Financial markets face more stormy times and policymakers should use them as an opportunity to reform oversight of banks and their capital rules, the European Union's market regulator said today.
"Never again will the political climate be so favourable for making a meaningful step forward," EU Internal Market Commissioner Charlie McCreevy told a financial markets conference.
Banking supervision needs shaking up as cross-border groups made up 80 per cent of EU deposits, the former minister for finance said, adding global rules on bank capital, known as Basel II, needed fundamental reform.
Member states and national regulators should put aside vested interests and back moves to more streamlined pan-EU financial supervision, he said.
Executive remuneration in the financial sector is also a target amid public outcry over bonuses for top bankers who have left banks that have needed taxpayers' money to stay afloat.
"Measures that focus on addressing perverse incentives are being considered," Mr McCreevy said. Mandatory rules were unlikely he said.
"It's a very vexed question. I don't possibly see a legislative proposal. Perhaps we could agree some broadly based principles, not only in Europe but globally as well," Mr McCreevy said.
Mr McCreevy repeated he would "prepare appropriate regulatory initiatives" for hedge funds and private equity once public consultations are completed.
He confirmed a Reuters story that a provision would be inserted into EU financial regulation now being amended so that clearing of off-exchange traded credit derivatives is mandatory to cut risk in the sector.
The clearing provision is expected to be inserted into the current reform of EU bank capital requirements rules now being adopted by the European Parliament and EU states.
McCreevy said the reform of the capital requirement rules, which apply Basel II, was just the beginning.
The Basel II framework had many shortcomings, including the absence of any overall gearing cap on bank balance sheets, and too much emphasis on credit ratings and "intellectually" refined risk models, Mr McCreevy said.
Not only a maximum overall leverage ratio was desirable for banks, "sub-set forms" controls on leverage were also needed in on or off balance sheet assets or derivatives, Mr McCreevy added.
Reuters