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EU/financial issues

Published on June 27, 2008
Interview given by Jean-Pierre Jouyet, Minister of State, Responsible for European Affairs to "L’AGEFI Hebdo", (excerpts)

Paris, June 26, 2008

(…)

FRENCH PRESIDENCY/EU FINANCIAL PRIORITIES/ECOFIN/ROADMAP/ LAMFALUSSY PROCESS

[*Q. - What is the order of priorities for action on [EU] financial issues?*]

THE MINISTER - Everything to do with financial stability and regulation is essential. We have to make sure that the roadmap defined at the ECOFIN Council is followed. This aims, at European and international level, to improve banking supervision and knowledge of credit risk, liquidity risk management, finalize the Solvency II directive, seek appropriate methods of regulation for the rating agencies and the increasingly transnational groups. In fact we need to pursue the so-called "Lamfalussy process” plan of action for financial services, launched under the previous French presidency.

I don’t think that the efficacy of the co-existence of national systems of regulation has been demonstrated. We need to move towards more integrated European regulation. This is especially important since we must avoid being beaten by America, which has launched a debate on the subject. In that country, the lack of supervision of financial institutions, particularly off-balance sheet financing, is partially explained by the different regulatory systems obtaining in the various States. The United States is in the process of giving the Federal Reserve greater power to supervise banks. So it would be paradoxical for Europe to remain fragmented in the area of market supervision when the United States is opting for a more integrated approach.

CREDIT RATING AGENCIES

[*Q. - Commissioner McCreevy has said we need to go further in regulating the credit rating agencies. Is there consensus on the subject?*]

THE MINISTER - We sense that consensus is possible. The task of the French presidency will, in particular, be to alert its partners to any conflicts of interest observed at the time of the sub-prime crisis between independent credit rating agencies and businesses/institutions or individuals providing general financial advice. Europe must adopt a common position so as not to be "lagging behind" at international level on what will be one of the main areas of action for the new US administration.

SINGLE REGULATOR/LEAD SUPERVISOR

[*Q. - Are we moving towards a single regulator? Is this a priority?*]

THE MINISTER - I hope there are going to be developments here. There are two possible approaches: either a "single regulator or a "lead supervisor" with a head supervisor per entity and coordination between the various supervisors. This is probably the most realistic approach. We have to have an ambitious approach, but it will very probably be difficult to get the newest member countries to accept it. Better-defined integrated regulation, with greater involvement of the Central European Bank - which has been very useful for providing solutions to the liquidity problems - and with the principle of this being extended to the insurance section, seems to me essential. (…)

HEDGE FUNDS

[*Q. - Will the French presidency be the opportunity for further discussion on hedge funds?*]

THE MINISTER - The aim is to achieve greater transparency on the operation of hedge funds and non-regulated entities, and a certain level of regulation and localization of risk. On the subject of financial transparency, under the French presidency, we’d like to have a substantive discussion on the classic regulation/self-regulation debate. The aim is to find the best balance between the two and move towards regulation. Self-regulation alone is no longer enough. Let me remind you that both sides of the Atlantic share the aim of having the fewest possible non-regulated entities. There’s also a need to clarify relations between financial institutions and hedge funds, i.e. the relations generalist banks maintain with hedge funds. From this point of view, we have to strengthen indirect supervision of these new players by banking controllers.

SOVEREIGN FUNDS

[*Q. - …and the sovereign funds?*]

THE MINISTER - Here, the debate could be easier since we agree on the principles: transparency, publication of results, knowing the source of their capital, the interests behind them and their strategy. There’s also a need to keep a check on the way sovereign funds operate and see in which sectors they can operate, in the knowledge that you won’t have a regulatory definition of the sectors to protect. How strategic a sector is can depend on governments, the flexibility of the different parties. My feeling is that we mustn’t be afraid of sovereign funds. We must agree at international level on the transparency and operating rules and decide where we’d like these funds to be authorized to invest. Obviously, for instance, there’s limited freedom in a field such as defence. In other sectors, everything depends on the nature of the funds. There are many areas where we would welcome them. For example, I have in mind the financial sector. Once the rules are clear, that you know where the funds come from and that it’s a medium-term investment, France must not lag behind other European countries. Competition in attracting these funds’ capital is going to grow. At the risk of being provocative, I believe that in some areas you can involve sovereign funds in public-private partnerships for public contracts. As for the principle of reciprocity, we have to try and enforce it, but not absolutely systematically. (…)./.

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