Europe-Australia Oration today. Last year Stephen Loosley eloquently spoke for a

fourth leg in Australian foreign policy in the shape of a more formal recognition of the

importance of the relationship between Australia and the European Union. Since he

spoke in May 2008, developments have been entirely in the direction he suggested.

Under the government of Prime Minister Rudd, the relationship between the EU and

Australia, already very positive in the past, has taken a new direction and grown in

stature.

In October last year we saw the adoption of the new EU-Australia Partnership

Framework. For the first time this placed the relationship much more in an 'action

stations' mode. Not only does it define more clearly the areas where Australia and

the European Union should cooperate – and sets out the reasons why – most

importantly it also sets real goals and targets in the form of Action items. The

objective was to conduct the active parts of the relationship under the umbrella of a

living document that ensured real achievements and that would be updated and

amended by adding areas for future work, in addition to recognizing actions already

successfully completed. This too has been fulfilled. This month in Stockholm Foreign

Minister Stephen Smith met Commissioner Ferrero-Waldner and Foreign Minister

Carl Bildt, of the Swedish presidency, in formal Troika consultations that adopted

revisions and additions to the partnership framework.

I do not want to elaborate on individual aspects but the partnership framework

provides for cooperation on foreign policy and security matters, on trade and

investment, for cooperation in the Asia Pacific region, for cooperation on climate

change and the environment and on research, education and people to people

contacts. In all these domains we have concrete actions where we are committed to

achieving results.

In practical terms the level of interest in Europe shown by Australian ministers has

been demonstrated by the succession of ministerial visits to Brussels and the

European Commission. The increased degree of cooperation, particularly in

important fields such as climate change, has also heightened awareness of Australia

and Australian policy making in Brussels.

Following the vote in my own country in the referendum on the Lisbon Treaty, Europe

is about to open a new chapter in its development. Last year Stephen Loosley

described the Lisbon Treaty as perhaps the most important European document

since the Treaty of Westphalia of 1648. This is his judgement and I might perhaps be

more cautious myself. However, I would agree that the important reforms of the way

the European Union operates will undoubtedly increase the profile of Europe globally,

as well as allowing us to conduct our decision making more expeditiously and with

more – not less – democratic oversight. For our partners, relating to the European

Union should be facilitated by the new office of the High Representative, with a foot

in both camps so to speak, both the Commission and the Council of Ministers. As

you will know, we still have some final steps to take on the Treaty but we are

confident that these last remaining issues will be resolved positively thus allowing the

Treaty to enter into force.

At the same time as the EU and Australia developed their relationship so positively

both parties were also called upon to face the difficulties of the global financial crisis.

Here too cooperation has continued, particularly in the forum of the G20. Australia

has made a highly visible contribution to discussions in the G20 while the European

Commission has also contributed, not only as a member of the G20, but also in its

role as the coordinator of the policy responses at European level. Of the developed

economies it is a fact that Australia is faring best in these difficult times and it is

important that we share experience in those areas of policy that underpin this

success.

This brings me to areas of my own field of competence within the Commission and I

should like to talk to you today about those policy responses to the financial crisis,

and in particular the European Commission's role in that.

There have been two sides to this: in the shorter term co-ordinating and overseeing

efforts to protect citizens against the worst effects of the crisis, and stimulate the

economy to recover; and in the longer term, the prevention of future crisis (this is

where improvement in regulation comes in). I must also be careful not to neglect

mentioning the international aspects either - as global co-ordination is crucial.

Reacting to the crisis

Regarding the shorter-term objective of reacting to the crisis, the Commission has

coordinated Member States' rescue operations in several ways, including setting out

principles governing the application of State aid to failing banks and minimising any

possible negative effects of State aid on the level playing field. I should perhaps

remind you at this point that the EU is the only jurisdiction in the world, other than the

WTO, to have real provisions with teeth to prevent competition-distorting subsidies or

State Aids – the EU has given the European Commission real power to co-ordinate

Member States' emergency interventions in the financial sector.

In the regulatory field, the Commission also proposed progressively increasing

minimum deposit guarantee levels (50 000 euro by the end June 2009, increasing to

100 000 euro by end 2010) to strengthen retail consumer confidence in the banking

system, while avoiding market distortions due to varying deposit guarantee levels.

These initiatives should not be seen in isolation. The financial services policy actions

have been coordinated with fiscal, monetary, and Member State rescue measures.

This has been crucial for re-establishing market confidence. And this coordination

has often been provided by the Commission.

Some positive signs of recovery have already been seen in financial markets: market

confidence has started to return to the financial sector – which have been reflected

by narrowing interest spreads in the money market and by the increase in equity

prices since the spring 2009. While the financial sector recovery so far is mainly

policy induced, and great uncertainties remain, it is at least a promising sign.

Long-term objective: preventing future crises

Regarding the longer-term objective of preventing future crises, let me say first of all

that some people think that the financial crisis has led to a knee-jerk reaction of overregulation.

It has been observed that the level of regulation tends to jump following a

crisis, and then over the years of the ensuing good times, there is pressure for

lightening the regulatory load, which happens just in time for the next crisis to strike.

So the level of regulation follows an inverse cycle to the economic cycle,

overshooting the optimal level just after each crisis and undershooting the optimum

following the peak of the economic cycle.

I think we need to get regulation right, in its detail and coverage, its level (national,

EU or global), and its timing - we all know that even good regulation when badly

timed can have serious pro-cyclical effects. Let me take some examples, which

illustrate how I think our recent regulatory proposals have got the balance right.

Let's first take the example of Credit Rating Agencies (CRAs), which undoubtedly

represent a major gap in regulation. Last year, we adopted a draft Regulation on

CRAs, which has now been adopted by the Council and Parliament and will enter into

force next year. There is widespread agreement that CRAs contributed in a

significant way to the recent financial crisis through giving excessively high ratings to

frankly dodgy securitisations such as Collateralised Debt Obligations based on US

subprime loans. They did this because they were paid by the issuer – a blatant

conflict of interest. And everybody relied on their ratings as the damn CDOs were too

complex for anybody without a PhD in mathematics to understand. So regulation is

clearly necessary in this field.

The second example is bank capital requirements. As we are painfully learning, it's

not just a question of putting capital ratios up or down. Increasing capital

requirements during a recession will worsen the credit crunch by reducing a banks'

ability to lend. The challenge is to have targeted anti-cyclical capital requirements,

which kick in when they are needed and do not worsen cyclical tendencies. That's

why we have just proposed more capital requirements for complex securitisations

and trading book activities, two areas where capital requirements have been lacking.

But we have to work also within the Basel committee on banking supervision, which

aims to set global principles for banking regulation including capital requirements, to

ensure a level playing field. Different regulatory requirements in different countries

are an invitation to regulatory arbitrage. These are illustrations of how it's not about

having more or less regulation but more intelligent targeted regulation. Easier to say

than to achieve, I know, but at least we know what the objective is.

Let's now look at the issues regarding financial supervision in the EU. The EU's

banking and insurance markets are increasingly integrated, being dominated by pan-

European groups, whose risk management functions are centralised in the group's

headquarters. Currently around 70% of EU banking assets is in the hands of some

40 banking groups with substantial cross-border activities.

However, financial regulation and supervision has got out of step with financial

integration. Under our legislative framework for financial services rules we have

framework legislation at the EU level with many of the interpretative details set at

national level. We also of course have 27 national supervisors (more in fact, since

some member states have two or three supervisors).

This can and does lead to disparities in the rules, and indeed supervisory practices.

We have 27 different definitions in the EU of what constitutes "own funds" for banks.

During the height of the financial crisis, we had different member States issuing bans

on short selling, of different durations. We have branches of banks operating in other

EU (and EEA) member states, where the host supervisor has no say in the way in

which the home Member State supervises the whole group. That of course was a big

issue with regard to branches of Icelandic banks operating in the UK and the

Netherlands under the EEA single passport.

So, something is out of kilter here. The solution which we have proposed in a major

legislative package in September this year, is a network-based one, with new

European Supervisory Authorities, working closely with national supervisors in a new

European System of Financial Supervisors. The new Authorities will increase coordination

and convergence at European level, while leaving day-to-day supervisory

work where it belongs, at national level. They will for example be able to intervene in

cases of disagreement between home and host supervisors to resolve

disagreements, and issue proposals for technical standards to try to iron out

regulatory differences between member States. They will also have direct

supervisory powers over Credit Rating Agencies, since they are pan-European by

nature, while leaving supervision of other financial institutions firmly in the hands of

national supervisors.

A second element of the revised supervisory structure will be a European Systemic

Risk Board (ESRB) which will monitor and assess the risks to the stability of the

financial system as a whole. It will provide early warning of systemic risks and,

where necessary, present recommendations for action to deal with these risks. Lack

of a dedicated body to monitor systemic risk was one of the factors contributing to the

current crisis, and this has been realised in the EU, in the USA and at a global level.

One more example. In April the Commission adopted the very first tranche of its 2009

financial services programme, consisting of a draft Directive on Alternative

Investment Fund Managers (hedge funds and the like), a Recommendation on

executive remuneration in the financial sector, and a Communication on packaged

retail investment products.

The draft AIFM, or hedge funds, Directive plugs an important gap in regulation. It

aims at ensuring that funds are transparent, with appropriate governance standards

and have robust systems in place for the management of risks, liquidity and conflicts

of interest. The point of our Recommendation on executive pay in the financial sector

was not to intervene in debates on what level of remuneration is just or appropriate. It

is to link pay and incentives to long-term performance and prevent excessive risktaking

behaviour. We have also proposed legislation to allow supervisors to require

capital add-ons in cases of imprudent pay and remuneration structures which

encourage short-term risk-taking.

International co-ordination

This evening I would also like to touch on the international, global element of financial

regulation. The best regulation and supervision in the world will be no use to Europe,

if the rest of the world is not appropriately regulated. That's why I was very

encouraged by the outcome of the two G20 summits this year, in London and

Pittsburgh. Many elements high up on both the EU's and Australia's agenda have

been reflected in the G20 Leaders' statements.

For example, the creation of the Financial Stability Board, on which the Commission

and Australia both have seats and are very active, will play a key role as an early

warning system of systemic financial dysfunctions, and our own future European

Systemic Risk Board will have to interact with it closely. There will also be global

colleges of supervisors for international cross-border groups, reflecting the EU crossborder

colleges which we are rolling out in Europe. The G20 is on the same page as

us regarding hedge funds, credit rating agencies, offshore financial centres, the need

to resist protectionist tendencies and conclude the ongoing WTO trade talks, and

many other issues.

International co-ordination through the G20 has already facilitated collaborative

discussions between the EU and Australia and recognising the importance of

continuing such engagement, I note that cooperation on implementation of the

Leaders' commitments has been included as an action item in the recently updated

EU-Australia Partnership Framework.

Conclusion

In conclusion, let me say that the current global economic slowdown was caused by

a financial crisis which could have been at least mitigated by better regulation and

oversight. The regulatory and supervisory measures which we are proposing aim at

the next crisis, to detect it early, and mitigate it when it arrives.

We don't want to overshoot with regulation and we don't want to undershoot either.

We will be careful to introduce new rules carefully, in order to avoid pro-cyclical

effects. We are simply striving to put in place a framework which will allow the

financial sector to perform efficiently its indispensable function in the economy, while

offering to all the users of financial services the protection they all deserve.

Thank you for your attention