Advances on the Road to Financial Reform

The United States and EU Member States are steadily chipping away at the iceberg that is the global financial crisis. The European Parliament on Wednesday approved the so-called “Solvency II” Directive, which, if also approved by the Council of Ministers, constitutes a significant change in EU insurance and reinsurance law. Solvency II is designed to improve consumer protection, modernize supervision, and deepen market integration. Insurance groups would have a dedicated “group supervisor” that would enable better monitoring of the group as a whole.

Commission President José Manual Barroso said:

"Solvency II will help protect policy holders from bad practice. It will help shield our economies against a repeat of the disastrous excessive risk taking by financial institutions, including certain insurance operators, that has contributed to the global crisis."

In Berlin, the German government is getting closer to a solution for dealing with banks' toxic assets and expects to have a law in place by the summer, senior ministers said on Tuesday. A government source told reporters that German banks would likely aim to park assets worth around 200 billion euros in bad banks.

The German Finance Minister, Steinbrueck, said two models were being analyzed—one where bad assets would be re-valued by a neutral third party and second where they would be transferred to special purpose vehicles at book value. This way, the state would risk a possible decline in the value of assets, but would not take any hit until the underlying securities matured. "Whether the guarantees are taken up will only be decided when the instruments mature, in anywhere from 15 to 20 years," Steinbrueck said.

Separately, German Chancellor Angela Merkel organized an economic summit at the Chancellery on Wednesday, meeting with business and trade union leaders. Some 40 industry stakeholders discussed how to improve Germany’s response to the economic crisis by improving coordination between the government, the business community, and trade unions.

In London, the Chancellor of the Exchequer, Alistair Darling, presented his budget on Wednesday and noted that the UK government soon intends to issue proposals for wide-ranging reforms of financial regulation in line with the G20 commitments:

"I will shortly publish a Treasury paper with my recommendations for wide-ranging reform. They will propose action to reform corporate governance and remuneration at banks to avoid undue risk taking. To improve regulation of capital and liquidity so banks do not over-extend themselves. To increase transparency, to achieve a single set of accounting rules—so that we can see the risks banks are taking and to regulate all important institutions including hedge funds.”

Wednesday, in a speech before the Economic Club of Washington, U.S. Treasury Secretary Timothy Geithner discussed the “community of nations” working together, but also emphasized the unique position of the United States, saying, “The rest of the world needs the U.S. economy and financial system to recover in order for it to revive. We remain at the center of global economic activity with financial and trade ties to every region of the globe.”

While the U.S. response remains steadily focused on the three goals of fiscal stimulus, repairing the financial system, and providing financial assistance to emerging and developing countries, it is only a matter of time until the focus turns to regulatory reform. With the G7 finance ministers and central bank governors meeting in Washington today, followed by a G20 ministerial meeting, additional discussion of how the Obama Administration plans to advance new regulatory measures is likely to take place very, very soon.

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