Credit Crunch Debate: International regulation needed

'The biggest problem for the European financial institutions is the lack of confidence among investors.' These were the words of Patrick Pearson, Head of Banking & Financial Conglomerates, DG Internal Market & Services at the European Commission, at the Credit Crunch Debate, which was organized by CMS Derks Star Busmann and took place in Amsterdam on 28 January. Leading speakers gave their views on the ins and outs of the credit crisis, and the conference concluded with an interactive debate.

Pearson added: 'The current feeling is that the market should not merely be efficient (as it has been before), but above all stable. Increasing the capital is a measure 'for the good times'. But we must seek a solution for the difficult times, and at present the solution is not to increase the capital.'

Bernard ter Haar, Director Financial Markets Policy and Deputy Treasurer General at the Ministry of Finance, believes that a single regulatory body in Europe is needed to restore the loss of confidence in the financial market caused by incomprehensible, obscure and 'innovatively' structured products. This view is shared by Pearson, who feels that we in Europe must all deal with rules in a uniform way. Ter Haar added: 'But there must be scope for national input. This process needs time, certainly about ten years. It is therefore not a solution to this particular crisis, but hopefully for the periods that follow.' According to Ter Haar, there is no doubt that we are entering a deep recession which may well last for two years. He went on to say that we must be prepared for the fact that the economic recession may in turn have a negative impact on the financial sector. 'The necessary restructuring of the financial market is therefore the responsibility of the market itself.'

Apart from the demand for international regulatory rules, the importance of tightening up the rules is very clear. Pearson added: 'The regulatory arena will change entirely. For example, rules will have to be drawn up for rating agencies and hedge funds.' Accountancy rules will also have to be scrutinized. Under the existing regulations, financial institutions are not permitted to accumulate reserves for economically more difficult times, but must pay them out to their shareholders. The Larosier Group will present a report on European financial regulation in March this year.

Hans Hoogervorst, chairman of the Netherlands Authority for the Financial Markets, believes unequivocally that prudential regulation must be tightened. In addition, the leverage ratio must be reduced and this will limit growth. He also believes that there is too much national differentiation, both at a prudential level and a behavioural level. 'The scope of financial regulation must be extended, both on the basis of institution type and by product', according to Hoogervorst. 'Leverage is a worldwide problem, and the European banks are no better in this than the American banks. It is important for banks to continue their activities, but they must be more cautious.'

The policy of all players in the financial market must focus on regaining the confidence of investors. The miscalculation of the American government in not helping Lehman has had a worldwide impact, as it caused a collapse in confidence in the American government. Patrick Doyle, a lawyer involved in the fall of Lehman Brothers, commented: 'The choice made regarding Lehman Brothers was wrong. If we had to do it again, we would have helped Lehman.' Ter Haar added: 'It is important to share our experiences so that we can follow how the various measures work.' A significant moment will therefore be the G20 summit in March.

The conference was attended by top officials from the financial market. Jos Streppel, CFO at AEGON, said: 'We must be careful with the discussion on the leverage ratio. It is not a general concept. The meaning of the leverage ratio depends on many factors.' Because of tighter capital requirements, credit will become more expensive. The question is how politicians will respond to this. Streppel went on to say that we have to do something about the capital ratio. At present, problems often have a direct, negative impact on the capital ratio. Streppel said: 'It should therefore be possible for banks to keep some reserves for more difficult times.'

At the end of the debate, Sjoerd van Keulen, CEO of SNS REAAL, stressed that the influence of the media should not be forgotten: 'As far as liquidity and confidence is concerned, we in the Netherlands are moving in the right direction. Furthermore, cooperation between regulators, politicians and, last but not least, the media is absolutely vital.'