North Thanet Liberal Democrats

The work of ECON in the face of financial crisis

Thank you for inviting me, I am pleased to be here and I will try and give you a flavour of where we have got to in the Parliament on a range of legislative issues, and also some forward looking thoughts on topical issues.

No speech these days can start without mentioning the crisis, and in the last few weeks we have seen that the crisis is like a virus - no sooner do you think you have the vaccine than it mutates to a new form, the latest mutation being in sovereign debt. We should not have been surprised; there were many predictions of this long ago. Like the flu virus we did not know who would catch it first, but we did know vulnerabilities.

And our responses have not been optimal. In the context of sovereign debt, some of the more extreme and populist rhetoric relating to bond market movement goes so far as to suggest any moving of money to a safer position is speculation and must be stopped. This denial of underlying fundamentals makes markets more nervous, not less. As I said on Tuesday at the Brussels Economic Forum, markets can sniff out excuses and inadequate responses like a pig hunting truffles. Markets will not be satisfied at us giving an aspirin for symptoms - be that ratings or spreads - when the underlying deficit is relegated to minor billing.

Stepping back, we can see that the financial crisis and the inadequacies of financial supervision and regulation have brought suspicion on markets in general, to the extent that the single market itself is under threat.

We have taken for granted the benefits of the single market, indeed many have forgotten its principles, and after slipping backwards on the project for some time it is in jeopardy. I fully support the excellent review by former Commissioner Mario Monti and urge everyone, in EU institutions and in national parliaments and governments, to take it to heart.

Returning specifically to financial markets, we were already scheduled to have reviews of many directives, and put together with the response to the crisis this means a fundamental review in the areas of trading, risk management, clearing and settlement. This could well have a profound effect on incumbents, investors and the whole dynamic of markets.

We must decide whether mandatory trading venues give rewards that offset the implications for competition and pricing. When increasing transparency, we should not lose sight of its purpose - what is the objective and who is it for. Market integrity, valuation, price formation and supervision may not all need the same.

Above all, we must keep clear about who we are serving.

First and foremost - even more so when we are hungry and needy for growth - has to be to serve the real economy and create the conditions for investment and an entrepreneurial spirit. We can not afford to get it wrong! If we close ourselves to the world, shut ourselves off from sources of investment capital or have to pay over the odds in consequence, we will be left behind - and the casualty of that will be Europe's cherished social ethos as reflected in the collective social models of the member states.

So, what is the role of the ECON committee right now?

We are well on our way with work on the first wave of the tsunami of legislation on financial services, and that is probably the area of prime concern to most of you. But the ECON committee also has in its remit competition policy, economic and monetary policy and tax, and all of these are working on overtime as well as financial services.

In competition there is the matter of how to unwind from state aid, including divestments by state owned banks, in which of course the state of the market plays a part. On tax, it is very important at a time of deficit to ensure that states can collect their full dues of tax, so cooperation and coordination become more important. And as I have already touched on, the crucial issue of sovereign debt and the response by way of economic governance and monetary policy for the Euro also gives us plenty to do

On tax, competition and economy, our role is mainly consultative, but importantly for economic governance Parliament now has co-decision over multilateral surveillance, and it is expected that some measures under this will come forward from the Commission and Mr Van Rompuy's Task Force.

As far as markets are concerned, the interest is to establish stability. To be successful any new surveillance rules must be strong enough and intrusive enough to spot problems in the future, before they become critical, and strong enough now to obtain good quality information on how member states are getting back onto the right track.

It is absolutely not the time to talk on the one hand about new grand plans on economic coordination, but then find that member states will not even sign up to better audit powers for Eurostat. There is no point in suggesting pre-approval of budgets - then denying access to verify what has really gone on. The answers and the controls are in looking at the books, with decent audit power, and the Parliament will be very insistent on this matter.

If I were to put my cynical hat on, I would even say that other coordination talk in Council without getting on with this matter of audit is a distraction, even an evasion, of a fundamental responsibility. And the market will rumble it!

Turning to financial regulation, the Committee has voted its position on supervision and the AIFM directive. We have concluded a first reading deal on the revision of the prospectuses directive and we are in trialogue negotiations with the Council and Commission aiming for a first reading agreement on the AIFM and the supervision package this summer. CRD 3 now also looks on track to have a chance of a first reading conclusion before the summer break, and in that we aim to incorporate the modifications currently being worked on in the Basle committee that will address anomalies which have been exposed since the original draft.

Plenty more is coming down the track from the Commission and in preparation we are already working on a report on derivatives that will be voted next Tuesday; a legislative initiative report on crisis resolution is at the amendment stage; a draft report looking into CRD 4 issues was published last week and a further report is in preparation covering a range of trading issues including dark pools, algorithmic trading and tape pricing.

It is probably not appropriate for me to lay out in any detail where I think - or hope - the final compromise deal with Council could be made on the matters in trialogue. Parliament always enters these negotiations having played its cards more transparently than the Council and if we have hidden trumps it is not my place as chair to give them away in advance.

However anyone with a degree of intelligence can go through the Council and Parliament texts and see that in sections which we have both amended either we agree - in which case that is more or less it and we just have to make sure we have the optimum version of text - or we disagree - in which case we have to find a compromise we can both accept, or do a trade off of 'you can win this one if we can win that one'.

Going through the AIFM, I would say that between us we can make a reasonable directive if we choose all the right bits. Third country aspects need a little extra thought but it has been made clear that this will be looked at again carefully.

On the supervision package, the Parliament has introduced some new ideas which have not, as such, been discussed by the Council and this means they have to have discussions quickly, but that process has started.

For example on the European Systemic Risk Board the Parliament has widened the board to include more varied expertise, which seems generally regarded as positive with the caveat that we need to make improvements in the area of safeguarding confidentiality. The Commission are in the process of preparing suggestions to help in this regard. There are other areas which will not be as easy. So far we have agreed there are some 24 priority issues to resolve, but for the main part there are not yet any give and take possibilities on the table. This is not an impasse; it is just early in the process.

Nothing is ever simple of course, and on top of the creation of supervisory architecture we have to deal with the changes in the Treaty which alters the way in which what we used to call comitology is done; when can the Commission make rules by itself and when does the Council and Parliament have to sign it off. At the moment the Council, Commission and Parliament are negotiating an inter-institutional agreement and anything conceded now in trialogue will be held against us in those negotiations.

My part in this is to make sure that the ECON committee always has enough time to consider things carefully. 99% of the time this might not be needed, but I am not prepared to have measures that could make substantial differences, for example to bank capital as happened with an IFRS amendment, having to be approved at such a speed that there is not adequate time for proper scrutiny and gathering expertise.

You may wonder what the relevance of all this is, but the omnibus directives within the supervisory package are full of technical standards that will be adopted under these powers and we only have once to insert safeguards.

Another topical issue is market abuse and short selling. The committee has already voted through an amendment in the AIFM directive that amends the market abuse directive with regard to short selling, so we have made a start even if it was the view of the minority in the committee that it should not be done in that way.

My preference is to legislate from a point of knowledge rather than suspicion and fear. It seems to me that we are making big steps towards a better understanding of derivatives and repository reporting will increase that. There will be instances where bans, limits and other interventions are justified either on a temporary or permanent basis but we should take care to understand the effects.

The recent ban on short selling in Germany has had the effect of making long term investors in the protected shares rush to sell. It is not the first time that harmful unintended consequences have been observed with such bans. There may well have been a political rather than technical reasoning behind Germany's action, but as we now have another experiment in progress, we may as well learn from it.

Finally, I will just say a few words on yesterday's Commission proposal on bank resolution funds.

Although I admit to an instinctive dislike of funds - it seems like a depressing expectation of failure with regard to our legislative changes - this is an idea that I think we can utilise.

If the fund is in fact a relatively small fund, used to intervene and achieve an orderly resolution, then it allows failure without chaos and excessive loss of asset value.

The proposal is not for a bail out, nor is it a repayment for state aid given in the current crisis. So if the sums are not in the bail out league it should not interfere with plans that countries may wish to develop relating to a levy for payback.

My particular take on this, which will not surprise those who heard my speech at the Commission hearing, is that in a single market it is totally unacceptable that at the time of a bankruptcy, with large cross border implications, we can end up with beggar-thy-neighbour being the only resolution mechanism.

We do not have a way of ensuring that at a time of insolvency there is a fair distribution of assets between members of a banking group located in different countries. One way of tackling this could come through the living wills that have been talked about for some time, if they also make proper provision for transfer of assets cross border. However that is not simple, I examined it in some detail in the context of insurance and Solvency 2.

The crunch comes because everything goes back to national insolvency laws and legal interventions can prevent assets being transferred to another country even if, from a fair play or living will point of view, that is where they should go.

So I hope that the network of resolution funds and the bridging concept that it embraces, can also be organised as a vehicle to achieve a fair cross-border resolution of assets.

I think I have now taken my fair share of time, and once again many thanks for inviting me to share some of my thoughts with you.

ENDS