VZCZCXRO4139
PP RUEHIK
DE RUEHFT #3284/01 3571419
ZNR UUUUU ZZH
P 231419Z DEC 09
FM AMCONSUL FRANKFURT
TO RUEHC/SECSTATE WASHDC PRIORITY 2883
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCNFRG/FRG COLLECTIVE

UNCLAS SECTION 01 OF 02 FRANKFURT 003284 
 
STATE FOR EEB (NELSON, HASTINGS), EEB/IFD/OMA (WHITTINGTON), EUR/CE 
(HODGES, SCHROEDER) 
TREASURY FOR SMART, ICN (NORTON), IMB (MURDEN, MONROE, BEASLEY) AND 
OASIA 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PREL GM
 
SUBJECT: EURO FINANCE WEEK PARTICIPANTS CALL FOR STRONGER U.S. 
FINANCIAL REGULATION 
 
FRANKFURT 00003284  001.2 OF 002 
 
 
¶1. Summary: During the 12th Euro Finance Week 2009 in Frankfurt, top 
representatives of the European and international financial 
community agreed that the financial crisis is not yet over. The key 
lessons from the crisis include: that banks are essential to the 
real economy but need better internal risk management, and that 
stricter and more effective regulation at all levels is required. 
Participants felt frustrated with what they perceive as insufficient 
U.S. regulatory reforms and are skeptical about the US following 
through on regulatory promises made. They praised EU reforms, 
particularly the creation of a common rule book, but wonder about 
their effective implementation.  Some questioned the ability of 
banks, many of which are still fragile, to support an economic 
upturn. End Summary. 
 
 
The Crisis Is Not Yet Over: Looming Risks 
------------------------ 
¶2. While the economic free fall has been stopped and recovery is on 
its way, the economic situation is still fragile, stated both the 
President of the European Central Bank (ECB) Jean-Claude Trichet and 
Eurogroup President Jean-Claude Juncker.  For Frank-Juergen Weise, 
Chairman of the Board of the German Federal Labor Agency, the core 
issue is not the intensity of the crisis, but its length. Chief 
Economist of Nomura Research Institute, Tokyo, Richard Koo warned of 
the risk of exiting too soon from the expansive fiscal policies 
after what he termed a "balance-sheet recession." 
 
¶3. Banking sector leaders discussed problems that could still occur. 
"The worst in all business sectors is not yet behind us," said 
Bundesbank President Weber, warning of further upheavals from credit 
card and loan defaults, the high level of market liquidity, and 
remaining toxic assets. Board member of the metal workers' union (IG 
Metall) Hans-Jurgen Urban also speculated that if growth remains 
flat and a credit crunch occurs, many of the leaders in the German 
automobile, electronic, and machine building industries will not 
survive. Overall, Germany has learned that it needs to reduce its 
export dependence by making the country more attractive to foreign 
investors, said Wolfgang Franz, Chairman of the German Council of 
Economic Experts. 
 
¶4. The Central and Eastern European (CEE) region also remains 
vulnerable, since it has the highest rate of non-performing loans in 
the world, noted Timothy Krause, IFC, Moscow.  CEE countries will 
see a sharp contraction of net foreign capital inflows due to the 
crisis and competition from new emerging markets. These countries 
have realized, as per Hungarian Finance Minister Peter Oszko and 
Bank of Moscow President, Andrei Borodin, that "sustainable 
long-term growth cannot be generated by debt" or external capital. 
Structural reforms, a new privatization push, and good governance 
will become even more important than in the past. 
 
 
First lesson: Banks are integral and need to manage Risk 
--------------------------------------------- - 
¶5. A key lesson from the crisis, most agreed, was that Banks are 
integral to the real economy, and must improve their internal risk 
management. Some, such as the Chairman of DZ Bank's Managing Board, 
Wolfgang Kirsch, and Hesse Minister President Roland Koch, 
speculated that banks that had forgotten their primary function 
prior to the crisis, which is to finance the real economy. As for 
risk management, it was the failure to keep up with the banks' "risk 
appetite" which created problems, according to Hans-Dieter Brenner, 
Management Board Chairman of Helaba Bank. Most speakers saw higher 
equity capital buffers and liquidity reserves as the principal 
components of an improved risk management system (although they 
uniformly spoke out against the introduction of a leverage ratio as 
a regulatory requirement.)  Josef Ackerman of Deutsche Bank pointed 
out that this will also require a strengthening of the position of 
risk managers within a bank's hierarchy and the change of risk 
management culture. The German Bundesbank proposed being more 
lenient on equity capital requirements in exchange for strengthened 
risk managers. 
 
 
Second Lesson: Restructure Regulatory Architecture 
---------------- 
¶6.  Another key lesson from the crisis is the need for tighter, 
globally harmonized regulation on all levels. Bundesbank board 
member Hans-Helmut Kotz called the Financial Stability Board (FSB) 
the "key innovation that came out of the crisis." Speakers praised 
G20 accomplishments, although expressed concern as to whether the 
decisions will be implemented if the crisis wanes. Sharon Bowles, 
Chair of the Economic and Monetary Affairs Committee of the European 
Parliament, warned that new regulation must be gradually introduced 
 
FRANKFURT 00003284  002.2 OF 002 
 
 
and made subject to impact studies to reduce potentially unintended 
consequences.  Josef Ackermann, of Deutsche Bank, proposed an 
"emergency fund for banks," an idea dismissed by ECB Governing Board 
Member Jurgen Stark, who warned against creating "new incentives for 
moral hazard." German Economic Minister Rainer Bruederle warned 
banks that they should not expect governments to bail them out 
again. 
 
 
EU Regulation: will it be sufficient? 
---------------- 
¶7. Jacques de Larosiere, Chairman of the High-Level Group on 
Financial Supervision, singled out the creation of a single EU rule 
book as the primary accomplishment of EU regulatory reform efforts, 
as it will overcome diverse and often contradictory national 
regulatory systems. The new European Systematic Risk Board (ESRB) 
will be an advisory agency rather than a supranational supervisory 
agency, which should allow the more effective national supervisors 
to continue to supervise. According to de Larosiere, the EU will 
enforce the rule book through a "comply or complain" basis, and 
sanction non-compliance with "naming and shaming." CEBS (the 
Committee of European Banking Supervisors) and the Basel Committee 
will undertake an impact study of the new architecture in early 
2010, with the new regulatory system in place by the end of 2011. de 
Larosiere warned against the regulatory proposals being further 
weakened by the EU Parliament. Sharon Bowles of the EU Parliamentary 
Committee on Monetary Affairs further questioned whether the new 
regulatory architecture was a "sufficient vaccine to inoculate 
against another crisis." Apart from enforcement, a key challenge 
will be reaching a common interpretation of the new rules. 
 
 
Criticism and Skepticism of U.S. Reforms 
----------------------------- 
¶8.  Numerous voices expressed frustration with current U.S. 
regulatory efforts.  Jacques de Larosiere called U.S. effort 
"insufficient", since they "keep an institutional patchwork that is 
completely ineffective." For Thomas Dietz, professor at the 
Bundesbank University, the "cacophony of voices" with which the U.S. 
speaks in international fora leaves a "pathetic, devastating image." 
Sharon Bowles lamented that the U.S. had not even thought about a 
national insurance regulator, while Arnaud Vossen, Secretary General 
of CEBS, complained that "the entire world except the United States 
applies Basel II standards." Christian Clausen from Nordea, 
Stockholm, continued, "A bank book prudently run by Basel II rules 
survived the crisis extremely well." 
 
¶9. Interlocutors were also concerned about tensions in the 
transatlantic conversation on regulation. Eddy Wymeersch, Secretary 
General of CESR (Committee of the European Securities Regulators), 
regretted that this dialogue had become increasingly difficult. 
"There are now ill feelings and frictions on all issues," he said 
pointing specifically to debates on credit rating agencies, 
accounting practices, and derivatives. Gabriel Bernardino, Secretary 
General of CEIOPS (Committee of European Insurance and Occupational 
Pension Supervisors), went so far as to say that if the U.S. does 
not implement the G20 agreements as promised, the EU Member States 
will have to rethink their relationship with the U.S. 
 
¶10. Comment: Participants at European Finance Week largely accepted 
the need for tighter financial regulation and supervision. Less 
frequently discussed, however, was the tension between tighter 
regulation and economic growth. Critique of U.S. regulatory 
practices recurred during the summit, with a strong sense of 
impatience for the US to present an equivalent regulatory playing 
field. End Comment