Merkel, Sarkozy renew call for tougher regulation ahead of G20

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France and Germany renewed their calls yesterday (21 June) for tougher regulation of the global financial sector, ahead of a G20 meeting in Canada later this week.

"Since our first meeting in Washington in 2008, we have made solid progress in implementing the financial regulatory reform agenda," French President Nicolas Sarkozy and German Chancellor Angela Merkel said in a joint letter to Canada's Prime Minister Stephen Harper.

"However, our work is not yet finished. Recent financial turbulences have shown that more needs to be done to ensure financial stability," they added in the letter.

Sarkozy and Merkel called for an international agreement to introduce a levy or tax on financial institutions and for an international accord on a financial transaction tax. 

"Such a levy or tax should be part of a credible resolution framework […] we believe this levy should be risk-adjusted and address the issue of moral hazard with respect to systemically important institutions," they stressed in the letter.

In Berlin, former European Central Bank chief economist Otmar Issing, who counsels Merkel on financial regulation, said he was advising her that a bank charge should be levied to allow banks to build up a risk buffer they could draw on in a crisis.

The two leaders won support for such a tax on financial transactions at the European summit last week (EURACTIV 18/06/10).

Herman Van Rompuy, president of the European Council, stressed at the EU summit that if there is no consensus at the G20 in Toronto, the EU will maintain its position and proceed by applying a levy on all banks.

Tougher call also on derivatives market

Sarkozy and Merkel also called for tougher regulation of the over-the-counter (OTC) derivatives market and said countries also had to tackle the credit default swap (CDS) market in a "coordinated fashion".

The two leaders said bank capital and liquidity should also be strengthened to better prepare the financial system to withstand shocks, although phased in by 2012 to not undermine economic recovery.

As part of this, bank stress tests globally should be disclosed, a move that would be completed in Europe at the latest in the second half of July.

The French-German letter also pushed for more supervision and regulation to improve credit rating processes and asked G20 leaders to seek help from the FSB to assess by June 2011 the need to reduce reliance of the financial sector on external credit ratings.

"The international code of conduct for credit rating agencies should be supplemented to address the impact that communicating and publishing rating changes may have in terms of amplifying financial turbulences and financial stability," the letter said.

Sarkozy and Merkel added all G20 countries should commit to peer reviews "to ensure a level playing field".

G20 leaders should also adopt appropriate sanctions for jurisdictions that still do not comply with internationally agreed standards and the Organisation for Economic Co-operation and Development (OECD) should review the list of areas that did not comply to international standards by November.

"We should also ask the FSB to publish by the end of 2010 a list of jurisdictions that are non-cooperative with regard to internationally agreed prudential standards," the letter said.

Merkel defends savings plan responding to Obama

German Chancellor Angela Merkel yesterday also defended her government's plans to pursue budget cuts after US President Barack Obama preached patience in clamping down on public spending.

Merkel unveiled plans this month for 80 billion euros in budget cuts over the next four years, a package she hopes will bring the structural deficit of Europe's biggest economy within European Union limits by 2013 and revive her political fortunes.

"This is not about a radical savings programme," she told a news conference in Berlin. "If we don't arrive at a sustainable growth path, but instead just generate puffed up growth, we will pay for that with another crisis. That is our deep conviction."

Merkel made her remarks after Obama, in a letter to Group of 20 countries, said public finance problems should be addressed "in the medium term" – a warning that clamping down on budgets should not be done at the expense of economic recovery.

Obama's letter was dated 16 June and released on Friday. Merkel's savings measures, touted as Germany's biggest austerity drive since World War Two, aim to deliver savings of 11.2 billion euros next year and lower a deficit set to exceed 5% of gross domestic product (GDP) this year, according to an official draft of the plan.

(EURACTIV with Reuters.)

The idea of making banks and other financial institutions pay for failings in the sector is not new. A bank levy on banks' liabilities is foreseen to either bail out banks or plug national deficits while a financial transaction tax (FTT) is envisaged for other purposes like financing the fight against climate change.

The Group of Twenty most industrialised countries worldwide (G20) has already called for a framework to prevent and cope with future financial crises on several occasions, with which the private sector would be actively involved.

EU Internal Market and Financial Services Commissioner Michel Barnier has made clear that he will not refrain from taking a tough stance against the private sector if necessary.

In May, the European Commission proposed that banks set up "preventive" funds, primarily financed from their liabilities and possibly their profits, based on the so-called 'polluter pays' principle (EURACTIV 26/05/10).

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