The Committee's Opinion on proposals for European financial supervision - Treasury Contents

Examination of Witnesses (Questions 1-19)



  Q1 Chairman: Welcome to this inquiry into proposals for the European macro and micro prudential financial regulation; it is an issue which we wish to treat with urgency given the decision that will be made on 2 December, so it is important that we get our report before Parliament to try and inform as much as possible this decision-making. Would you introduce yourselves, please, for the record.

  Dr Alexander: I am Kern Alexander from the University of Cambridge.

  Dr Danielsson: Jon Danielsson from the London School of Economics.

  Q2 Chairman: I will introduce the absent Professor Richard Portes from the LBS. He is on his way, running, I am told, so we look forward to him coming in breathless! The Swedish Presidency is eager to get the proposals for the Systemic Risk Board in the sectoral supervisors agreed by ECOFIN on 2 December and the European Council shortly thereafter. I presume that is not a reasonable timetable for you, is it? We are all agreed on that.

  Dr Alexander: It is quick but the proposals have been debated since last spring when the de Larosie"re Committee made the report, and there was a consultation by the Commission issued in March and then another one again in May; but this is a fairly condensed time period, yes.

  Q3  Chairman: The Directive on Alternative Investment Fund Managers has been extensively redrafted, and the European Central Bank has recently expressed concerns that the proposals would put the industry at a significant competitive disadvantage. Should the Presidency learn from this and give European governments more time to consider these proposals?

  Dr Alexander: I think that now is the time to consider these issues. We have been in the midst of a financial crisis and the political urgency of re-regulating the financial markets is a current issue. I think the debate should be held now.

  Q4  Chairman: If these proposals had been in place do you think Europe would have dealt with the financial crisis better?

  Dr Danielsson: I would say, no. The problem really with these proposals is expressed in the first place where it says there has been a weakness in the existing macro prudential oversight, and then immediately followed by saying "given its expertise in macro prudential issues, the European Central Bank can make a significant contribution". I did see a contradiction in those two statements. The problem is, prior to the crisis we had very little understanding of what constitutes systemic risk in general, and most central banks viewed systemic risk as a secondary activity. Now coming into the crisis of course systemic risk has become hugely important, but we have an understanding of what systemic risk is but we do not really know what it means; we do not really know how to measure it; we do not really know how to react to it properly. This is why I think these proposals, on the one hand, they are important; we do need a mechanism for understanding systemic risk; however, the specific proposals I do think they are misguided.

  Q5  Chairman: As we know, the proposals for monitoring risk and better supervision have been negotiated through the G20, and other forums. Is it sensible for the EU to take the lead in these proposals without more knowledge of what is happening at a global level?

  Dr Danielsson: I would say, no. The problem really is—and I think this is where I find this proposal problematic—there is a very heavy emphasis on the structure of the institutions. It is a long discussion on who sits on the various boards, the 62 members; the sub-board, the 32 members; the various sub-boards; the President and the Vice President of the European Central Bank are apparently in charge. Of course, I would like to see an explicit mention of the governor of the most important central bank outside the Euro area being a vice president of this board; that is the Bank of England. I think that he should be there. However, it is very light on what the board is supposed to be doing. The emphasis is all on the institutional structure and not on activities. I think that reflects our uncertainty in what the target means. They are explicit in one place where they start talking about compensation. They make the statement that compensation contributed to the crisis, which of course is agreed by most people; but then they start going into the issue of, we might need to regulate compensation in some sense; and that is not something people universally agree with. Then they continue by saying, "In extreme cases if such policies are the result of a non-application of legal requirements, the Authority may be able to take action to require national supervisors to apply the requirements effectively". They are talking about compensation here. They appear to assume the board will have a power to force the national authority to take action on compensation. While we do not understand systemic risk properly, and on the list of systemic risk issues, compensation is the highest.

  Chairman: We are finishing at ten minutes to eleven and we have a lot of questions. We are grateful to you for coming, so we will try and be crisp all round.

  Q6  Mr Fallon: Dr Alexander, could you just clarify the extent to which these draft Directives have moved further from the original agreement in June at European Council, which I understand from paragraph 20 was to give the European supervisors decision-making power as to whether national supervisors were meeting their requirements under a single rulebook, and power also to resolve disagreements. Is it not now the case that what is being proposed gives these European authorities direct supervisory power over individual institutions?

  Dr Alexander: It primarily gives the ESAs, the Supervisory Authorities, oversight in coordinating and promoting more consistency of supervisory practices over Member State supervisors. There are certain situations—if a supervisor does not comply with a determination made by the Supervisory Authority—that the Supervisory Authority can then apply a rule or a decision directly to the financial institution, and then it can be appealed to a board of appeal. That was not fleshed out in the earlier proposal, yes, you are correct. That is part of making this institutional proposal more detailed.

  Q7  Mr Fallon: I understand that, but I just want to be absolutely clear: the European Banking Authority, for example, can under certain circumstances directly regulate an individual bank?

  Dr Alexander: When you say "regulate", I am thinking in terms of supervision like oversight. They can make decisions, determinations, and issue an order in a crisis situation; but they do not exercise the ongoing regulatory oversight of the banks; that is still done by the Member State supervisors.

  Q8  Mr Fallon: It is left to the Commission, as I understand it, to determine what an emergency situation should be under the draft legislation. Why is that?

  Dr Alexander: The Commission has an EU surveillance authority that has been delegated to it by the Council of Ministers under Article 99 of the Treaty of Rome; so the Commission is involved in surveillance. It has the power to do that already.

  Q9  Mr Fallon: The Commission therefore under certain circumstances could declare an emergency situation against the wishes of a Member State?

  Dr Alexander: Yes, it could.

  Q10  Mr Fallon: What has happened to the safeguard in the European Council communiqué of June that none of this should impinge in any way on the fiscal responsibilities of Member States? How is that safeguard promulgated in the drafts?

  Dr Alexander: This safeguard is there. In each of the regulatory rules for each European Supervisory Authority it is clear that they may not make a decision or a determination that will infringe or impinge on the fiscal responsibilities, or fiscal requirements of a Member State.

  Q11  Mr Fallon: Does that apply to the Commission itself when it decides: what is an emergency situation?

  Dr Alexander: It does apply to the Commission certainly. Just because the Commission declares an emergency does not mean that the UK has to raise taxpayer money to bail out a bank; so there is a safeguard there. The statement also says in the future there should be an evolution and greater burden-sharing, and rules ought to be designed to promote better fiscal management by the Member State authorities: but right now there is no compulsion of a Member State to use taxpayer money to bail out a bank.

  Chairman: Professor Portes, welcome. Your spirit has been with us since we started earlier. We are concerned about the timescale for this and the legal implications and I know you are an expert in that area. We are hoping to finish for ten minutes to eleven and would like to get through as much as possible by that time.

  Q12  Nick Ainger: Can we move on to the composition of the European Systemic Risk Board. The general board is made up of 33 members, 29 of whom are bankers; is that balance right?

  Dr Danielsson: I would think the balance is broadly wrong, because one thing we learnt in the crisis is that the most important institution perhaps is the Treasury. Prior to the crisis we thought we could leave these issues to the Central Bank and to the supervisor. Now of course we have learned that the taxpayer is called upon in almost all systemic crisis events to provide vast sums; and therefore I would think in a Systemic Risk Board like proposed here at least the treasuries of the most important countries should be represented because they will be called upon to provide the funds if something happens.

  Dr Alexander: I agree that in crisis management it is essential to have the Treasury involved, because the Treasury raises the money to fund any type of bail-out or crisis and they should have a seat somehow on a Systemic Risk Board. The issue would be: do they have a voting right, as opposed to a non-voting right?

  Professor Portes: I am afraid I am in disagreement with both my colleagues here. This Board is already, by my count, 57 members. We are talking about action in crisis situations—let us get serious. Having yet another set—and you could not have just the most important countries around the table; you would have to have the treasuries of all the Member States represented—add another 25—absurd. You cannot possibly deal with crises and any recommendations, because of course the SRB will have no authority under this proposal to issue any binding requirements; so we are talking about proposals. As I say, you cannot imagine this body acting efficaciously, should a crisis arise.

  Q13  Nick Ainger: Is not your two colleagues' view correct that you need more input than just the central bankers; because basically that is what the general board is, with voting rights?

  Professor Portes: The SRB, no more than the supervisory bodies, will not have any power to make commitments that entail fiscal obligations. Certainly you would expect some degree of consultation if the ESRB judges that a problem is not really a problem of liquidity but potentially a problem of solvency, therefore potentially needs taxpayer funds as a back-up; but having the representatives of the treasuries in there, I find the scale of this thing completely out of control.

  Q14  Nick Ainger: Is that not the problem, that rather than looking at what this Committee is supposed to be doing and the input of information into it and the experience of people on it, it has to—because it is a European body—take into account all the 20-odd members of the European Union; and so automatically you come out with this huge body rather than an organisation which is effective, a committee which actually has the information on which to make informed decisions? Should we not be turning it round and looking at it from that perspective?

  Professor Portes: It is possible that it might develop an executive committee which would in effect have powers and responsibilities that could commit or at least very much obligate other members to follow it. Take the existing European Central Bank, it has a broad council, all the governors, plus the executive board. The executive board is only six people. With six people who can do business—you can make decisions—and then communicate to other members of the Council should the need arise. There is no provision for any such executive, as far as I can see.

  Q15  Nick Ainger: The Steering Committee of the Systemic Risk Board, could that be seen as the executive committee and you actually have a wider range of members there?

  Professor Portes: Potentially, but there is no explicit detail as far as I can see of the functions of that committee, and how far it would be able to act expeditiously in a crisis.

  Dr Alexander: I would like to comment on that. The Steering Committee is designed to support the decision-making of the 61 member general board. It says that in the explanatory note. The Steering Committee could perform a more effective executive function in discharging the responsibilities of the Systemic Risk Board. I think there is potential for the Steering Committee to grow into a more effective smaller, more cohesive decision-making unit.

  Q16  Sir Peter Viggers: Do you think that members of the European Economic Area will be content to be subject to bodies on which they have no representation?

  Dr Danielsson: I do not think this institution will have much to say about institutions in the European Economic Area to begin with, so I do not see why they should be concerned either way.

  Dr Alexander: Whether this body will have an impact on EEA states?

  Q17  Sir Peter Viggers: Yes.

  Dr Alexander: I think there are points of contact with the other three EEA states outside the EU that have been involved in the Systemic Risk Board as non-voting members, and also the Swiss National Bank as well, the EFTA country. So there is an effort to include all European countries, not just the EU countries, regarding oversight surveillance; not really making decisions in a crisis, but in gathering information and exchanging data on cross-border banks that are operating in Europe; and monitoring macro prudential risk in the financial system. It does create I think an important channel for a flow of information which we do not have right now.

  Q18  Sir Peter Viggers: There is nothing in the draft regulations to ensure representation of the non-Eurozone countries on key committees like the Steering Committee. If the Steering Committee were to evolve as you have indicated should not the non-Eurozone countries be represented?

  Dr Alexander: I think that the chair and the vice chair of the general board will be elected by the general board; and all Central Bank governors will have a position on the general board so they can vote for a non-Eurozone Central Bank governor to be a vice chair, for instance, of the Committee. That is not included in the current proposal.

  Q19  Sir Peter Viggers: You are speculating about the way the situation may evolve; but should it not be written in the regulations to make it clearer at this point?

  Dr Alexander: I think it is written in the regulation that they can vote amongst the Central Bank governors who will be the chair and who will be the vice chair of all the European Union Central Banks.

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