BRUSSELS The European Union financial services industry must act fast to avoid a regulatory backlash or face mandatory changes, the bloc's top market regulator said on Thursday.
EU Internal Market Commissioner Charlie McCreevy, responsible for shaping the 27-nation bloc's financial rules, said the global credit crisis highlighted flaws but ultimately markets must self-correct.
"If the industry wants to avoid a regulatory backlash, it must show itself capable of stepping up to the mark. Not with a grudging de minimis approach, but with real leadership and commitment," McCreevy said in a speech to the Royal Institute of International Affairs in London and made available to the media.
Turmoil began last August when problems in the U.S. home loan sector began to unsettle global markets.
"Is it not surprising, indeed stupefying, that over six months into this crisis we still don't know the full extent of the problem. Such opaqueness has also prevented effective crisis management," McCreevy said.
"We must have appropriate data and disclosure that could help identify problems in the securitised market at an early stage. Market participants should deliver it and deliver it now," McCreevy said.
Banks showed signs of "failing standards", he said.
"Banks built up risk exposures but without any corresponding capital buffer. How could this be defendable? And how could top management allow this to happen? Or regulators, with some small banks clearly over-exposed by any measure of risk," he said.
ROLE OF REGULATOR
Changes to Basel II rules that govern how much capital banks must set aside to cover risks on their books will be proposed this year, focusing on liquidity risk management, concentration risk and securitisation, McCreevy said.
Credit rating agencies, which gave good ratings to securitised products that sank in value, also had to adapt.
"I do not think credit rating agencies can expect to emerge from this crisis without significant changes to the way they operate," McCreevy said.
"So the burden is on them to come up with real improvements. Otherwise we shall have to do this for them," McCreevy said.
Even regulators themselves needed to understand securitised products better.
"Frankly I doubt that many were up to speed. Regulators being too far behind the 'knowledge curve' is not satisfactory and must not happen in the future," McCreevy said.
Greg Tanzer, secretary general of the International Organisation of Securities Commissions (IOSCO), said McCreevy raised a "fair question" but regulators were careful about their role.
"Should regulators be anticipating every regulatory issue that comes up or should regulators be facilitating financial market innovation and setting broad parameters," Tanzer said at a Reuters summit on regulation.
"There are undoubted benefits in financial innovation and if regulators had more of a gatekeeper mentality which meant preventing anything getting on the market until they completely understood it, then there might be extra costs."
IOSCO's members from 100 countries, including EU states, were rethinking their approach to financial innovation and trying to better identify emerging risk, Tanzer said.