Financial crisis and stalled moves to reform cross-border oversight trigger wide reassessment of Europe’s supervisory architecture By Melvyn Westlake

US watchdog boss sees “regulatory black hole.” EU launches derivatives review. Can industry forestall offcial intervention? By Melvyn Westlake

The deterioration in banking sectors across a large number of countries, which has been evident for at least three years, is set to worsen as the global economy slows down and loan books decline in quality. In a systemic banking report* likely to alarm regulators struggling to contain a global financial crisis that has resulted in the bailing out of several banks, rating agency Fitch identifies a continuing global shift of country banking systems into higher risk categories.

Structured finance participants are resigned to a ‘skin-in-the-game’ rule being enacted. But can the damage be contained? The European structured finance industry is engaged in a last ditch lobbying effort to persuade EU governments and lawmakers not to impose a 5% retention requirement on securitised investment deals. But its chances of success appear to be receding.

WASHINGTON – The backlash against credit rating agencies, because of their role in helping to cause the global financial crisis, shows little sign of diminishing on either side of the Atlantic. In the US, senior executives of the three largest agencies – Moody’s Investors Services, Fitch Ratings and Standard & Poor’s (S&P) – received a roasting at a Congressional committee hearing in late October.

LONDON – Some 80% of the 152 national discretions currently available to EU countries under the Capital Requirements Directive will be eliminated if the European Commission follows advice it has just been given by supervisors. The large number of national discretions and options are a deeply resented by many bankers because they create an unlevel playing field and undermine the goal of a single financial market across the 27-country EU bloc.

SANTIAGO – Suggestions that both the Basel II bank capital rules and fair value accounting standards should be relaxed to cut banks some slack in stressed conditions seems “like a very hazardous way forward,” a top Swedish central banker warned in early November.

LONDON – One year after the sweeping new financial law known as the Markets in Financial Instruments Directive (MiFID) took effect in Europe, the top EU regulator responsible for it has declared the outcome to be “largely a success.” Markets have become more competitive and service providers are able to move around Europe more easily, Charlie McCreevy, the European Commissioner for internal markets told a financial audience in London in early October.

LONDON – As world leaders prepared for their mid-November emergency crisis summit in Washington, UK and French central bankers argued for “macro-prudential” policies as a means of preventing or limiting future problems.

SEOUL – Procyclical effects arising from bank capital rules and accounting standards should only be taken into account in supervisory approaches if they exist on a significant scale, according to a top German central banker.