to minimum level of coverage from €20000 to €100000 and reduction of payout period€100000 and reduction of payout period

Solvency II: Modernisation of solvency rules for Solvency II: Modernisation of solvency rules for EU insurance companies and strengthening of EU insurance companies and strengthening of supervision of cross-border insurance group.supervision of cross-border insurance group.

Credit Rating AgenciesCredit Rating Agencies

Ensuring adoption of existing Ensuring adoption of existing legislative proposalslegislative proposals

17

Coming forward with further work Coming forward with further work

soonsoon Derivatives and Credit Default Swaps: OTC Derivatives and Credit Default Swaps: OTC

derivatives, industry working group will come derivatives, industry working group will come forward with proposals to mitigate risks on forward with proposals to mitigate risks on CDS by the end of the year.CDS by the end of the year.

Hedge Funds and Private EquityHedge Funds and Private Equity Executive pay: Work on going, report on Executive pay: Work on going, report on

actions expected for the end of the year.actions expected for the end of the year. Reflection on financial services policy and Reflection on financial services policy and

regulatory structures (first half 2009).regulatory structures (first half 2009). De Larosière GroupDe Larosière Group on EU supervision on EU supervision

(Report to Commission by end (Report to Commission by end FebruaryFebruary - - beginning Marchbeginning March):):

Regulatory response: Regulatory response: Ongoing workOngoing work

18






Application of state aid Application of state aid rulesrules

Commission communication: The application of State aid rules to measures taken in relation to financial institutions in the context of the current global financial crisis (13 Oct.).

ECB guidelines for the pricing of the guarantees (20 Oct.).

Commission communication: Recapitalisation of financial institutions in the current financial crisis: limitation of the aid to the minimum necessary and safeguards against undue distortions of competition (5 Dec.).

Commission communication: Temporary framework for State aid measures to support access to finance in the current financial and economic crisis (17 Dec.) (17 Dec.)


17 Member States have announced national schemes aiming at restoring confidence in the markets :

State-backed guarantees for bank liabilities.

Increased access to liquidity from central banks (in some case covered by state guarantee).

Capital injections into financial institutions.

Increase in the level of minimum deposit insurance.

Others have intervened on individual rescue cases


Since the beginning of October to date, 16 plans have been endorsed by the Commission, sometimes by means of several decisions (in chronological order, DK, UK, IE, DE, SE, PT, NL, FR, ES, IT, FI, EL, AT, SL, LV and HU). In parallel, the Commission has approved several individual new rescue plans (Roskilde, Sachsen LB, Bradford and Bingley, Hypo Real Estate, IKB, ING, Dexia, Fortis, Parex, Aegon, SNS Reaal, Carnegie, KBC, Bayern LB, Nord Lb, SdB, Anglo Irish, Kaupthing Bank Finland, Ethias). As of beginning of February , around 10 national schemes (or sub-components) or individual rescue aid are still in the pipeline (for example: PL scheme, BPN, Northern Rock).

22






23

The Commission Action Plan on 29 October presented Europe’s integrated approach along three strands:

• A new financial market architecture at EU level. • Measures to deal with the impact on the real economy.• A global response to the economic slowdown.

The Commission European Economic Recovery Plan, presented on 26 November and adopted by the December European Council, presents more details making use of existing policy instruments and coordination arrangements.

Stimulating the real economy

24

Stimulating the real economyKey elements of the EERP:

Comprehensive approach: • Macroeconomic response using monetary and fiscal policy instruments.• Structural reform measures to complement macroeconomic impulse and enhance resilience (short-term), boost growth potential and pave way for low carbon economy (longer term).

Integrated response is essential to enhance effectiveness (coordinated fiscal impulses). Increased Community financing via EIB and EBRD. Coordinated response at the EU level, at both national and the EU level to secure synergies and avoid negative spill-overs.

25

EERP –Structural policyEERP –Structural policy

(1)(1) Structural reforms that support demand Structural reforms that support demand and enhance resilience in the short run:and enhance resilience in the short run:

Support of consumer purchasing power Support of consumer purchasing power through improved market functioning.through improved market functioning.

Address immediate competitiveness problems Address immediate competitiveness problems through adequate wage setting.through adequate wage setting.

Harness labour markets by facilitating Harness labour markets by facilitating transition and flexible working time.transition and flexible working time.

Reduce regulatory and administrative burden Reduce regulatory and administrative burden (e.g. cut red-tape for business starts).(e.g. cut red-tape for business starts).


26

(2)(2) Structural reforms in four priority areas of Lisbon Structural reforms in four priority areas of Lisbon Strategy to boost growth potential and economic Strategy to boost growth potential and economic sustainability over medium term:sustainability over medium term:

Labour market policiesLabour market policies: promote employability and rapid re-: promote employability and rapid re-integration of unemployed through flexicurity and targeted integration of unemployed through flexicurity and targeted support measures.support measures.

BusinessBusiness: enhance financing for business and cut red tape; : enhance financing for business and cut red tape; promote entrepreneurship.promote entrepreneurship.

Infrastructure and energyInfrastructure and energy: step up investments to : step up investments to modernise Europe’s infrastructure and energy efficiency.modernise Europe’s infrastructure and energy efficiency.

Research and innovationResearch and innovation: increase public and private R&D : increase public and private R&D expenditure; support cleaner technologies (construction; expenditure; support cleaner technologies (construction; ‘green car initiative’; promotion of high-speed internet).‘green car initiative’; promotion of high-speed internet).


EERP –Structural policyEERP –Structural policy

International International dimensiondimension

28


The crisisThe crisis ChronologyChronology Origin and root causes of the crisis Origin and root causes of the crisis Crisis in figures and financial-economic outlookCrisis in figures and financial-economic outlook


Consistency with international Consistency with international reactionsreactions

29

Key players (among others): Key players (among others): International level: FSF, G20, Basel Committee, International level: FSF, G20, Basel Committee,

IASB, G8IASB, G8 EU level: Commission, EP, Council, ECB, 3L3 EU level: Commission, EP, Council, ECB, 3L3

CommitteesCommittees Consensus on the need for reform of Consensus on the need for reform of

international financial architecture (but Europe international financial architecture (but Europe may need to go further)may need to go further) Strengthening transparency, international Strengthening transparency, international

consistency and quality of regulatory standards.consistency and quality of regulatory standards. Enhancing sound regulation.Enhancing sound regulation. Promoting integrity in financial markets.Promoting integrity in financial markets. Reinforcing international cooperation, including Reinforcing international cooperation, including

cross-border co-operation among financial cross-border co-operation among financial supervisors. supervisors.

Working with our Working with our international partnersinternational partners

30

Working with our international Working with our international partnerspartners

G20 Washington Summit, 15 Nov:G20 Washington Summit, 15 Nov: IMF and the FSF to enhance their “efforts to better IMF and the FSF to enhance their “efforts to better integrate regulatory and supervisory responses into integrate regulatory and supervisory responses into macro-prudential policy framework and conduct early macro-prudential policy framework and conduct early warning exercises” .warning exercises” . IMF to “conduct vigorous and even-handed IMF to “conduct vigorous and even-handed surveillance reviews of all countries, as well as giving surveillance reviews of all countries, as well as giving greater attention to their financial sectors and better greater attention to their financial sectors and better integrating the reviews with the joint IMF/World Bank integrating the reviews with the joint IMF/World Bank financial sector assessment programs (FSAPs)” .financial sector assessment programs (FSAPs)” . Role of the IMF in providing macro-financial policy Role of the IMF in providing macro-financial policy advice would be strengthened.advice would be strengthened. Commitment was made by all G20 members “to Commitment was made by all G20 members “to undertake a FSAP report and support the transparent undertake a FSAP report and support the transparent assessments of countries’ national regulatory systems” .assessments of countries’ national regulatory systems” .Next Summit of G20, Berlin, 22 FebruaryNext Summit of G20, Berlin, 22 February

31

Thank you for your Thank you for your attention!attention!

If you have more questions:If you have more questions:

[email protected]@ec.europa.eu

Documents

The Financial Crisis and the EU Policy Responses Marie Donnay European Commission – DG Ecfin – Unit C4 The views expressed in this presentation do not