Financial reform programme faces a major test in the months ahead
During the autumn, the EU will continue its work on the overhaul of the European financial regulatory system. While many important measures have already been adopted, for example on improved supervision of credit rating agencies and limits on bonuses paid by banks and investment firms, more work remains to be done in 2010.
Several key pieces of legislation are awaiting final approval, while other elements of the reform are still being fleshed out. The Commission aims to present most of the remaining proposals by the end of the year and invites the EU countries and the European Parliament to adopt the texts by the end of 2011.
Another legislative proposal coming out shortly will aim to ensure increased transparency and safety in trading in derivatives, financial products that derive their value from an underlying asset.
Also in the pipeline is a proposal to regulate the short-selling of financial instruments, including credit default swaps relating to sovereign debt. As a trading practice, short-selling can be useful and legitimate, but it has been suggested that it may have aggravated the debt crisis.
As for measures already on the table, the EU governments and the European Parliament are very close to final agreement on the new European system of financial supervision. This involves the creation of a board to monitor system-wide risks in the financial system of the EU as a whole and the creation of three new European supervisory authorities to oversee and co-ordinate national supervision of the banking, insurance and financial markets.
Another important bill currently under negotiation aims at regulating hedge funds and other alternative investment funds used by professional and institutional investors.
Further ahead and in line with work undertaken at global international level, the EU is in the process of re-examining capital requirements for banks and investment firms – to ensure that all financial institutions have an appropriate level of capital reserves. The existing legislation has already been amended twice as a result of the financial crisis but more changes are necessary.
The EU also plans to revisit its rules on credit rating agencies. Rules on registration and supervision of credit rating agencies were introduced following the 2008 crisis.
Early in the financial crisis, the EU increased guarantees on bank deposits to enhance consumer confidence and prevent possible bank runs. In July, the Commission proposed a thorough revision of this legislation in order to speed up payouts and make sure EU countries have adequate funds to cover the guarantees.