EU’s McCreevy: Complexity Is at Heart of Crisis

Charlie McCreevy, European Commissioner for the Internal Market and Services, spoke with The Wall Street Journal about how the European and global regulatory landscape needs to change in order to prevent a repeat of the current crisis. Here are edited excerpts from the conversation.

WSJ: The talk at Davos is all about how to reform the financial system to prevent the next blowup. Where do you stand?

CM: I’ve always believed the best result will come out, economically and in terms of wealth creation, from open markets. But we need to have appropriate regulation alongside that. Getting the balance right is the trick.

WSJ: Did we get the balance wrong?

CM: It’s hard to know. In my view, there’ll be multiple reasons as to the cause of the financial crisis [when we look back], of which regulation perhaps in certain ways will play a role. But it won’t be the only reason. In fact, it’ll be only one of, say, 25 other reasons.

WSJ: Can you think of one particular mistake we need to correct now?

CM: Complexity is at the heart of it. It’s very obvious that the top management of financial institutions didn’t understand the products they were taking on or selling. The investors who were buying them certainly didn’t understand them. It’s obvious the directors didn’t understand them either. And I don’t believe, myself, that the regulators were in a position to understand them either.

WSJ: You’ve been advocating an overhaul of European banking supervision for banks that operate across borders. European Central Bank president Jean-Claude Trichet has indicated recently the ECB might be best-placed to supervise those cross-border banks.

CM: That is a separate debate. I think we should try to agree just how we will supervise those institutions that operate across member states, then secondly deal with the location. I’m easy about that. I’m neither for nor against.

WSJ: After U.K. bank Northern Rock suffered a run and was nationalized last year, you said if a similar thing had happened with a big bank that operates across borders in the euro zone, it would have been “chaos” to coordinate an emergency response. Then we had the weekend rescue of Fortis NV, which operated in Belgium, the Netherlands and Luxembourg. Was it chaos?

CM: Fortis is a very good example. You could not get a closer group [of countries], proximity-wise, with good understanding between them, and all three were founding members of the European Union. And it’s not a secret that it was a very, very troublesome negotiation. I think it proves the case.

WSJ: The idea that there might be supervisory “colleges,” comprised of supervisors from different countries that would supervise cross-border banks has taken off internationally. Do you think it has legs?

CM: I imagine it’ll have to be something like that. I’d be somewhat taken aback if, as a result of this international financial crisis that when the leaders of the G-20 meet, they don’t advance global cooperation in some of these areas. It’d be somewhat illogical if they don’t do so.

WSJ: The Basel II capital standards are one example of where you might say global cooperation in financial regulation hasn’t worked all that well. They’re coming under increased fire from all parts of the globe.

CM: We should go back to a cruder measurement of the adequacy of capital. Simple, direct routes may be the way forward. But I also say that policy makers should not be afraid to stand back — no matter how august a body has come up with ideas — to say, well, that mightn’t be the way [for us]. Whatever Basel comes up with, then I think the people that put that into effect — say, congresspeople in America, or legislators here in Europe — should be prepared to say well, ok, that’s what they came up with. But we can approach it somewhat differently.

WSJ: The ECB is reluctant to take the kind of steps the U.S. Federal Reserve has taken, of buying assets directly. If they were to decide to buy euro-zone government debt, would there be a competition issue? There are after all 16 euro-zone members.

CM: Well, there may be. But there hasn’t been a government that’s made changes in this area [during the crisis] that hasn’t raised some type of state-aid issue. And the Commission has been pretty flexible, dealing with these particular measures, because we’ve had to be. Now, would some of those issues arise if the ECB did that? Possibly. We’ll have to wait and see what Mr. Trichet and his board decide to do.

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