Time for Action

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In the EU there is a common objective to achieve a single market, and we have made a lot of progress towards that goal (not least with the successful introduction of the euro). We have a set of well-established banking directives, which form the basis of the single market in the banking sector, and which give EU banks the right to operate across borders and through establishments in other Member States. And even though each Member State has its own national arrangements and responsibilities for banking supervision, the directives lay down a set of common minimum prudential standards and rules that legally have to be applied to all of them. One must also consider the impact of the Financial Services Action Plan (FSAP), an important package of measures designed in the late 1990s to help achieve a single market in the financial services sector.

The FSAP includes two key legislative initiatives: Basel II and the International Accounting Standards (IAS). Both initiatives offer enormous opportunities for convergence. This will in turn enhance efficiency and facilitate the completion of the single market. The EU has decided that IAS will apply to all listed companies. This means that all EU listed companies will be speaking the same language in their financial reporting. Regulation will make the application of IAS a legal obligation.

Neither the European Commission nor the Member States will have the option of making changes to the standards. My own institution, Banco de España, the accounting regulator for Spanish banks, has extended the principles of IAS to individual balance sheet items, since it is possible that they will in future be applicable for tax purposes. Basel II has many benefits, even if sometimes we need to step back from the details to fully appreciate them. One of the most important benefits from a banking perspective is that it brings regulatory capital closer to economic capital, reducing the possibility of regulatory distortions to banks’ business and enhancing efficiency.

But Basel II’s full advantages can only be realised if it is implemented effectively and consistently across different countries. Basel II means far-reaching changes to the way we supervise banks, and this creates the ideal conditions for achieving convergence. Given that we all have to change our practices, we have a real incentive to work together to find the best ways of implementing the
new framework. Both initiatives provide us with a window of opportunity for achieving greater convergence. We should not miss out.

NEW INITIATIVES

The extension of the so-called Lamfalussy approach to regulation and supervision of the banking sector and, in particular, the creation of the Committee of European Supervisors (CEBS) have given banks the tools to take advantage of this opportunity. CEBS is a committee of high-level representatives from all of the banking supervisory authorities and central banks of the EU. It has three important functions:

• Advising the Commission on matters of EU banking
• Promoting convergence in implementation of EU legislation and supervisory practices
• Promoting cooperation and information sharing between supervisory authorities

The latter two tasks are crucial with regard to IAS and Basel II, and CEBS is working hard to develop common thinking and consistent approaches. More generally, our aim is to develop a strong system of cooperation and coordination between national authorities and to build a common supervisory culture. CEBS operates through consensus. So what initiatives are we taking?

In the case of IAS:

• Prudential filters to avoid unwanted distortions to regulatory capital
• Common formats for financial reporting.

For Basel II:

• Supervisory review for Pillar 2, based on the principles of proportionality of supervisory actions and dialogue between supervisor and institution
• Validation of advanced approaches
• Common reporting for the solvency ratio Home-host coordination

This is the first time that a single set of reporting requirements for banks’ solvency and of accounting data for regulatory purposes have been proposed.

WILL IT WORK?

Consensus makes decision-making more difficult, but the end result is supported by everyone (another example is the Basel Committee). With agreement on common or consistent approaches ex ante there is a much better chance of convergence than there would be if everyone just designed their own individual approaches. In this respect, as we have seen, Basel II and IAS provide us with a window of opportunity.

Market discipline works for supervisors too. The proposed directive to implement Basel II imposes an obligation on supervisors to explain publicly how they are applying Basel II (also known as supervisory disclosure). Supervisory disclosure will be an important tool for demonstrating to the outside world the real level of convergence we have reached, and will act as a driver towards greater consistency.

CEBS is currently consulting on a framework for supervisory disclosure under Basel II, and has tried to ensure that the proposal promotes the highest degree of transparency and usefulness. So where do the new countries fit in? Some have suggested that the incorporation of such a large number of new Member States will slow down the process of integration. From CEBS’s perspective, this could not be further from the truth.

We all have to make changes to implement Basel II and IAS, so we are all in the same boat. And we are aiming to arrive at the same port at the same time. Furthermore, some of our most important convergence initiatives in CEBS have stemmed from proposals from the new countries. Our experience so far has been very positive and better than even we expected.

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