The Financial Crisis and the EU Policy Responses

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Rosamond Emmeline Cunningham
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1 The Financial Crisis and the EU Policy Responses Aliénor Margerit European Commission - DG ECFIN Directorate Macrofinancial Stability International Conference Wroclaw April Globalisation, European integration and economic crisis

2 Structure of the presentation The crisis Origin of the crisis The crisis in figures EU policy responses Coordinating Member States Direct financial support to MS Application of state aid rules Regulatory responses Exit strategies

3 The crisis

4 Structure of the presentation The crisis Origin of the crisis The crisis in figures EU policy responses Coordinating Member States Direct financial support to MS Application of state aid rules Regulatory responses Exit strategies

Origin of the crisis Macroeconomic roots Abundant global liquidity, real estate bubble Rapid credit growth, high leveraging Supervisory failure : supervision too focused on individual institutions,

5 Origin of the crisis Macroeconomic roots Abundant global liquidity, real estate bubble Rapid credit growth, high leveraging Supervisory failure : supervision too focused on individual institutions, no global picture Microeconomic roots Originate and distribute model Complex and opaque financial products (CDS ) Conflicts of interest of rating agencies Incentives for short-run risk taking (Compensation schemes ) Maturity mismatches in banks balance sheet Domino effects and feedback loops when bubbles pop

6 Structure of the presentation The crisis Origin of the crisis The crisis in figures EU policy responses Coordinating Member States Direct financial support to MS Application of state aid rules Regulatory responses Exit strategies

7 Crisis in figures: Interbank market basis points 3m EURIBOR spread over OIS 300 3m GBP spread over OIS 3m USD LIBOR spread over OIS Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Source: EcoWin

8 Crisis in figures: Corporate bonds spreads basis points 400 BBB 300 A 200 AA 100 AAA 0 Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Source: EcoWin, own calculations

9 DE FR BE NL ES AT IE IT EL UK DK SE CH NO IS DE FR NL UK CH Crisis in figures: losses and capital injections in the EU (banks and Insurance companies) 200 Loss Capital injection Loss Capital injection EA EU NEA NEU EA EU NEA NEU EA EU NEA NEU EA EU NEU NEA Banks Insurance Banks Insurance Source: Bloomberg. Cutting date 16/02/2010

10 Source: Ecowin, last value: 26 May 2009

11 Crisis in figures : Capital injections in the banking sector (as % of GDP) 8 7 Total approved injections Effective capital injections IE LU BE NL UK DK DE AT LV EU EA GR FR IT SE HU PT FI PL SK Source: Commission Services, cutting date 31/12/2009

12 % of GDP Crisis in figures :budget deficits (% of GDP) Source : Commission Spring forecast Nominal balance 2007 Nominal balance 2008 Nominal balance 2009 Nominal balance % of GDP threshold FI DK LU SE BG NL CY DE AT SI BE CZ SK PT IT EE LT FR HU ES PL LV MT EL RO UK IE EA- 16 EU- 27

13 % of GDP Crisis in figures: public debt Public debt % Maastricht criteria EE LU BG RO LT DK SL SK CZ FI SE CY LV PO ES NL ML AT DE EU IE PT UK HU EA FR BE EL IT Source: European Commission

14 Public Finance Public debt level and medium term projections Budget deficit as % of GDP in EU, US and Japan % of GDP 120 Scenario 1 (No consolidation) Scenario 2 (Consolidation 0.5% of GDP per year) Scenario 3 (Consolidation 1% of GDP per year) US JP EU-27

15 Crisis in figures: unemployment Unemployment rate in the EU July 2010 forecast ES LV LT IE EE PL SK EA HU EU FR DE SE BE US PT EL IT UK FI BG RO MT CZ SI AT LU DK JP NL CY Source: Commission services.

16 Structure of the presentation The crisis Origin of the crisis The crisis in figures EU policy responses Coordinating Member States Direct financial support to MS Application of state aid rules Regulatory responses Exit strategies

17 Coordinated EU response G20 Summits Commission Communications : Driving the European recovery Financial Supervision in Europe ECOFIN roadmaps

18 Structure of the presentation The crisis Origin of the crisis The crisis in figures EU policy responses Coordinating Member States Direct financial support to MS Application of state aid rules Regulatory responses Exit strategies

Direct financial support to MS Ceiling increased from EUR 12 to EUR 50 billion 3 MS benefit from the mechanism (HU / RO/ LV) Conditionality Coordinated action with IMF HU LV RO Total assistance 20

19 Direct financial support to MS Ceiling increased from EUR 12 to EUR 50 billion 3 MS benefit from the mechanism (HU / RO/ LV) Conditionality Coordinated action with IMF HU LV RO Total assistance 20 7,5 20 % PIB 21,7 40,5 17,1 European Union 6,5 3,1 5 Instalment ,5 Instalment 2 2 1,2 Instalment 3 1,5 IMF 12,5 1,7 13 Instalment 1 4,9 0,6 5 Instalment 2 2,3 0,2 1,9 Instalment 3 1,4 Instalment 4 0,1 Others 1 0,5 2

20 Structure of the presentation The crisis Origin of the crisis The crisis in figures EU policy responses Coordinating Member States Direct financial support to MS Application of state aid rules Regulatory responses Exit strategies

21 Application of State aid rules 4 Commission communications on the issue : Application of state aid rules to measures taken in relation to financial institutions ; Recapitalisation of financial institutions, Treatment of impaired assets, Assessment of restructuring measures. The objective : Ensuring a level playing field in Member States support to banks in a flexible way.

22 Structure of the presentation The crisis Origin of the crisis The crisis in figures EU policy responses Coordinating Member States Direct financial support to MS Application of state aid rules Regulatory responses Exit strategies

23 Regulatory responses 5 priorities: Developing a more efficient supervisory structure Enhancing capital requirements Mitigating procyclicality Improving crisis management Extending the perimeter of regulation and supervision

24 Developing a more efficient supervisory structure De Larosière Report A macro pillar : the European Systemic Risk Board (ESRB), responsible for macro-prudential supervision A micro-pillar : the European System of Financial Supervisors (ESFS) The day-today supervision remains at national level

25 More and better capital in the banking system CRD 2: colleges of supervisors, better liquidity management, retention clause for securitised assets CRD 3: higher capital requirements for re-securitisations and trading book items CRD 4 (under discussion): Definition of capital, liquidity ratios, leverage ratio. Specific measures for the big ones? (Obama s proposals on systemically important institutions) Testing the resilience of the EU banking system : the CEBS stress test

26 Mitigating procyclicality CRD 3: remuneration schemes CRD 4: Dynamic provisioning, countercyclical capital buffers Accounting issues : role of the Fair Value accounting

27 Towards a EU crisis management framework? Crisis management Commission public consultation on crisis management Reflection on burden sharing and bank resolution Discussions on bank levy, stability funds (SE and DE initiatives) Deposit Guarantee Schemes Protected amount raised from EUR to EUR DGS currently under review in the EU

28 Extending the scope of regulation Hedge Funds Credit Rating Agencies On-going reflections on the trading of credit derivatives (overthe counter trading vs trading through CCPs) Non cooperative jurisdictions

29 Structure of the presentation The crisis Origin of the crisis The crisis in figures EU policy responses Coordinating Member States Direct financial support to MS Application of state aid rules Regulatory responses Exit strategies

30 Exit strategies Exit from State guarantee schemes first Case by case approach for banks under restructuring Fiscal exit : fiscal consolidation should start in 2011 at the latest

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