Eurofi had their annual conference in Gothenburg, Sweden last month.
The meeting was themed: what priorities for the incoming EU authorities in the light of the financial crisis? and saw a number of common themes recur in discussions by key policymakers, officials and industry figures.
The official report has just been released (download here), and here is their summary of the meeting:
While it is clear that the worst of the crisis is behind us, “we are not out of the woods yet”.
This is in large part because one of the main underlying contributors to the crisis has not gone away: the existence of moral hazard. Indeed, it has probably got worse in the financial system because of the implicit acknowledgement that some institutions are too big or to interconnect to fail has in many cases become explicit.
This is an issue not just for the financial authorities but also for the single market. A total of €3 trillion has been injected into the EU’s financial sector, but it has been distributed unevenly, creating potential distortions of the competitive landscape.
For this reason, as well as the massive burden placed on public finances, it is important to start thinking about an exit strategy that can extricate governments from some of Europe’s largest financial groups.
However, the financial sector faces enormous issues of trust – the public has been appalled by what’s happened. Many market participants have lost faith in each other, partly because the value of so many impaired assets remains so uncertain.
The debate continues over whether banks will be forced to narrow their activities – with influential figures such as Paul Volcker, economic adviser to President Obama, speaking out in favour of restrictions while many in the industry argue that it was not business models that were to blame for the crisis but poor execution.
There is clear consensus that the crisis revealed unsuspected systemic risks and that these must be dealt with. Self-regulation has been thoroughly discredited and new regulation is on the way or has already been introduced in an attempt to harness the momentum for change that much fear is running out as the crisis recedes.
It is agreed that regulation and supervision of individual financial entities is not enough – there must be oversight of macro systemic risks as well and this oversight must be linked to microprudential regulation, not just in the EU but on a global basis.
The industry is clearly unhappy at the weight of new regulation. Jacques de Larosière warns that there are dangers of unintended consequences from the overlapping of the various initiatives. Moreover a system of ratios that would be to some extent disconnected from effective risks would do nothing to address the causes of this crisis. These measures will have a disproportionate impact on Europe where bank intermediation is far more developed than in the US.
However, policymakers have become more confident in their assertions that there are restrictions to the sector’s freedom that are justified for the good of the system as a whole.
Nonetheless, it is recognised that significant challenges remain in implementing the regulation.
An unprecedented level of communication and co-operation will be necessary to ensure that overkill and regulatory arbitrage are avoided.
There must also be a re-examination of the financial system, of its role and size, some participants said. The world faces a range of significant, long term challenges such as climate change, scarcity of natural resources and ageing population. Dealing with these requires a more long term outlook from investors that has been lacking in recent years and to tackle obstacles long term investment has to face up.
The regulatory framework of OTC derivatives and alternative investment funds (AIFs) is also being reviewed with the objective to bring additional safety to the financial system. The industry however points out that constraints that may be unnecessary from a risk mitigation perspective and potentially damaging to customer needs should be avoided and that the specificities of the products concerned should be well taken into account. The risk management processes of management companies should also be revised in light of the financial crisis and the responsibilities and liabilities of the players operating along the fund value chain should also be clarified.
Finally, the on-going actions to improve the efficiency and competitiveness of cash equity infrastructures (MiFID and the Code of Conduct) should not create new risks particularly when implementing interoperability between CCPs.
As Jean-Claude Trichet, President of the European Central Bank, said: “While a lot has been achieved, a lot remains to be done.”