New parliament must 'restore confidence and trust' in markets

Arlene McCarthy reflects on the eurozone crisis as she looks back over her time as a member of the European parliament

By Arlene McCarthy

01 May 2014

Between 2007 and 2009 the global financial system experienced its worst crisis in almost 80 years with banks worldwide facing losses of more than €1.4 trillion. The eurozone economy was plunged into a crisis which threatened the very survival of the euro as a currency and the long-term stability of the eurozone economy. These two events shaped the policy agenda of the economic and monetary affairs committee of the 2009-2014 European parliament.

The key priority for legislators was to restore trust and confidence in financial markets. The financial crisis revealed weaknesses not only in global regulation but in regulatory coordination across the European Union. This fragmented approach aggravated irresponsible risk taking behaviour in financial institutions. Financial institutions deemed 'too big to fail' and operating outside and beyond national supervisory systems were those most prone to engaging in highly leveraged risky lending.

"The financial crisis revealed weaknesses not only in global regulation but in regulatory coordination across the European Union"

The GDP loss from the eurozone and financial crisis from 2008 to 2012 forced legislators to focus attention on putting in place effective measures at all levels to prevent or mitigate the effects of any future potential financial crisis in Europe. The economic and monetary affairs committee embarked on a programme to implement the G20 reforms and ensure our banking and financial systems are stable, safe and serve the needs of citizens and the real economy. Banks have to hold more capital, hedge funds and short selling have been regulated, derivatives traded in the EU must be centrally cleared and the EU has passed rules to tackle market abuse. We have put in place a new EU supervisory architecture ensuring that banks and financial markets come under both EU and national supervision. The EU is in the end of the phase of its biggest ever programme for financial services reforms. Around 62 measures have been proposed or adopted.

During the crisis, eurozone countries had to bail out their banks but doing so raised their levels of sovereign debt leading to a situation where eurozone countries were unable to repay their debts. In response, the EU has established a banking union to tackle these structural weaknesses. Eurozone banks will now be properly supervised by the European central bank, depositors money will be protected up to €100,000 and a eurozone fund will be set up through levies on banks to ensure taxpayers no longer have to bail out failing banks.

Regulatory change gives us reason for cautious optimism about the future of financial markets, however, cultural change - the most difficult to achieve - is still a priority for the reform agenda and depends on the industry to take up the challenge and self regulate. The Libor scandal and allegations surrounding manipulation of the energy markets in the oil and gas sectors, as well as potential manipulation in forex and foreign exchange markets, have hit market confidence hard and caused massive reputational damage to firms involved. It is clear that cultural change is needed to tackle what one financial commentator has described as "greed in finance getting the whip hand over judgement, prudence and probity".

Policymakers dealing with complex financial markets, regularly grapple with the challenge of achieving the balance between stability and safety of financial markets and choice, flexibility and competition. The litmus test of the new regulatory architecture will be whether in a fast moving, hi-tech global financial system, these rules will result in markets becoming more transparent and stable through effective risk management, supervision and an effective cross border surveillance system that keep one step ahead of those who make use of the fragmented landscape to manipulate markets.

Can we say with confidence at both a global and EU level that financial sector reforms are delivering safer, more stable markets and are operating in the service of the real economy? Is the system in good shape to prevent future crises? Are we confident that we have key tools in place and policies to tackle excessive risk and to better regulate markets, in particular the new types of manipulation we witnessed in the Libor scandal? The parliament must ensure that the raft of technical standards, which the EU supervisory authorities will propose over the coming years, are suitably tough to assist in preventing future crisis and flexible enough to enable the industry to thrive in a competitive global environment.

As a vice-chair of parliament's economic and monetary affairs committee, I had the privilege of being at the negotiating table for the shaping of many of these laws. It is now for the 2014-2019 parliament to take up the challenge of ensuring proper and effective implementation of all the laws introduced since 2009 and to ensure that legislators, regulators and industry to continue the work to restore confidence and trust in markets.