Speech ASEM meeting

Toespraak | 17-04-2010

Thank you Madam Chair,

I appreciate this opportunity to share with you some of our experiences in Europe of creating a new financial system.

The financial crisis has had a severe impact on our financial sector and our economy as a whole. But I would like to make a positive contribution to this discussion and highlight a specific advantage that has emerged.

Because alongside the dramatic events of the past two years, this crisis has also given us a unique opportunity to engage in building a better and more stable financial system. And now is the time to use this momentum.

Or in the words of Machiavelli, ‘Never waste the opportunities offered by a good crisis’.

As a matter of fact, using a crisis as a springboard for action has been an important feature of the history of the European Union.

For more than half a century, the deepest crises have given us the best opportunities to take forward the process of European integration. For example, just think of the creation of the European Community itself, after World War II. And the creation of EMU, after the exchange rate crisis in 1992.

And today, we need to take a similar step forward, to make our financial system more stable. Let me share with you three important lessons from a European perspective.

Making financial markets work

The first lesson is that we need to make financial markets work. This means repairing them, so that they function properly, but not damaging the foundations of our common financial market.

There are obviously many shortcomings in the way the international financial market operates at the moment. But we can’t solve them by withdrawing behind national borders, or by restricting international capital flows, or the international provision of financial services. That would undermine the added value of the capital market and hold back economic growth. It would also be counterproductive. After all, both Asian and European companies operate worldwide. We need an international financial system to support that international context.

Our challenge is to get the international financial markets to work properly. We need a system in which our economies can benefit from free capital flows, while containing financial risks.

In Europe, the European Commission has aimed to strike a balance. A balance between ensuring financial stability on the one hand, and preventing state aid and maintaining international competition on the other.

This is a delicate balance.

In mid-crisis, the focus probably shifted more towards concerns for financial stability.

But now, as we cautiously return to normal market conditions, the Commission has rightly started to pay more attention to preserving free capital markets and international competition.

In particular because in order to reverse the capital support given to the financial sector, we will need to carefully coordinate the actions of different countries. I’m thinking here about timing, ensuring a level playing field and minimising economic impact. Let me pick out four elements:

- The financial exit should start with the withdrawal of government guarantees.

- We need to clearly communicate and plan our intentions to phase out financial support. This includes transparency towards the public and the financial sector.

- The financial exit should be based on an assessment of the stability of the financial system and of country-specific factors. Its timing should take into account a broad range of factors. These include macroeconomic and financial sector stability, and the continued proper functioning of credit channels.

- Finally, the financial exit also needs to be coordinated between countries. We need to take measures at the right time and in the right order.

These four elements, then, are the foundations for rebuilding a sound financial sector that functions as it should.

Effective implementation of measures to create sound and stable financial institutions

I now move on to the second lesson. The importance of making real progress in implementing agreed measures to create sound and stable financial institutions. Although we have made good progress over the last year, we still have a lot to do.

It is obvious that we need to make financial regulation stronger and broader. And it’s obvious that countries cannot do this on their own.

Over the past year the G-20, supported by the FSB and the IMF, has played a leading role in securing agreement on the most important reforms.

Reforms will need to include: (i) stronger capital requirements, (ii) more stringent compensation policies, (iii) better monitoring of systemic risk, (iv) ensuring consistent regulation for similar activities outside the financial sector and (v) creating more harmonised and less pro-cyclical international accounting standards.

This is a comprehensive and ambitious reform programme that was agreed by the G-20. But it is not complete. Important elements are missing. Let me give you three examples:

- Firstly, we need more emphasis on implementation. We have made ambitious plans, but now we also need stronger commitment to deliver. In our case, most G-20 recommendations have been translated into European directives, but we still have a lot to do. The same is true in other regions, including the US.

- Secondly, the G-20’s reform programme is not complete. We’re still not paying enough attention to compensation practices. We have agreed on the FSB principles, but we need more vigilance. We need supervisors who actually oversee abnormal compensation policies. That’s why I recently announced additional measures in the Netherlands, to give our supervisors greater powers and increase the scope under the law for clawing back unjustified bonuses in the financial sector.

- The final missing element I want to share with you is that we urgently need international agreement to improve crisis management. Here we come to one of the most striking features of this financial crisis. The authorities were forced to rescue financial institutions by taking exceptional measures, because there was no pre-defined entry strategy. These actions passed on an excessive share of the risks to ordinary taxpayers. But some think they may have set a precedent for the future. This should not be the case. Government intervention should not favour unsecured creditors and create moral hazard, because this will undermine market discipline. We need to improve crisis management and create the right incentives.

On all these points, we need a global approach.

It was my privilege to take part in the G-20’s meetings in both Washington and London. I have witnessed that the combined international efforts make in restoring financial stability.

So in the future, the G-20 and the FSB will have an important role to play. The G-20 and the FSB should monitor progress from country to country, and report on whether reforms are being implemented fully and consistently at a global level.

Speaking for a country with a large financial sector, we know that international coordination is essential. So we are committed to continuing our contribution through these fora.

Strengthen international supervision

The third lesson that I want to emphasise is that, internationally, we need to work together far more closely on financial supervision.

This crisis has shown us just how interconnected the international financial sector has become – perhaps more so than we thought. Financial instability in one country can spread to other countries almost instantly.

But financial supervision is still organised along national lines. This has been especially evident in the operations to rescue large cross-border financial institutions. The Belgian-Dutch company Fortis was broken up along national lines. All the financial support for ING was provided by the Dutch government, although it is a multinational institution and its problems arose mainly outside the Netherlands.

In our globalised economy, financial institutions will continue to operate on a global level.

Financial supervision has to reflect this economic reality.

In Europe, we have made a breakthrough on international supervision. We have created three European supervisory agencies that will coordinate financial supervision and will have the authority to mediate and to issue binding technical standards. This is an important step towards more harmonisation in financial supervision and towards a European single rule book.

And this is only a first step. In the future, we will need to step up international supervision, giving more authority to European agencies and making better rules on crisis prevention and resolution – especially on burden-sharing between countries in rescues of cross-border financial institutions.

We need stronger international supervision on a global basis too. There has been some progress here: the creation of colleges of supervisors for large institutions and the supporting work of the FSB. But compared with regional initiatives, this progress has been only modest.

We need to step up our global efforts. For the large global financial institutions in particular, we need to continue and to intensify cooperation on international supervision. This includes cooperation between European and Asian supervisors. The FSB will need to continue to play an active role to achieve this.

Conclusion

Madam Chair. This brings me to my conclusion.

This crisis creates the momentum for further financial reform. This is what I have tried to underline today. We need to seize this opportunity to implement reforms and create a more stable financial market.

Our reform efforts should not be driven by conservatism or national interests. We need to take a leap forward. We need to bring international regulation and supervision into line with economic reality. In particular we need to (i) make financial markets work, (ii) create sound and stable financial institutions and (iii) intensify international supervision.

In Europe, we have made important progress in these areas. Asia is also doing its part. But the lessons I have outlined also apply on a global level. I hope that this meeting, as well as the G-20 and the FSB, will contribute to more global understanding and coordination.

Thank you.