Good morning Ladies and Gentlemen,
I am pleased to be here today on the same platform as my old sparring partners Richard Bruton and Joan Burton. Unusually, we are on the same side today because none of us is in any doubt but that Ireland's economic future is inextricably intertwined for the better with that of the European Union.
These are challenging times and will potentially become more challenging in the year that lies ahead. For Ireland – a small open economy - the impact of international financial disturbances can be as dramatic as for any Member State in Europe. But if the recent financial turmoil has demonstrated anything, it has demonstrated our inter-dependence – inter-dependence between the Member States of Europe and inter-dependence between Europe and the United States and the rest of the world.
The turmoil that began in earnest towards the end of last summer was the culmination of an exceptional boom in credit growth and leverage in the financial system over more than a decade. The boom was fed by a long period of benign economic and financial conditions, which increased the amount of risk and leverage that borrowers, banks and investors were willing to take on, and by a wave of financial innovation that expanded the system's capacity to generate credit assets and leverage but outpaced its capacity to manage the associated risks. Periods of booms and busts are of course inherent to a market-based system. But the forces of amplification and contraction that characterised the most recent cycle have been unprecedented.
What has happened requires a coordinated global policy response. As the EU's Internal Market Commissioner I have responsibility for leading the work in Europe that is involved in shaping that response – work that involves us working together with the other major global markets around the world to address the many failures that became increasingly evident once the global market turmoil took hold.
Our priority in the near term has been to restore confidence in the soundness of financial institutions and markets. That process is well under way with banks replenishing their capital bases to compensate for the losses they have incurred, and with the European Central Bank responding flexibly and rapidly to market developments, working in concert with the Member States.
Over the medium term we need to put in place supervisory, disclosure, and regulatory reforms to address market failures and to strengthen institutional resilience, bringing about regulatory and other changes that will strengthen prudential oversight of capital, liquidity and risk management, ensure higher standards of transparency and valuation, achieve better discipline and governance on the credit rating agencies and ensure more robust arrangements for dealing with stress in the financial system.
But little of this will be possible without an intensive collaborative effort between supervisors and governments across the 27 Member States and a coordinated approach at EU level on behalf of all Member States to ensure that what we do dovetails with regulators in the other major capital markets of the world, especially the United States.
The work stream is a burdensome one and will take time to implement. Strengthening financial supervisory cooperation between the Member States of Europe is key. It is absolutely essential if we are to successfully manage, for example, the inevitable fall-out that would happen in the event at some future date of the threat of failure of a systemically important cross border EU financial institution. Having a robust system in place to deal with such a threat will be critical if we are to protect Europe's savers and investors and to protect Europe's financial stability. If the recent credit market turmoil - and in particular the run on Northern Rock in Britain and on IKB in Germany - alerted us to anything, it alerted us to just how interconnected the world's capital markets are and to the importance of cross border cooperation in the regulation, oversight, and supervision of financial institutions. Fortunately, neither of the institutions I have mentioned had material cross border operations. But if they had had, what would have happened? Who would have decided on the need (or otherwise) for supervisory intervention? Who would have telephoned whom? Which supervisor would have had access to which information on which to make sound decisions? Who would have led the intervention? Which authority would have guaranteed which deposits, to whom and to what extent? To these questions, I am afraid there were – and are – no clear answers. And that is why I have initiated a full review of the supervisory framework under which Europe's 40 cross border institutions currently operate with the intention of establishing Colleges of Supervisors to deal with the many complex issues that are involved in ensuring that financial stability is properly underpinned across the 27 Member States. I hardly need to point out that underpinning financial stability and supervision at EU level will be vital going forward for financial services centres right across Europe, including Ireland. Anyone who thinks that this could be done by Member States acting alone is not living in the real world. Similarly anyone who thinks that as the reality and inevitability of EU enlargement has taken hold that we can continue to tackle urgent problems without the streamlining of the decision making processes in Europe is failing to face up to reality.
While talking about cross border supervision and financial turmoil I want to take this opportunity to reiterate my position in relation to my proposed reforms of the fund industry's regulatory framework in Europe; I have no intention of compromising investor protection or effective supervision and oversight of funds until all of the supervisory issues that were identified by Member State supervisors in the course of our stakeholder consultations have been resolved. Therefore, when I bring forward my proposals to the Commission for reform of the UCITS framework in coming weeks, it will not contain management company passport provisions. No such provisions will be advanced unless and until Member State securites market regulators, under the auspices of CESR, develop robust and effective solutions to the supervisory challenges that have been identified in respect of the passport proposal.
Because of the global nature of our capital markets work to restore and underpin financial stability on a pan- European basis is not enough. Global markets are closely inter-twined as we all saw when the apparently remote problems of the sub-prime mortgage holder in California, in Dakota, and in Michigan quickly became the problems of banks and mortgage holders in Amsterdam, in Dublin, in London, and in Madrid. The US mortgage market problems resulted in the first instance in virtual closing down of the international securitization market. This in turn reduced the underwriting capacity of the mortgage markets all over. In turn the hundreds of billions of losses that the mortgage market problems gave rise to and that wiped out huge proportions of the equity capital of banks with holdings of securitized US mortgage portfolios right across the globe generated fear about the financial strength of the banks themselves which in turn manifested itself in the disruption of inter-bank markets, the drying up of global liquidity, the run on Northern Rock in Britain, the insolvency of IKB in Germany, the rise in the cost of bank funding and hence the increased mortgage rates - and reduced pension funds – that householders everywhere in Europe are now experiencing.
So given that the problems are international in dimension, the solutions must be international in dimension too.
For Ireland - with its significant and rapidly growing financial services centre - it is clearly vital that we are part of that process. It would be ludicrous to have all 27 Member States going off in different directions with 27 different rule books and 27 different solutions. It would undermine the European capital market and make it impossible to negotiate and reach agreements with capital markets beyond Europe's borders, with whom cooperation is vital to underpin global economic and financial stability. And make no mistake it has been the integrated, liberalized, open and global capital markets that have been the engine of the unprecedented economic advances in the developed world over the past fifteen years and from which Ireland has benefited so much.
Of course I am the first to recognise that the European institutions are far from perfect. And beyond the reforms that the Lisbon Treaty will usher in they won't be perfect either. But I hope and believe that they will equip Ireland and Europe to deal with the many important global challenges that lie ahead - Challenges some of which are financial, some environmental, and some related to border and other types of security. To be effective, what all of these challenges require to be of benefit to all 27 Member States is collective effort and action at European level. This collective action will be greatly facilitated if it is propelled through a more streamlined institutional framework in Europe. I hope that support for such a framework will be forthcoming in the weeks ahead.