Financial crisis

Since the crisis dawned, policymakers in Europe have been keen to reassure voters that they are taking action to prevent another such crisis from happening again. This has led to a flurry of new policies and policy adjustments to minimize risk and ensure that an atmosphere of sobriety prevails in the financial sector.

But with pressure mounting to implement many changes before the end of the year, critics are now becoming more vocal. Hastily-made changes, they warn, could end up further damaging markets; reasonable responses, not knee-jerk reactions are what the sector needs.

Controversial law

One controversial development is the European Commission's proposed Alternative Investment Fund Managers Directive. It aims to increase supervisory scrutiny on managers of hedge funds and private equity funds.

But Sharon Bowles, who chairs the European Parliament's economic and monetary affairs committee, has warned that the proposed legislation might prompt investors to move their money outside the EU.

"Every time you add an expense (through regulation), you are dropping the yield for the European investor," she told the European Voice. She criticized the "one size fits all" approach taken by the Commission in the AIFM draft legislation. "I think you have to take into account the nature of the type of fund," she said.

Sweden has now called for a discussion over a number of key issues in the AIFM directive, in the hope of resolving some of the bigger problems with the draft while it holds the EU's six-monthly rotating presidency.

Sweden suggested, for example, that the proposed minimum threshold for portfolio values could be deleted. Additionally, it said that an alternative investment fund needed to be clearly defined so as to clarify the scope of the directive.

"Given the global character of the activities of many market players, the current draft does not seem workable as it in many cases will not be possible to hold the assets in the EU without incurring considerable costs for investors," Sweden said in its note on the directive.

The European asset management industry's central lobbying group has also warned that key changes are still needed to the directive, saying politicians otherwise risk ratifying legislation that increases the potential for systemic risk.

Peter de Proft, director general of the European Fund and Asset Managers Association (EFAMA) argued specifically that requiring funds to hold assets in depositories could increase systemic risk because only a handful of firms would be able to provide the service.

"Depository regulations for institutional investors change the burden of responsibility, limiting the depository function to Europe without the possibility of outsourcing," he said. "We are limiting the number of institutions who are able to fulfill the role, which is contrary to the principles of risk and increases risk because (the depositories) would hold all of the assets."

Curbs on pay and bonuses

Another policy area which is now sparking the anger of European bankers tired of being the scapegoats of the crisis is proposed curbs on salaries and bonuses within the sector. In April, the European Commission responded to public anger about perceived managerial greed in the midst of the recession by unveiling several proposals to cut back on excessive remuneration.

"Up to now, there have been far too many perverse incentives in place in the financial services industry," said EU Internal Market Commissioner Charlie McCreevy. "It is neither sensible nor sane that pay incentives encourage excessive risk-taking for short-term gain."

McCreevy said that managers' salaries should reflect "sound and effective risk management," while the payment of bonuses should be linked to the long-term performance of the company. In addition, a company's remuneration policies need to be "adequately disclosed to stakeholders" and properly supervised. Finally, banks should be permitted to "claw back" bonuses paid if there is evidence of wrongdoing.

German Chancellor Angela Merkel said she wants leaders at the upcoming G-20 summit in Pittsburgh to agree on measures that would limit the high bonuses paid to bank executives. G-20 finance ministers meeting in London ahead of the Sept. 24-25 summit agreed on steps to limit bankers' bonuses but declined to back French and German proposals for a mandatory cap. Instead, they proposed that bonuses be deferred for up to five years to allow time to assess bankers' actions over the longer term.

But European bankers are starting to fight back. Some banking professionals claim they've already cleaned up much of the excess voluntarily; others, like UBS Chairman Kaspar Villiger, say that the crackdown on bonuses is a populist measure being used by politicians to deflect blame away from themselves.

"Many banks have made inexcusable mistakes, however these mistakes are not the cause of the crisis," Villiger told Reuters. "The markets have not failed, they have reacted logically to the misguided incentives set by politicians, in particular (in) the US."

Villiger, a former Swiss finance minister, said there was now a tendency to over-regulate financial markets.

"The financial markets do not need more regulation, they need better regulation," he said.

At a recent banking conference in Frankfurt, Urs Rohner, CEO at Credit Suisse, warned against rules that would hamper the sector's ability to attract the best talent, or that would put European banks at a disadvantage against banks in other financial centers.

And Josef Ackermann, CEO of Deutsche Bank, was quoted by Reuters as saying: "The war for talent is in full swing. The question of whether we have learned something focuses too much on the question of bonuses and leaves out other aspects."

Author: Deanne Corbett
Editor: Rob Mudge