Financial Market Crisis: Lessons, Future Prospects and Policy - PowerPoint PPT Presentation

Financial Market Crisis: Lessons, Future Prospects and Policy Responses Mario Nava European Commission, Banking and Financial Conglomerate Unit December 2009 The views expressed in this presentation are the personal views of the author and not those of any institution to which he is affiliated 1

Table of Content 1. EU Objectives and Tools 2. FS Policy and EU economic integration: 2.1 The FSAP 2.2. Results in the market place 3. The Financial Crisis 4. The Impact on the Real Economy of the Financial Crisis 5. Policy Responses 6. Conclusions 2

1. EU Objectives and Tools 3

Growth – Stability – Cohesion as the main EU objectives 4 Tools Objectives

2. Financial Services Policy and EU economic integration: 2.1 FSAP 2.2 Results in the Market Place 5

The FSAP 99-05 FSAP (99-2005) Policy has been very innovative and courageous: – A bold and comprehensive plan – An unrivalled wide consultation with all possible stakeholders – A new method (Lamfalussy) 6

Impact on wholesale markets Eliminating barriers for cross border investments Pension Funds (IORP) Take-Over Bids & X-border Mergers Prospectuses European Company UCITS III MiFID Improved transparency and quality of information MiFID Transparency IAS Reg. + 4 th & 7 th CL Directives Prospectuses Integrity 2 nd & 3 rd Money Laundering Market Abuse Containing risks CRD (Basel II) Implementation Settlement finality Financial Collateral Directive Solvency I Financial Conglomerates Pension Funds (IORP) 7

Other landmark measures Retail Payments (Regulation 2560/2001) X-border redress (FIN-NET) Consumer Protection (Distance marketing, Insurance mediation, MiFID) Supervision/Regulation Reinsurance supervision E-Money Winding-up of banks & insurance companies New securities committee (Lamfalussy) Taxation Taxation of savings in form of interest income 8

Lamfalussy Process Level 1: Broad Framework Principles in Directive/Regulation Level 2: Implementing Rules delegated to Commission, assisted by Regulators and Securities Committees Level 3: Strengthened Co-operation between Supervisors to Improve Implementation Level 4: Strengthened Enforcement of Community Law Objective: Improve Efficiency and Transparency in the regulatory framework for the financial sector, ensuring wide public consultations before mesure are adopted. 9

Lamfalussy committees Securities and Banking Insurance and Pension Financial Conglomerates Investment Funds Funds Level 1 Commission, Council and Parliament Level 2 European Securities European Banking European Insurance & Financial Conglomerates Committee (ESC) Committee (EBC) Occupational Pensions Committee (FCC) Committee (EIOPC) Chair: Emil Paulis (EC) Chair: David Wright (EC) Chair: Karel van Hulle (EC) Chair: Mario Nava (EC) Site: Brussels Site: Brussels Site: Brussels Site: Brussels Level 3 Committee of European Committee of European Committee of European Cooperation of CESR, CEBS and CEIOPS Securities Regulators Banking Supervisors Insurance & (CESR) (CEBS) Occupational Pensions Supervisors (CEIOPS) Chair: Eddy Wymeersch Chair: Giovanni Carosio Chair: Thomas Steffen Site: Paris Site: London Site: Frankfurt Level 4 Commission, MS Governments, European Court of Justice 10

2.2 Which results in the Market Place? 11

EU-15 contribution to world financial activity 100 10 15 90 27 29 17 13 80 15 Others 9 6 70 8 Japan 13 17 60 36 39 US 50 33 EU 40 30 51 49 37 20 34 27 10 0 Bank Assets Insurance Stock Market Debt Securities Foreign Premiums Capitalisation Exchange Market Sources: BIS (2008), IMF (2008) and SwissRe (2007) Data reflects that EU financial system is strongly bank-based. EU has also a dominating position in the Forex with 49% of Mkt share (av. daily turnover) US 17%, Japan 6%. 12

Foreign investment in the EU markets by origin of investors Equity Bonds 100 100 9 10 11 10 90 20 90 6 21 21 6 5 5 24 80 80 4 4 4 5 29 7 9 70 28 28 8 32 70 8 60 60 50 Rest of the w orld 50 EEA+CH 40 40 US 68 67 67 63 30 30 Other EU 56 56 56 53 20 20 10 10 0 0 2001 2004 2005 2006 2001 2004 2005 2006 Source: IMF (2006-2008). Data for 2006 are provisional While the most recent data (2004-2006) on EU foreign equity and bond investments shows a steady situation, the percentage of investments that originated from another EU country has increased for both types of assets when compared to 2001 13

European Financial Services M&A. Domestic vs cross border 50% 45% 40% 35% percentages 30% Domestic 25% 20% Crossborder (intra-EU) 15% 10% 5% 0% 2005 2006 2007 Source: PWC (2006-2008), Commission services calculations. Data refers to top 20 european FS deals announced for each year Cross-border consolidation has been a significant feature for banking M&A activity over 2007 and has been driven by the significant size of the acquisition of ABN-AMRO by RBS, Fortis (now partly nationalized) and Banco Santander. 14

Inte gr ating financ ial mar ke ts in the E U • Who le sale se g me nt sho ws a hig h de g re e o f inte g ratio n; • 45 banking g ro ups re pre se nt 70% o f E U banking asse ts; • Marke ts in Ne w Me mbe r State s do minate d by fo re ig n banks; • I nsuranc e : Allianz, AXA, Ge ne rali, Aviva • E qually e quity marke ts, mo ne y marke ts, inve stme nt funds 15

Mar ke t shar e of for e ign owne d banks (% of asse ts, 2006) 16

Cr oss- bor de r ac tivitie s Banking Gr oup Asse ts # Host c ountr ie s in E ur ope (E UR million) De utsc he Bank 1,308,481 16 BNP Paribas 1,258,078 16 HSBC 1,233,950 11 Barc lays 1,216,729 10 Cré dit Ag ric o le 1,061,443 16 Ro yal Bank o f Sc o tland 924,021 8 So c ié té Gé né rale 848,417 16 I NG Bank 834,035 17 Unic re dit 786,419 20 Santande r Ce ntral 767,070 10 Hispano 17

Standard deviation of euro area retail interest rates (in %) 3,000 2,500 2,000 Percentage 1,500 1,000 0,500 0,000 01/01/2003 01/05/2003 01/09/2003 01/01/2004 01/05/2004 01/09/2004 01/01/2005 01/05/2005 01/09/2005 01/01/2006 01/05/2006 01/09/2006 01/01/2007 01/05/2007 01/09/2007 01/01/2008 01/05/2008 Loans to NFC:Less than1 mio up to 1 y Loans to NFC:Over 1 mio up to 1 y Housing loans up to 1 y Consumer loans 1 ‐ 5y Source: ECB data, L. Vajanne (2007). Note: data refers to a) loans to non-financial corporations up to an amount of € 1 million; variable rate and up to 1 year initial rate fixation; b) loans to non-financial corporations over an amount of € 1 million; variable rate and up to 1 year initial rate fixation; c) loans to households for house purchases; variable rate and up to 1 year initial rate fixation; d) loans to households for house purchases; over 5 and up to 10 years initial rate fixation. 18

Regional price discrepancy for local active users of banking services 100% 90% 80% 86,6% 83,5% 84,2% 75,5% 70% 57,1% 60% 59,0% 50% 46,2% 44,7% 41,7% 37,6% 40% 39,5% 33,8% 39,1% 30% 34,1% 32,0% 30,4% 20% 10% 0% 2005 2006 2007 2008 Euro area Europe Non-euro area North America Asia-Pacifc Source: Capgemini (2008). Note: data refer to the price discrepancy around the regions' average price for day-to-day banking services (account management, cash utilisation, exceptions handling, payments) in the period 2005-2008. Price discrepancy is calculated as the standard deviation of a region's bank prices divided by the region's average price. A minor discrepancy means that a region's prices are close to the average and relatively homogeneous, while a larger discrepancy indicates that price levels vary greatly among banks in a region. 19

Is Europe an attractive place to invest? Cumulated value of Initial Public Offerings (IPOs) in the EU and US € bn 100 90 80 70 60 50 40 30 20 10 0 EU US EU US EU US EU US EU US EU US EU US 2001 2002 2003 2004 2005 2006 2007 All IPOs International IPOs Investment Companies Source: PricewaterhouseCoopers (2007), "IPO Watch Europe" The increased attraction of international IPOs (from companies registered in third countries) is due both to the increase competitiveness of the EU capital markets, but also to the restrictive provisions of the Sarbanes-Oxley Act in the US. 20

What did we learn from FSAP 99-05? • Plan vs. « scattered directives » • Consulting pays off in terms of “directives transposed”, but most especially in terms of market ability to exploit new opportunities. • But…obviously it costs! • Institutional courage and innovation also pays off if used with good judgement: Lamfalussy method of extended consultation 21

3. The Financial Crisis 22

Origin and Facts Macro • Weak market conditions in 2001 • Subsequent cuts of interest rates to 1% in mid 2003 • Excess money supply and low returns (US lax monetary policy) • Massive imbalances, (namely US – and Asia +), US excess consumption (little US saving) • EU growth supported 23