Larosière Report: A new European framework
27/02/2009
The keenly awaited Larosiere Report, determining the state of, and need for regulation in the Eurozone has argued for a new early warning system to be created by the IMF, BIS and other bodies, along with the creation of a group to drive convergence of international regulation

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The keenly awaited Larosiere Report, determining the state of, and need for regulation in the Eurozone has argued for a new early warning system to be created by the IMF, BIS and other bodies, along with the creation of a group to drive convergence of international regulation.
The report also suggests a push to level the playing field for the varied regulation in Europe and an inclusion of ‘uncooperative states.'
The report analyses in some detail the main causes of the financial crisis.  What is striking is the complexity and interconnectedness of a number of major factors that amplified the crisis.  The main failures are:

  • Macroeconomic causes
Example: ample liquidity, low interest rates - and too loose monetary policy - the US in particular; accumulation of large global imbalances; mispricing of risk and large increases in leverage.
  • Risk management
By firms, supervisors, regulators and a lack of transparency - leading to the build up of the shadow banking system, the originate to distribute model and extreme complexity which few understood.
  • Credit rating agencies
Dramatic failures in the ratings of structured products, major conflicts of interests.
  • Corporate governance
Weak shareholders and management of firms; remuneration schemes providing the wrong incentives...
  • Regulatory/supervisory
Wrong incentives - procyclicality e.g. Basle process; mark to market accounting; lack of regulation of derivatives markets; insufficient examination of macroprudential risk.
  • Global institutional weakness
IMF, FSF, G20... and lack of coordination.

In the UK the British Bankers' Association has already responded positively, saying in a statement:
"The British Bankers' Association agrees that it is vital to set up a European wide forum for financial stability, as proposed today by the High Level Group chaired by Jacques de Larosiere, which obviously must work alongside of central banks of non-Eurozone countries.  Other aspects of the report, such as the changes to EU regulatory and supervisory structures are also welcome and we are pleased the group agreed to a step by step approach to bring the regulators of Europe closer together.           
"We favour an enhanced role for the Committee of European Banking Supervisers (CEBS) in bringing about agreement amongst  regulators, which is particularly necessary for the banks that operate across borders. A common rulebook would be a step forward, but as rules can mean different things in different countries it would be of greater importance to achieve equivalent implementation and equivalent outcomes.
"However, financial services is also a   global industry  and for changes in Europe to work for this industry they must be set in the international context. It is vital regulators worldwide consider how difficulties in one country can have knock on effects elsewhere."
Download the report to the right >