ECMI Policy Brief

Since 2003, the EU and the US have conducted a vibrant regulatory dialogue on financial regulation, but domestic priorities seem to have taken precedence in response to the financial crisis. This ECMI Policy Brief compares the institutional and regulatory changes occurring on both sides of the Atlantic. On the institutional side, it compares macro- and micro-prudential reforms. On the regulatory side, it compares four key areas: bank capital requirements, reform of the OTC derivative markets, and the regulation of credit ratings agencies and hedge funds.

The financial crisis has sharpened the debate on Europe’s back office architecture. This paper reviews the ECB’s decision to proceed with its Target 2 Securities (T2S) project, which aims to establish a common IT platform for securities settlement, reducing differences between current infrastructures and creating a borderless pool of pan- European securities. The apparently solid configuration of the project shakes, however, when we closely examine the impact of this common infrastructure on the competitive landscape.

Credit ratings are a quasi-public good, and investors and financial markets regulators need an independent assessment of the credit-worthiness of an issuing entity because of information asymmetries and principal agent problems. In light of the high volatility of market-based measures and the failure of internal risk management, private CRAs are best fit for purpose. However, natural barriers of entry in the rating business and conflicts of interest have led to an inflation of ratings and a deterioration in their quality.

There remains considerable confusion as to how exactly the MiFID and UCITS directives will interact in the long run. This uncertainty reflects the growing pains of a regulatory transformation that represents no less than a tectonic shift from intense and prescriptive product regulation to a more flexible, principles-based regulation of management functions. Unlike UCITS, MiFID is a horizontal directive that cuts across the entire financial services industry (except for insurance).

by Karel Lannoo
 

by Karel Lannoo
 

by Peter G. Dunne

by Karel Lannoo

by Charles Gottlieb