ECON Committee held a public hearing on hedge funds and private equity, and had exchanges of views with Eurogroup Chair Jean-Claude Juncker and CEBS chair Kerstin af Jochnick on the current financial turmoil, and with Gerrit Zalm, Chairman of the Trustees of the IASCF on the IASB constitutional review.
Other issues including “Competition: Sector inquiry on retail banking”, and “Green Paper on Retail Financial Services in the Single Market” could not be followed due to parallel meetings in JURI Committee.
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Exchange of views with Mr. Jean-Claude Juncker
Exchange of views with Kerstin af Jochnick
Public Hearing on Hedge Funds and Private Equity
Exchange of views with Gerrit Zalm
Exchange of views with Mr. Jean-Claude Juncker
Eurogroup Chair Jean-Claude Juncker said that the outlook for the Eurozone economy had worsened, and the next forecasts would be for lower growth and higher inflation than previously expected. Nevertheless, he warned against “excessive pessimism”, stressing that the economic fundamentals were solid.
“We cannot speak of anything more than a slowdown. There is no risk of a recessionary spiral in Europe as there is in the United States,” Mr Juncker said, adding that it was not necessary to adopt the same policies as the US. IMF forecasts for the euro area economy were too pessimistic, he added, extrapolating “almost slavishly” a worst-case American scenario onto Europe.
Alexander Radwan (EPP/DE) was one of several MEPs to raise the issue of reforming the regulatory framework for the financial services industry, notably in the light of plans for change in the US.
Mr Juncker replied that those who think financial supervision is satisfactory at present have not been looking closely. “We need better rules. We cannot wait for the next disaster to happen,” he said. The US proposals should prompt Europe to act too. It was a matter for action by ministers, he added, arguing that leaving new rules to the financial supervisory bodies alone to develop would be slow.
Olle Schmidt (ALDE/SWE) and other MEPs asked about the increasing role of the Eurogroup and, in particular, the relationship between the Eurogroup and the ECOFIN Council.
Mr Juncker said that “it is natural for us [the Eurogroup] to consider issues that are important to us.” That the Eurogroup’s influence had grown was only natural, he said. However, the economic coordination within the euro area was too still too weak. But its development had to be a natural process supported by all governments.
Exchange of views with Kerstin af Jochnick, Chairperson of CEBS
“Bank liquidity conditions and risk management continue to be subject to significant stress” Mrs af Jochnick characterized the current situation in financial markets. “The development in many markets, with disappearing liquidity and uncertain pricing, shows that steps have to be taken to reinforce both risk management and the supervisory framework.”
“Adequate supervisory resources must be dedicated to liquidity supervision, and attention should be paid both to the firms’ liquidity risk profiles and the level of systemic risk they entail”, she said and proposed that supervisors should systematically challenge the firms’ assumptions on stress testing and make sure that robust processes are in place to define the firms’ strategy and risk appetite.
CEBS has conducted a snapshot analysis of disclosures made by a sample of 20 large European banks. The preliminary results “show differences in terms of the content of the disclosures as well as their presentation”, she explained. “We are concerned that the lack of disclosure on banks’ business models and on their role in structured finance activities could make it difficult for market participants to properly assess the banks’ risk profile.”
The lack of consistency in banks’ valuations, uncertainty about their accuracy and inadequate transparency “may have contributed to the lack of confidence of market participants and exacerbated the market turbulence”, she said. Therefore, “CEBS is closely liaising with the industry, as well as with accounting and auditing standard setters, to make sure that efforts are made to adopt robust and rigorous valuation standards that satisfy all involved parties.“
The Discussion mostly centred on on the role of CEBS and supervisory arrangements. Ieke van den Burg (PSE/NL) was disappointed that there were no legally binding arrangements. Elisa Fereirra (PSE/POR) asked about the institutional implementation of CEBS. Piia Noora Kauppi (EPP/FIN) asked about the lead supervisor model. She criticized that there is no real level playing field in the college of supervisors and the differences how these colleges operate, in particular with regard to the information provide. Her criticism was supported by Lazlo Becsey (EPP/HUN). Jose Garcia (EPP/ESP) wondered about the concept of a European Supervisor.
Mrs af Jochnick reminded that CEBS is just four years in operation, but acknowledged that more can be done, in particular with regard to the implementation of CEBS guidelines. Also, CEBS is no supervisory agency itself, she said and doubted, that a EU supervisor could have done better when facing the crises. Also, there are many different vies among Member States, she said pointing out that an EU agency is a political decision. However, the current system is adequate, although there is room for more convergence.
Margarita Starkeviciute (ALDE/LIT) pointed to the interplay of risk based approaches in the Solvency II Drective and the CRD. Mrs af Jochnick confirmed that CEBS is looking closely to this issue. The differences exist, but the bases are very much alike, she said.
Pervenche Beres (PSE/FR) and John Purvis (EPP/UK) asked about the preparedness of CEBS for the turmoil. Mrs Beres also asked about the cooperation with the ESCB. Mrs af Jochnick noted that CEBS will also undertake regular qualitative risk assessments. "It's a new thing for us to make a regular analysis. We are prepared to do that for the future," she said. Such an analysis dovetails with a wider financial stability assessment made regularly by the European Central Bank but there was a "grey borderline" between the two that needed looking at, she added. She added that a more detailed report on the market turmoil will be completed by mid-year.
Speech Jochnick
Public Hearing on Hedge Funds and Private Equity
Starting the presentations Deputy Governor Jean-Pierre Landau from the Banque de France noted that the concept of Hedge Funds to spread the risks has proved a lot less effective than expected. On the other hand, Hedge Fund industry withstood the recent events much better than expected. CRAs, their rating strategies and the transparency of ratings played a significant role in the financial turmoil, he said.
Dan Waters from the UK FSA focused on financial stability issues underlining that Hedge Funds pose no systemic risks. Hedge Funds have not been a catalyst, nor a driver of the crises. The supervision of these funds takes place indirectly through the banking sector, and the review of current events provide no indication why this should be changed.
Jennifer Walmsley from Hermes Equity Ownership Services stated that the attractiveness of Hedge Funds stems from the low degree of regulation. She also outlined the great variety of existing Funds. She noted that the transparency of these funds, eg. with regard to directors pay or the underlying positions of the fund, might well be advantageous as experience in the UK showed.
Ann Kristin Achleitner form the University Munich took a academic point of view reporting about current studies on Private Equity and regulation which provides evidence that the ‘bad guy’ image is not valid any more.
Peter Rossman, International Union of Food, Farm and Hotel Workers, however pointed out the negative experience with Private Equity buy-outs in the US.
The Questions from various MEPs mainly centred on possible regulatory steps and harmonisation between Member States towards Hedge Funds and Private Equity, the role of Codes of Conducts or harmonized standards, transparency issues and the role of CRAs. Harsh criticism came from Paul Rasmussen (PES/DA) to Mr Waters. Mr Rasmussen, author of the ECON report on Hedge Funds and Private Equity questioned if Mr Waters judgement is correct that nothing has to be undertaken.
Mr Waters made clear that the FSA is acting a lot, both nationally and internationally. The UK FSA is closely monitoring the top UK Hedge Fund managers. However, there is no casual connection between Hedge Funds and the current turmoil, Mr Waters said. He also outlined that Codes of Conduct are not a substitute for FSA regulation, but a ‘helpful addition’. Also, the existence of these Codes does not mean that there is a lack of regulation. He also noted that with regard to transparency issues the information provided to investors is good, however, the problem exists that these vary between Hedge Funds and are difficult to compare.
Mr Landau outlined that it impossible to establish a regime that would regulate the complexity of financial products. However, it has to be made sure that investors are aware of the risks of these products. Ratings, therefore, should reflect the characteristics of financial products. He proposed that CRAs should use different symbols in their ratings which should reflect possible higher capital requirements. Mr Landau also warned about to regulate every time a problem appears. Before any possible acting the process has to be carefully investigated and understood.
Mrs Walmsley made clear that one cannot regulate the activities of Hedge Funds themselves. However, calling for more transparency, it must be clear who the shareholders of a company are. Market participants are also well aware about all existing Codes of Conduct.
Mr Rasmussen will present the ECON draft report to ECON on 5 May.
Speech Waters
Further information and presentations
Exchange of views with Gerrit Zalm, Chairman of the Trustees of the IASCF
Mr. Zalm stated that the constitutional review should be finalised in October 2008 with the aim for implementation in January 2009. However, two fast track issues, the setting up of a Monitoring Group and the expansion of the IASB Board to 16 members should be concluded by October 2008.
“Trustees are recommending the establishment of a Monitoring Group to end the practice of self-appointment and to create a formal link to public authorities, including the European Commission”, Gerrit Zalm said providing an update on the ongoing review of the rules governing the IASCF. “The Monitoring Group would be responsible for approving the selection of Trustees after an agreed nominations process administered by the IASC Foundation.”
The Monitoring Group will be composed of:
- the responsible member of the European Commission,
- the managing director of the International Monetary Fund,
- the chair of the IOSCO Emerging Markets Committee,
- the chair of the IOSCO Technical Committee (or deputy chair in cases where either the Chairman of the Japan Financial Services Agency or Chairman of the US Securities and Exchange Commission is the chair of the IOSCO Technical Committee),
- the chairman of the Japan Financial Services Agency,
- the chairman of the US Securities and Exchange Commission, and
- the president of the World Bank
He outlined that the Trustees also recommend the expansion of the IASB to 16 members, composed of:
- four IASB members from the Asia/Oceania region;
- four IASB members from Europe;
- four IASB members from North America; and
- four IASB members appointed from any area, subject to maintaining overall geographical balance.
Alexander Radwan (EPP/DE) made clear that Parliament will only accept a regime in with Trustees have the competences to influence decisions and can be made accountable for decisions taken by the Board. He also warned about possible hijacking of IFRS by the US.
Mr Zalm explained that the standards are global standards and that the IASB therefore has to avoid national or regional exemptions. However, he noted that there is a need to create an extra procedure to guarantee due diligence.
Statement Zalm
Issues not attended
Due to parallel discussions in JURI Committee the following two subjects could not be attended:
- Competition: Sector inquiry on retail banking, Consideration of amendments
- Green Paper on Retail Financial Services in the Single Market, Consideration of amendments
© Graham Bishop