Authors Iain Begg | Gabriel GlÃ¶ckler | Anke Hassel ... - The Europaeum

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prudential regulation – though only limited micro-prudential regulation. 21 The need to regulate applies particularly to financial instruments that have developed systemic significance, such as credit default swaps (CDS). In cases like CDS, over-the-counter bilateral financial transactions should become regulated by a centralised clearing house, with the power to impose trading conditions aimed to ensure systemic stability. The crisis showed how the alleged benefits of securitisation (efficiency, dispersion of risk, etc) can turn into factors of grave financial disruption. The growth of securitised credit intermediation increased systemic risk in a way that was inherent rather than just a matter of bad execution. 22 Therefore re-regulation of securitised credit is needed, focusing on more simplicity, transparency, and real diversification of risk. Off-balance sheet transactions have been a major source of opacity, concealing risks and liabilities and generating grave systemic instability. All transactions should be incorporated in the bank balance sheets, displaying all the risks undertaken by financial companies. The recent crisis has offered useful insights into market failures in the functioning of the globalised financial system. Serious principal-agent problems have characterised the behaviour of banking executives. The emphasis on quarterly reporting skews their investment behaviour heavily toward short-term high-return investments, accumulating sizeable future risks for their company and the system at large. Risk management considerations should be closely integrated into remuneration decisions. Bankers bonuses should be assessed in a multi-annual framework, spread over the cycle, or even held in escrow for a certain period, to ensure that profitability is sustainable. The systemic implications of excessive banking bonuses justify regulatory authorities imposing remuneration caps. Excessive leverage has been a major factor in the recent crisis. Maximum gross leverage ratios and new capital and liquidity requirements should be designed to constrain commercial banks’ roles (“utility banking”) in risky investment banking activities. Moreover, the current system operates in a procyclical manner, amplifying the effects of expansion as much as those of crises. In fair weather conditions, the evaluation of the risks is too optimistic, the assessment of asset values runs high, and the resulting exuberance leads actors to undertake even higher risks. When a sharp downturn occurs, the reverse happens, asset valuations fall steeply, market actors are led to panic sales and the effects of the crisis are magnified. The “mark to market” system exacerbates procyclicality. 40 After the crisis: A new socio-economic settlement for the EU
For all its virtues, the Basel II framework has a tendency to function procyclically. The Basel II capital adequacy requirements should be raised by a ratio linked to the growth of the value of each bank’s assets. Thus, at times of expansion the capital adequacy bar would be raised, moderating excess lending, and building up capital reserves during boom time in the event of a downturn. 23 Countercyclical regulation should be most constraining at the height of the bubble, breaking away from policies of regulatory laxity and neglect that led to the crisis. Regulatory supervision must extend to include the “shadow” financial system (major investment banks, private equity and hedge funds, and sovereign wealth funds operating in Europe). The recent crisis demonstrated that a major source of instability in the US was the lack of any regulation in the derivatives industry. As a principle, there should be comprehensive regulatory coverage across the entire financial system, covering all leveraged institutions over a certain size, in order to prevent regulatory arbitrage. Regulatory initiatives would be incomplete if they failed to tackle systematic patterns of tax evasion that distort actors’ incentives and market competition. Following the G20, global government coordination should target offshore companies based in tax havens, a scandalous source of tax evasion and financial corruption, especially since taxpayers money has been invested in the banking system bailout. Offshore centers contribute to draining fiscal revenues and unfairly shifting the tax burden onto the majority of working tax payers and productive enterprises. Europe should lead the efforts of global-level intergovernmental tax cooperation, which should heavily sanction governments and authorities that insist on free-riding by retaining offshore centres. At an EU level, the effort to tackle tax-havens should lead to closer tax coordination. Indeed, the financial and economic crisis in general makes tax harmonisation a highly relevant issue. Finally, private rating agencies have been heavily implicated in underrating the high risks of toxic investments that led to the subprime bubble and subsequent meltdown, and have also been implicated in serious conflicts of interest. As the role of rating agencies has vital implications for systemic stability and the public interest, it is important to ensure fully transparent methodologies and evaluation systems. The EC has already adopted legislation requiring all credit ratings agencies active in Europe to register with EU regulators and observe demanding rules of conduct. Regulatory Chapter 2 – George Pagoulatos 41
Page 1 and 2: Authors Iain Begg | Gabriel Glöckl
Page 4 and 5: Published in 2009 by Policy Network
Page 6 and 7: 4 After the crisis: A new socio-eco
Page 8 and 9: 6 After the crisis: A new socio-eco
Page 10 and 11: Simona Milio is associate director
Page 12 and 13: Chapter 10 Simona Milio ...........
Page 14 and 15: Before the crash: the EU as a parti
Page 16 and 17: liberalisation. The City of London
Page 18 and 19: of the Financial Services Action Pl
Page 20 and 21: confidence and world trade, to whic
Page 22 and 23: following the ECJ’s controversial
Page 24 and 25: signals are in place to promote a n
Page 26 and 27: need to be constructed to create ac
Page 28 and 29: or indeed re-impose, what they rega
Page 30 and 31: Markets with rules The overall conc
Page 32 and 33: 30 After the crisis: A new socio-ec
Page 34 and 35: Target financial stability The EMU
Page 36 and 37: Belgium, the Netherlands and Luxemb
Page 38 and 39: mortgage banks and the insurance se
Page 40 and 41: financial market rules. The ESFS au
Page 44 and 45: initiatives vis-à-vis ratings agen
Page 48 and 49: Even if membership in a monetary un
Page 50 and 51: emained relatively contained to spe
Page 52 and 53: The second channel of functional sp
Page 54 and 55: But even so, the depth and intensit
Page 56 and 57: governance in the EU and the euro a
Page 58 and 59: in the EU show, authorities at the
Page 60 and 61: factors will remain prevalent and b
Page 62 and 63: centralised decision-maker. Similar
Page 66 and 67: (GNI), the interests of the member
Page 68 and 69: terms only very slowly and as a per
Page 70 and 71: policy proposal asks itself what th
Page 72 and 73: ensure that a ceiling is put on the
Page 74 and 75: Reform of EU expenditure Spending 4
Page 76 and 77: The medium-term financial framework
Page 78 and 79: unanimity. The need to obtain the c
Page 80 and 81: therefore, was weakening the Europe
Page 82 and 83: for the signing of the strict and d
Page 84 and 85: Since then, member states have name
Page 86 and 87: in the world monetary system. It al
Page 88 and 89: a Treaty that not only ignores trad
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Firstly, they should include policy
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emanate from demographic trends. Ho
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Furthermore, the Lisbon agenda may
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Strengthening, if not really crafti
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incentives in the welfare schemes a
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security, yet at a lower cost than
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102 After the crisis: A new socio-e
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asis only in the 1990s, and over th
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in an increasingly global age the
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So what kind of social role for the
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effective common policies in areas
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help by ensuring a thorough audit a
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irrespectively of benefit and costs
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to the European Innovation Scoreboa
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flexible labour regulation than cou
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to cope with change is germane to a
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average job tenure figures in the E
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(74), and road vehicles (78). On th
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Towards a less dogmatic approach Wh
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will be reinforced rather than cont
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Where do we come from? The EU agend
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However, so far the flexicurity app
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existing practices of wage subsidie
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minimum wage tend to have higher pr
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commitment for employment”, 18 un
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provisions for minority protection,
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eflected in the objective of the Li
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instruments have been criticised fo
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However, the countries’ planning
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ich developed country pre-occupatio
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emerging markets (indeed the rules
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Energy and carbon use depend on fou
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concentrate on the size of the cake
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esurgence of long-term unemployment
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22 Financial Services Authority (FS
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7 This idea is not new. The 1970 We
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33 Arpaia, Alfonso, Declan Costello
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9 See Garabiol-Furet, M.-D. (2006)
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Chapter 11 1 Victor, D.G. (2006)
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Authors Iain Begg | Gabriel GlÃ¶ckler | Anke Hassel ... - The Europaeum

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