Authors Iain Begg | Gabriel Glöckler | Anke Hassel ... - The Europaeum

For all its virtues, the Basel II framework has a tendency to function
procyclically. The Basel II capital adequacy requirements should be raised
by a ratio linked to the growth of the value of each bank’s assets. Thus, at
times of expansion the capital adequacy bar would be raised, moderating
excess lending, and building up capital reserves during boom time in the
event of a downturn. 23 Countercyclical regulation should be most
constraining at the height of the bubble, breaking away from policies of
regulatory laxity and neglect that led to the crisis.
Regulatory supervision must extend to include the “shadow” financial
system (major investment banks, private equity and hedge funds, and
sovereign wealth funds operating in Europe). The recent crisis
demonstrated that a major source of instability in the US was the lack of
any regulation in the derivatives industry. As a principle, there should be
comprehensive regulatory coverage across the entire financial system,
covering all leveraged institutions over a certain size, in order to prevent
regulatory arbitrage.
Regulatory initiatives would be incomplete if they failed to tackle
systematic patterns of tax evasion that distort actors’ incentives and
market competition. Following the G20, global government coordination
should target offshore companies based in tax havens, a scandalous source
of tax evasion and financial corruption, especially since taxpayers money
has been invested in the banking system bailout. Offshore centers
contribute to draining fiscal revenues and unfairly shifting the tax burden
onto the majority of working tax payers and productive enterprises.
Europe should lead the efforts of global-level intergovernmental tax
cooperation, which should heavily sanction governments and authorities
that insist on free-riding by retaining offshore centres. At an EU level, the
effort to tackle tax-havens should lead to closer tax coordination. Indeed,
the financial and economic crisis in general makes tax harmonisation a
highly relevant issue.
Finally, private rating agencies have been heavily implicated in underrating
the high risks of toxic investments that led to the subprime bubble and
subsequent meltdown, and have also been implicated in serious conflicts
of interest. As the role of rating agencies has vital implications for systemic
stability and the public interest, it is important to ensure fully transparent
methodologies and evaluation systems. The EC has already adopted
legislation requiring all credit ratings agencies active in Europe to register
with EU regulators and observe demanding rules of conduct. Regulatory
Chapter 2 – George Pagoulatos 41