| ‘We can’t build a fortress around Europe & invent stupid tax proposals’ |
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| Charlie McCreevy, European commissioner for the internal market and services, in a wide ranging interview with FINANCE in anticipation of his keynote address at the Finance Dublin/Finance Magazine Global Financial Services Centres Conference 2008 on June 16th-17th, gives his views on the competition between established and emerging financial centres and regulatory issues therein. Against the backdrop of ‘siren calls’ for increased regulation, McCreevy outlines some of the practical steps that are being taken to resolve the credit crisis. |
You have rejected consistently the “siren calls” for increased regulation in your term of office to date. However, with the credit crisis, and renewed calls for the inevitability of increased regulation (e.g. see recent columns by Martin Wolf, of the FT), and public sector intervention in some form is your stance as firm, and as justified as ever?
I don’t think that the credit crisis per se proves the need for more regulation but it does suggest a need for better regulation. Clearly, the existing regulatory framework has weaknesses in it, supervision has also not been what it should have been and supervisors have struggled to keep up with the pace of financial innovation. You cannot regulate risk out of the system - if you did markets would cease to function and capitalism would cease to exist. And as far as the response to what has happened is concerned I think that a responsibility rests on many shoulders, not just those of regulators, for putting things right.
What practical steps can be/are being taken to resolve the credit crisis?
Work is going on on several fronts at the moment. Last October we developed a road map with Europe’s Finance Ministers having reached a consensus on what the key problems were. This is structured around four key objectives: First, to improve transparency in the market with respect to banks’ exposures relating to securitization and off-balance sheet items; second, upgrading valuation standards to respond in particular to the issues surrounding the valuation of illiquid assets; third, strengthening the prudential framework for the banking sector and fourth, looking at the role played by the rating agencies and the “originate and distribute “model. As far as the rating agencies are concerned I am determined that we work to ensure that there is a much more robust framework for managing their conflicts of interest. They have to “up their game” significantly and the way in which they strengthen their governance model must be meaningful, effective, enduring, and robust. I will continue to push hard on this.
Regulatory and supervisory issues aside, there are many others involved in the financial services sector who have to look at their responsibilities and question whether they have in the past paid sufficient attention to what was going on in their institutions: Take boards of some of the major US banks in particular. Were they sufficiently focused on risk management and how can they strengthen the oversight of that going forward? And there is the issue of incentive structures: Are they too loaded towards front-end income generation rather than longer term earnings quality and value creation?
In the context of the present market environment, and steps that may be taken as a result, how do you see the competitiveness of the 18 foremost financial centres within the EU (identified in the GFCI Index study as being among the world’s fifty leading financial centres) being enhanced overall, in an international context?
The sources of competitiveness for financial centres have many dimensions: First and foremost, investors and counterparties must have confidence in a financial centre: Without it the centre won’t get off the starting blocks or if it does won’t survive the first storm. And confidence in a financial centre is a function of confidence in the governance of the Member State in which the centre exists, in the local supervisor, and in the regulatory framework - it needs to be at one and the same time robust without being over-burdensome and it needs to be principles rather than rules based. But, of course, there must also be a good deal of consistency in the regulatory framework as between the 27 Member States in Europe - otherwise you significantly add to cost, encourage regulatory arbitrage, and create an unlevel playing field.
More generally, for financial centres to succeed they obviously need to attract and retain the appropriate talent pools and I believe strongly that for financial centres to remain at the leading edge and to continually move up the value chain they need to invest heavily in high level financial education and innovation. That doesn’t happen by accident: It needs very proactive and efficient cooperation between government and industry .
What is your current view on the competition between the EU’s financial centres with those in the United States, and indeed those in the Middle East (e.g. Dubai, Bahrain, Abu Dhabi), and indeed Asian centres, such as Hong Kong, Singapore, and emerging centres such as Eastern Europe, and India?) Is it healthy, and can it be positive?
Well you can’t really talk of the EU’s financial centres as one: They all have different competitive advantages in different niches, and some in many niches. But I think if you look at the figures you will see that Europe is doing very well indeed in financial services because our regulatory framework overall is pretty good and in many places we have created the fiscal environment - both at a corporate and a personal level - to attract the right talent and the value added businesses. In the modern world people and capital are very mobile and we shouldn’t lose sight of the fact that we can’t just build a fortress around Europe and invent stupid tax proposals and expect to keep the business in Europe. It won’t happen.
Would you subscribe to the view once put forward by Leon Brittan, for example, that competitive deregulation can be a positive force within the EU, in the framework of the EU’s modern structures, e.g. CESR.
I think Leon Brittan is right about that, yes. And every time we regulate we need to ask ourselves: Is there a better way, a more flexible way, or a cheaper way of achieving the end result? And is what we are proposing proportionate?
Can such healthy competition within EU centres, and between EU centres and those outside, flourish in the present environment, which clearly requires closer regulatory and policymaking cooperation on a global basis?
I don’t believe that close supervisory cooperation need to stand in the way of different regulatory regimes at all. I believe it is perfectly possible to strengthen the international framework for dealing with financial turmoil without needing a uniform regulatory environment. I also believe, by the way, that there may be a need to review the policy mandates of central banks in particular in respect of monetary policy and the role they should play not just in terms of the need to contain inflation but also in terms of the need to underpin financial stability. It is questionable whether - against the background of the creation of so many off-balance sheet, ‘orphan’ entities and the bubble in housing markets that they fueled - it is questionable whether central banks should have been turning a blind eye.
What in your view have been the key factors behind the success of Ireland’s IFSC?
I think there have been several factors: First, we have a young, talented workforce, well educated and a plentiful supply of suitably qualified people in financial services who are happy to come to Ireland to live or to return here having emigrated in the past. Second, I think that the supervisory and approval framework here has worked efficiently and our regulatory framework is sensible. Third, my sense is that when companies have come here and have had a positive experience they have been happy to add new financial services activities to their original operations. Fourth, we have a good tax regime - at both the personal and corporate level. And finally, as a country we are pretty accessible to the largest financial centres in Europe with whom we do business as well as being a country that, geographically, is ideally positioned between the EU and the US. All these things help.
Can we be optimistic that these conditions can continue to be met, given what you are seeing on the global financial landscape?
The one thing we can’t afford is complacency. We need to watch our costs. And in particular we need to ensure that we keep adapting our educational system to the needs of a modern economy and the financial services sector within it.
On a personal level, what has given you most satisfaction from your term of office to date?
Leaving aside the numerous, specific initiatives across the Internal Market portfolio, I am particularly glad that from the outset I have been at the forefront of the debate in support of open markets, to which very many in Europe are strongly opposed. I am also pleased that I have been tough and uncompromising in ensuring the enforcement of basic internal market Treaty freedoms, such as, for example, the free movement of capital. This hasn’t been popular in some Member States. But I am glad I stood my ground on it because it is key to building up Europe’s competitiveness that we have a strong and open internal market in which capital can move freely and gravitate towards where it can generate the greatest efficiencies and best returns within a competitive market place. |
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| Article appeared in the June 2008 issue.
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