Let's not lose opportunity for reform, says EU bigwig

Charlie McCreevy says the next crisis will be totally different from previous ones if history is anything to go by. Photo / Dean Purcell

The opportunity to bolster regulation of financial markets must be seized now before memories of the crisis fade, says Charlie McCreevy.

The European Commissioner for Internal Market and Services, whose responsibilities include financial regulation, visited Wellington and Auckland this week.

Before going to Brussels he was Ireland's Finance Minister between 1997 and 2004.

"I don't like tempting fate but hopefully we are out of the crisis," he told the Weekend Herald.

But that meant already the impetus for reform was starting to weaken and there were signs that institutions on both sides of the Atlantic that had benefited from taxpayer-funded bailouts were slipping back into a business-as-usual attitude on matters such as excessive executive remuneration.

"Ordinary taxpayers losing their jobs don't expect to see that," McCreevy said.

"I have tried to go down the road of allowing regulators to impose additional capital [requirements] on entities they deem to have inappropriate risk-reward structures."

Other areas where Brussels has sought to tighten the regulation of the financial sector include credit rating agencies, banks' capital requirements, new supervisory mechanisms for financial institutions operating across borders, and measures requiring those undertaking securitisations to keep some "skin in the game".

But just as generals in peacetime are always preparing for the last war, McCreevy is the first to admit that no amount of regulatory infrastructure can protect the world from a critical mass of greed and folly building up again.

"I've always said that the next crisis, that will inevitably come, will be totally different from previous ones, if history is anything to go by," he said.

"I'm not a believer in heavy-handed regulation and I've been criticised heavily by some in Europe for this. I don't believe you can regulate greed and risk-taking out of existence, just as I know you can't regulate sin out of existence - and what a boring world it would be if you did!"

Europe is in the throes of setting up a new regulatory superstructure to co-ordinate and harmonise the EU's supervisory framework, which remains fragmented along national lines despite the creation of a single European market more than a decade ago.

The crisis exposed a fundamental problem in the supervision of financial institutions. We have global markets and multinational banks, but national regulators.

And as long as bailouts and guarantees involve putting vast sums of taxpayers' money at risk that tension is bound to remain.

"The elephant in the room that is not being talked about is what taxpayer will end up ponying up for an institution that goes belly-up. Can you say to taxpayers of country A that they have to pay for what happens in countries B, C, D and E? This is an extremely vexed question we don't have a satisfactory answer to," McCreevy said.

Within the European Union there are more than 40 large financial institutions operating across borders.

"We don't have a single supervisory network or plan to deal with them in the event of a crisis. We have put some proposals on the table, but they include a provision that no decision will be made at the centre that would impinge on the fiscal responsibilities of the member states."

The crisis saw some international European banks get into difficulties.

"It wasn't very glorious how we dealt with them. Now imagine if it was big global institutions we had to deal with."