European Commission President José Manuel Barroso has asked a panel of experts to suggest “far-reaching proposals” to improve cross-border securities regulation within the European Union. The aim is to fix failings exposed by the credit crunch.
The EU already has the Committee of European Securities Regulators, charged with improving supervision, but “more is clearly needed,” Barroso said recently. “We need to remove the mismatch between European financial markets on the one hand, and purely national supervision on the other.”
Jacques de Laroisière, former managing director of the International Monetary Fund, will lead the group. Barroso has told him to produce a report by early next year.
The Commission says that while the EU has more than 8,000 banks, just 44 cross-border institutions hold two-thirds of total bank assets—and they operate in up to 15 member states.
“Obviously a situation where markets are integrated, and supervision fragmented among national supervisors, gives rise to extra risk and makes cross-border intervention difficult,” the Commission said in a briefing note.
The Commission has already published plans to create what it calls “colleges” of supervisors as part of its proposed reform of insurance regulation. But some member states have resisted the move.
“The current crisis shows that Europe may need to go further,” the briefing note said. “When a cross-border bank active in a few member states is in trouble, it has proved possible, though not easy, to find solutions. This could be even more difficult in the case of a bank active in many member states.”
Barroso
Barroso said that once financial markets were back on their feet, “We must ensure that they function properly so as to serve citizens and businesses rather than themselves.”
Proposed regulations include measures on executive remuneration, short-termism and “perverse incentives,” Barroso said. “There must be no more business as usual. We must rethink regulatory and supervision rules for financial markets, including banks, mortgage lenders, hedge funds, and private equity.”
Accounting Body Blames Crunch on Governance
The principal cause of the credit crunch was not sub-prime mortgage defaults but a failure of corporate governance at banks, according to international accountancy body the Association of Chartered Certified Accountants.
Bad governance encouraged excessive short-term thinking and a blindness to risk, the ACCA says.
“The fundamental responsibilities of a corporate board—to provide strategic oversight and direction, to ensure a strong control environment, and to challenge the executive—appear to have been inadequately discharged,” ACCA president Richard Aitken-Davies says.
“Remuneration and incentive packages have encouraged short-term thinking. We need to ask what inhibited banks‚ boards from asking the right questions and understanding the risks that were being run by their managements.”
But the accounting profession should be in the firing line too, Aitken-Davies adds: “Accounts preparers, standard setters, and auditors must all learn from the last year. It is clearly unacceptable that poor-quality loans can be sliced, diced, and parceled up with an AAA sticker and overvalued on banks‚ balance sheets as a consequence.”
The ACCA has published a policy paper, “Climbing Out of the Credit Crunch,” setting out some of the reforms it wants to see. They cover corporate governance, compensation, and incentives; risk identification and management; and accounting and financial reporting and regulation. “Accepted practices in all these areas need to change to avoid future failures,” it says.
It wants risk-management departments in banks to have greater influence and power, a clearer message from regulators about what they are trying to achieve, and better training for managers so they can understand complex products and business models.
Brit Regulator Fires Warning on CEO Pay
The British Financial Services Authority has published a list of good governance principles on executive pay and is visiting every financial firm doing business in the London to check that they are in compliance.
The move follows FSA concern about the role that executive pay practices have played in the current financial market turmoil.
In a “Dear CEO” letter sent last week to all financial firms operating in the city, FSA Chief Executive Hector Sants said that in many cases executive pay structures have been inconsistent with sound risk management.
“It is possible that they frequently gave incentives to staff to pursue risky policies, undermining the impact of systems designed to control risk, to the detriment of depositors, creditors, and ultimately taxpayers,” he wrote.
Sants
Sants said the FSA did not want to get involved in setting pay levels, but warned: “We want to ensure that firms follow remuneration policies which are aligned with sound risk-management systems and controls, and with the firm’s stated risk appetite.”
His letter told firms to review their compensation practices. If they were not in line with sound risk management, “that is unacceptable [and] immediate action will be required,” Sants said.
Examples of bad practice described in the letter include: a failure to take risk or capital cost into account; employee bonuses calculated solely on the basis of financial performance (they should also reflect other performance measures, such as risk-management skills and adherence to company values, says the FSA); and business areas determining pay deals for risk and compliance staff.
More generally, the FSA wants to see pay packages that include a clear link to performance and an element of deferred compensation. It plans to visit every London-based firm to talk about executive pay by the end of the year. It will then publish a report on pay practices and areas where it wants improvement.
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