Simon Lovegrove

On 25 February 2009, the High Level Group on Financial Supervision in the EU chaired by Jacques de Larosière published its report on the financial crisis. Chapter 4 of the report discussed global repair and began by stating that global economic and financial integration had now reached a level where no country or region could insulate itself from developments elsewhere in the world. This pointed to the need for a co-ordinated, global policy response not only in the area of financial regulation and supervision, but also in the macroeconomic and crisis management field.

Since of the publication of the de Larosière report there have been few successes regarding international agreement on regulatory issues (notably Basel III but see below). For example, Europe has been in negotiations with the United States for some time over the differences between the proposed European Market Infrastructure Regulation (EMIR) and the Dodd Frank Act. When EU Internal Market Commissioner Michel Barnier attended the Brookings Institute think-tank in Washington DC last June he warned that “incoherence and inconsistency between our [EU and US] rules will have negative consequences for our markets”.

However, the differences are not just isolated to instances involving the United States. For example, the European Commission has recently published its CRD IV package of proposals that are intended to implement the Basel III requirements. However, the proposals contain a number of additional requirements and the Commission has openly stated that Basel III is not law but “a configuration of an evolving set of internationally agreed standards that now need to fit in with existing EU (and national) laws and arrangements”.

Notwithstanding this the CRD IV package does, however, signal that Europe as a region is moving ever closer to having a unified set of regulatory rules. In June 2009 the European Council called for the establishment of a “European single rule book applicable to all financial institutions in the Single Market”. The purpose of the single rule book is to provide a single set of harmonised prudential rules which all institutions in the EU have to respect. The CRD IV package consists of a draft Directive and a draft Regulation. The draft Regulation is directly applicable and sets out, among other things, a single set of capital rules. I suspect in the coming months and years we will see the Commission use Regulations more and more.

It is also worth mentioning the new European Supervisory Authorities which came into force at the start of the year. One of these authorities, ESMA, already directly regulates credit rating agencies and it is expected that it will soon regulate trade repositories. ESMA also has a role in drafting EU legislation, in the form of technical standards and this will especially important with key pieces of EU legislation like EMIR, the MiFID and MAD reviews and the Alternative Investment Fund Managers Directive.

As noted by the de Larosière report developing consistent regulatory rules across a region like Europe will not solve the problem. A coordinated global policy response is needed. At its July meeting the Financial Stability Board agreed to develop a global framework for monitoring and evaluating the implementation of agreed financial reforms and international standards. It will be interesting to see how this framework develops and whether it will have any real impact. Something is clearly needed.