Examination of Witnesses (Questions 1-19)|
3 NOVEMBER 2009
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
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
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 isand I think this is where I find this
proposal problematicthere 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 situationsif a supervisor
does not comply with a determination made by the Supervisory Authoritythat
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
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 situationslet us get serious. Having yet another
setand you could not have just the most important countries
around the table; you would have to have the treasuries of all
the Member States representedadd another 25absurd.
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 tobecause it is a European bodytake
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 businessyou can make decisionsand
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.