VZCZCXRO4139
PP RUEHIK
DE RUEHFT #3284/01 3571419
ZNR UUUUU ZZH
P 231419Z DEC 09
FM AMCONSUL FRANKFURT
TO RUEHC/SECSTATE WASHDC PRIORITY 2883
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCNFRG/FRG COLLECTIVE
UNCLAS SECTION 01 OF 02 FRANKFURT 003284
STATE FOR EEB (NELSON, HASTINGS), EEB/IFD/OMA (WHITTINGTON), EUR/CE
(HODGES, SCHROEDER)
TREASURY FOR SMART, ICN (NORTON), IMB (MURDEN, MONROE, BEASLEY) AND
OASIA
SIPDIS
E.O. 12958: N/A
TAGS: EFIN ECON PREL GM
SUBJECT: EURO FINANCE WEEK PARTICIPANTS CALL FOR STRONGER U.S.
FINANCIAL REGULATION
FRANKFURT 00003284 001.2 OF 002
1. Summary: During the 12th Euro Finance Week 2009 in Frankfurt, top
representatives of the European and international financial
community agreed that the financial crisis is not yet over. The key
lessons from the crisis include: that banks are essential to the
real economy but need better internal risk management, and that
stricter and more effective regulation at all levels is required.
Participants felt frustrated with what they perceive as insufficient
U.S. regulatory reforms and are skeptical about the US following
through on regulatory promises made. They praised EU reforms,
particularly the creation of a common rule book, but wonder about
their effective implementation. Some questioned the ability of
banks, many of which are still fragile, to support an economic
upturn. End Summary.
The Crisis Is Not Yet Over: Looming Risks
------------------------
2. While the economic free fall has been stopped and recovery is on
its way, the economic situation is still fragile, stated both the
President of the European Central Bank (ECB) Jean-Claude Trichet and
Eurogroup President Jean-Claude Juncker. For Frank-Juergen Weise,
Chairman of the Board of the German Federal Labor Agency, the core
issue is not the intensity of the crisis, but its length. Chief
Economist of Nomura Research Institute, Tokyo, Richard Koo warned of
the risk of exiting too soon from the expansive fiscal policies
after what he termed a "balance-sheet recession."
3. Banking sector leaders discussed problems that could still occur.
"The worst in all business sectors is not yet behind us," said
Bundesbank President Weber, warning of further upheavals from credit
card and loan defaults, the high level of market liquidity, and
remaining toxic assets. Board member of the metal workers' union (IG
Metall) Hans-Jurgen Urban also speculated that if growth remains
flat and a credit crunch occurs, many of the leaders in the German
automobile, electronic, and machine building industries will not
survive. Overall, Germany has learned that it needs to reduce its
export dependence by making the country more attractive to foreign
investors, said Wolfgang Franz, Chairman of the German Council of
Economic Experts.
4. The Central and Eastern European (CEE) region also remains
vulnerable, since it has the highest rate of non-performing loans in
the world, noted Timothy Krause, IFC, Moscow. CEE countries will
see a sharp contraction of net foreign capital inflows due to the
crisis and competition from new emerging markets. These countries
have realized, as per Hungarian Finance Minister Peter Oszko and
Bank of Moscow President, Andrei Borodin, that "sustainable
long-term growth cannot be generated by debt" or external capital.
Structural reforms, a new privatization push, and good governance
will become even more important than in the past.
First lesson: Banks are integral and need to manage Risk
--------------------------------------------- -
5. A key lesson from the crisis, most agreed, was that Banks are
integral to the real economy, and must improve their internal risk
management. Some, such as the Chairman of DZ Bank's Managing Board,
Wolfgang Kirsch, and Hesse Minister President Roland Koch,
speculated that banks that had forgotten their primary function
prior to the crisis, which is to finance the real economy. As for
risk management, it was the failure to keep up with the banks' "risk
appetite" which created problems, according to Hans-Dieter Brenner,
Management Board Chairman of Helaba Bank. Most speakers saw higher
equity capital buffers and liquidity reserves as the principal
components of an improved risk management system (although they
uniformly spoke out against the introduction of a leverage ratio as
a regulatory requirement.) Josef Ackerman of Deutsche Bank pointed
out that this will also require a strengthening of the position of
risk managers within a bank's hierarchy and the change of risk
management culture. The German Bundesbank proposed being more
lenient on equity capital requirements in exchange for strengthened
risk managers.
Second Lesson: Restructure Regulatory Architecture
----------------
6. Another key lesson from the crisis is the need for tighter,
globally harmonized regulation on all levels. Bundesbank board
member Hans-Helmut Kotz called the Financial Stability Board (FSB)
the "key innovation that came out of the crisis." Speakers praised
G20 accomplishments, although expressed concern as to whether the
decisions will be implemented if the crisis wanes. Sharon Bowles,
Chair of the Economic and Monetary Affairs Committee of the European
Parliament, warned that new regulation must be gradually introduced
FRANKFURT 00003284 002.2 OF 002
and made subject to impact studies to reduce potentially unintended
consequences. Josef Ackermann, of Deutsche Bank, proposed an
"emergency fund for banks," an idea dismissed by ECB Governing Board
Member Jurgen Stark, who warned against creating "new incentives for
moral hazard." German Economic Minister Rainer Bruederle warned
banks that they should not expect governments to bail them out
again.
EU Regulation: will it be sufficient?
----------------
7. Jacques de Larosiere, Chairman of the High-Level Group on
Financial Supervision, singled out the creation of a single EU rule
book as the primary accomplishment of EU regulatory reform efforts,
as it will overcome diverse and often contradictory national
regulatory systems. The new European Systematic Risk Board (ESRB)
will be an advisory agency rather than a supranational supervisory
agency, which should allow the more effective national supervisors
to continue to supervise. According to de Larosiere, the EU will
enforce the rule book through a "comply or complain" basis, and
sanction non-compliance with "naming and shaming." CEBS (the
Committee of European Banking Supervisors) and the Basel Committee
will undertake an impact study of the new architecture in early
2010, with the new regulatory system in place by the end of 2011. de
Larosiere warned against the regulatory proposals being further
weakened by the EU Parliament. Sharon Bowles of the EU Parliamentary
Committee on Monetary Affairs further questioned whether the new
regulatory architecture was a "sufficient vaccine to inoculate
against another crisis." Apart from enforcement, a key challenge
will be reaching a common interpretation of the new rules.
Criticism and Skepticism of U.S. Reforms
-----------------------------
8. Numerous voices expressed frustration with current U.S.
regulatory efforts. Jacques de Larosiere called U.S. effort
"insufficient", since they "keep an institutional patchwork that is
completely ineffective." For Thomas Dietz, professor at the
Bundesbank University, the "cacophony of voices" with which the U.S.
speaks in international fora leaves a "pathetic, devastating image."
Sharon Bowles lamented that the U.S. had not even thought about a
national insurance regulator, while Arnaud Vossen, Secretary General
of CEBS, complained that "the entire world except the United States
applies Basel II standards." Christian Clausen from Nordea,
Stockholm, continued, "A bank book prudently run by Basel II rules
survived the crisis extremely well."
9. Interlocutors were also concerned about tensions in the
transatlantic conversation on regulation. Eddy Wymeersch, Secretary
General of CESR (Committee of the European Securities Regulators),
regretted that this dialogue had become increasingly difficult.
"There are now ill feelings and frictions on all issues," he said
pointing specifically to debates on credit rating agencies,
accounting practices, and derivatives. Gabriel Bernardino, Secretary
General of CEIOPS (Committee of European Insurance and Occupational
Pension Supervisors), went so far as to say that if the U.S. does
not implement the G20 agreements as promised, the EU Member States
will have to rethink their relationship with the U.S.
10. Comment: Participants at European Finance Week largely accepted
the need for tighter financial regulation and supervision. Less
frequently discussed, however, was the tension between tighter
regulation and economic growth. Critique of U.S. regulatory
practices recurred during the summit, with a strong sense of
impatience for the US to present an equivalent regulatory playing
field. End Comment