EU rejects calls for further regulation on financial markets


Responding to questions from MEPs about the recent financial turmoil, ECB chief Jean-Claude Trichet and Commissioners McCreevy and Almunia highlighted the need to improve the transparency of financial markets rather than taking further regulatory action in order to avert similar crises in the future.

Responding to calls from a number of MEPs for further regulation of financial markets (EURACTIV 06/09/07), ECB President Jean-Claude Trichet and Internal Market and Economic Affairs Commissioners Charlie McCreevy and Joaquín Almunia stressed that greater transparency regarding increasingly complex financial instruments and better risk-management by banks and financial instruments would suffice to restore confidence in the money markets. 

The sooner confidence is restored, the less impact the crisis would have on the EU’s real economy, stressed Almunia. 

He gave MEPs the latest forecasts for economic growth, which the Commission has cut slightly – by 0.1% – compared with previous predictions in May. He explained that ‘downside risks’ had increased with the financial turmoil but that the fundamentals of the EU economy remained sound. 

Commenting on the ECB’s decision to leave interest rates unchanged (EURACTIV 07/09/07), Trichet stressed that “risks to price stability remain on the upside over the medium term”, suggesting that a further rate rise is still on the cards once financial markets have calmed down. 

When one MEP pointed to the apparent paradox of injecting large amounts of cash into the markets to ease tensions and facilitate short-term borrowing operations while also leaving the door open to further rises in interest rates, Trichet responded that the ECB’s primary mandate of maintaining price stability had to be kept separate from its responsibility for ensuring that money markets function properly. 

“If we were blurring these responsibilities and if I was telling you that because of the short-term money market turbulences we put into question our responsibility of delivering price stability in two years time…we would deteriorate the present situation of the markets,” he said. 

ECB President Jean-Claude Trichet said that the ECB had repeatedly warned that markets were showing an "under-appreciation of risks in general". 

He blamed much of the crisis on the "overwhelming" complexity of some of today's financial products and argued that both those selling such products and those buying them had a responsibility to understand and manage the risks involved. 

Further improvements in regulators' surveillance activity will be needed to ensure this, he said, adding that the Basel II arrangements on banking would help, but not solve all the problems. 

He stressed that the crisis should be seen as a wake-up call for markets to become more open about the risks they take on. "The fact that there is a suspicion that not all financial institutions are displaying their real risk and potential losses creates this sentiment of absence of confidence," he said. "We clearly have to improve this issue because a return to confidence is absolutely of the essence between the institutions themselves." 

Finally, he denied that the ECB's refinancing operations had served to let banks which had behaved recklessly off the hook, saying: "Central banks and certainly the ECB will not bail anybody out. We lent at interest, on a 24 hour basis, with collateral. We are not pouring money into bad behaviour. We are permitting the market to function properly so that those who behaved well do not end up being punished by the turbulence. Those who behave improperly will have to pay the price." 

Economic and Monetary Affairs Commissioner Joaquín Almunia expressed confidence that "the sound economic fundamentals of the European economy will help weather the current financial turmoil.” But, he warned that the expected “pronounced slowdown in the US economy” would have “negative consequences for our growth figures”. He concluded that“the increased risks to the outlook require governments to hold steady to the reform and budgetary consolidation agenda, precisely to enhance the resilience of the EU economy". 

Internal Market Commissioner Charlie McCreevy again rebuffed calls for a regulatory response from the Commission, warning that "fast policy action is likely to be a bad reaction". "We believe that a 'light touch', principle-based regulation is the best approach for the financial sector". 

He nevertheless added that improving information disclosure, risk monitoring and market surveillance was indispensable, adding that this was already the aim of the reformed framework for financial markets, including the Basel II (banking), MIFID (financial instruments) and Solvency II (insurance) projects, which are not yet in operation. 

However, he stressed: "We should not delude ourselves into thinking that Basel II or MiFID would have prevented the present crisis. It is worth recalling that the crisis was born out of risky loans being repackaged and sold to institutional investors some of whom at least did not appear to fully understand the nature of the underlying risk." 

He criticised the role of Credit Rating Agencies in the crisis: "They have been very slow in down-grading their credit ratings, their methodology has been weak and not very well explained. They also face a potential conflict of interest between providing an objective risk assessment and advising institutions on how to structure instruments. We need to know what agencies do and what they don't." 

He concluded by saying: "We should be glad that the present financial supervisory framework has stood up to the strains of recent weeks… The current framework has been tested, and has held up well." 

But some MEPs continued to insist on the need for regulatory action. Ieke van den Burg, coordinator of the Socialists on the committee, said: "We need structural measures to prevent crises like this being repeated and proliferating…The [European Central] Bank's role cannot be limited to providing emergency aid. It is time now for Europe to take better control of the situation and put in place measures to improve regulation and supervision on the financial markets." 

After financial markets across the globe went into a tailspin following the US sub-prime mortgage crisis in early August, the European Central Bank (ECB) reacted with a massive injection of funds - around €300 billion - into European financial markets, in order to fend off a possible liquidity crisis and ensure cash remained available for companies short-term borrowing operations. 

As the turmoil raised fears over economic slowdown and job losses in the EU, the ECB - which had been widely expected to raise its main interest rate from 4% to 4.25% in order to limit potential inflation caused by steady growth in the eurozone – decided to leave interest rates unchanged (EURACTIV 30/08/07)

ECB President Jean-Claude Trichet was summoned for an extraordinary hearing, on 11 September 2007, by the chair of Parliament's Economic and Monetary Affairs Committee, the socialist Prevenche Bères, to discuss the recent developments and the ECB's actions following the crisis. 

  • 8 October 2007: Mr Trichet should come before the committee again for the regular "Monetary Dialogue", which normally takes place four times a year. 

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