EU MESSAGE: Why does the Commission refuse to look upstream and acknowledge the source of the crisis? Reminding industry to enhance transparency and urgently address risk management systems is not enough to prevent such crises in the future. Extracts from Charlie McCreevy’s (European Commissioner for Internal Market) speech on 9 September 2008 at the Transatlantic Corporate Governance Dialogue 2008. (Bold text inserted by ECRC) ONE YEAR AFTER THE SUB PRIME CRISIS SURFACED AND DEBTORS REMAIN AS VULNERABLE AS EVER AND THE FINANCIAL SECTOR IS STILL IN TURMOIL. We live in difficult times. We are now a year into this crisis and things will get worse before they get better. On many occasions, I have stated that a considered response to the current crisis is what is best; there have been repeated calls by industry not to "legislate in haste" as we would then only "repent at leisure." But time and tide wait for no one, as they say. One year on, there are areas that I have identified where there is definitely room for improvement. In the autumn, I will present proposals for legislation in certain areas by strengthening the existing prudential framework. These should help to stem the tide. However, these cannot be, nor should they ever be viewed as, a substitute for proper corporate governance. REMINDER THAT RESPONSIBLE CREDIT IS SO IMPORTANT, BECAUSE IT WILL HELP FIRMS DURING THOSE BAD TIMES. Corporate governance is essentially about the behaviour of firms in good times and bad times. There is much room for improvement in the way financial institutions equip themselves to deal with the bad times. And that must inevitably start by addressing how they behave when the going is good. RISK MANAGEMENT AND TRANSPARENCY ARE KEY TO GOOD GOVERNANCE - WHERE ARE THE COMPLETE DATA ON EXPOSURES OF FINANCIAL INSTITUTIONS TO STRUCTURED PRODUCTS AND OFF-BALANCE SHEET VEHICLES? Financial turbulence can have many underlying causes. However, this time round, it is poor, indeed, sometimes disastrous, risk management by financial institutions which was partly to blame for the current financial turmoil. In the final analysis, such poor risk management is, in part, a result of failing internal governance. …. one area which I think would provide a good early warning of faults in a firm's risk management system is the firm's approach to transparency. REMUNERATION – WHY SHOULD PUBLIC FUNDS BE USED TO HELP GUARANTEE MINIMUM RETURNS FOR EXCESSIVE RISK-TAKING? Up to now, there have been far too many perverse incentives in place. It cannot be either sensible or sane that compensation incentives encourage excessive risk-taking for short term gain such as the next bonus day or share option on offer. They need to be aligned with shareholder interest and long-term, firm-wide profitability…..But we should also be aware that simply by changing the remuneration structure of the people who sell the products, we will not solve the problem. After all, where internal control structures work properly, employees should be prevented from taking excessive risks…….. I think that in the light of recent events, Member States that have not yet done so, should reconsider their policy and ensure that shareholders can vote on the remuneration criteria of board members. IMPROVING TRANSPARENCY AND QUALITY OF RATINGS OF THE CREDIT RATING AGENCIES INGNORES THE KEY CAUSE OF THE CRISIS WHICH IS IRRESPONSIBLE CREDIT PROVISION ON THE BACK OF SPECULATIVE INCENTIVES IN HOUSE PRICES. One conclusion that I have drawn from recent events is that the EU must take action with a view to the role and the use of credit rating agencies. CRAs played a major role in the market turmoil by greatly underestimating the credit risk of structured credit products….. I have decided that we can no longer leave it to the rating agencies themselves to deal with this. This business is much too important for the stability of the financial markets for us to sit by watching from the sidelines. And that is why I intend to propose in October, a legally binding registration and external oversight regime whereby European regulators will supervise the policies and procedures followed by the CRAs. ECRC WOULD BE HAPPY TO CONTRIBUTE IN LOOKING AT THE ROLE AND COOPERATION OF SUPERVISORS AND LEGISLATORS We also need to in all this. It is clear that EU regulators need to cooperate more – it is not sufficient to have a national focus when financial markets are integrated at the EU level, and sometimes even at the global level. EU finance ministers agree with this, and there is a continued call for improvements to be made. That is why the Commission is preparing to revise its decisions establishing the EU supervisory networks. The aim is to ensure that EU supervisors take account of the EU dimension in their daily work, and improve the likelihood of delivering convergent, EU-wide regulation. Key points will include a revised decision making process, better financing and setting certain work priorities at the EU level. This would go a long way towards strengthening financial stability in the EU Single Market. I will also soon propose some significant changes to our implementation of the Basel 2 regime – the so called Capital Requirements Directive. We need to strengthen certain aspects; get the incentives right for the originate- to- distribute model; large exposure regime; the distribution of home-host powers. ID: 41848 Author(s): iff Publication date: 10/09/08     URL(s): Link to McCreevy’s speech at the Transatlantic Corporate Governance Dialogue 2008 Link to booking form for "London 2008" Conference

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