EU Officials Resist Push For New Financial Market Rules

European economic officials are resisting calls for new regulations in response to the credit crunch rocking financial markets, despite worries that calm won't be restored quickly.

Finance ministers, central bankers and regulators, meeting Friday and Saturday, said Europe should avoid the "Sarbanes-Oxley mistake" that followed accounting scandals at Enron Corp. (ENE), Tyco International Ltd. (TYC) and other U.S. companies. The Sarbanes-Oxley rules, rushed through the U.S. Congress in 2002, subsequently have been criticized for being too rigid and costly. German Chancellor Angela Merkel and French President Nicolas Sarkozy are leading the push for stronger regulation, blaming the banks that made risky bets on U.S. subprime mortgages and the ratings agencies that graded these investments for the current financial-market turmoil. "We have to moralize financial capitalism," Sarkozy said Sept. 10, following a meeting with Merkel. "We want transparency. We want regulation. We want capitalism for entrepreneurs and not for speculators." Most of Europe's economic officials opted for a softer stance, noting that the opaque securities backed by bad mortgages need to be studied before any regulatory action is taken. "It would be a mistake to rush out now with new ideas for regulation," said Charlie McCreevy, the European Commission's financial-markets overseer. European Central Bank President Jean-Claude Trichet said: "It's too early to draw definitive conclusions." Bank of Italy Governor Mario Draghi disagreed with the majority view. Regulators can either let the markets govern themselves or impose stricter rules, he said, adding that the first option was tried and didn't work. Draghi also heads the Financial Stability Forum, a body of international regulators that has been asked by the Group of Seven leading industrial countries to investigate the recent financial-market turbulence. Transparency, not regulation, was the catchword most finance ministers and central bankers used. In a statement, they said high-level treasury officials will discuss with their U.S. counterparts "how to further improve transparency of complex financial instruments, of institutions and vehicles." The treasury officials will also examine ratings agencies' role in financial markets.

ECB Ready To Help Struggling Banks

The ECB and the U.S. Federal Reserve, which have provided banks with several rounds of emergency liquidity, so far have kept the credit crunch under control, ministers and central bankers said. They were concerned that liquidity problems won't ease quickly, but said the European and global economies are still on strong footing, further damping what could have been a larger crisis. "As things become clearer, confidence will return. Nobody is able to say how long this will take," Central Bank of Ireland Governor John Hurley said. Until the crisis eases, the ECB stands ready to help banks struggling with liquidity problems, Trichet said. The Bank of England will also provide assistance, according to Chancellor of the Exchequer Alistair Darling. Bank of England Governor Mervyn King has criticized cash-injections, saying they encourage irresponsible risk-taking. But on Thursday, the central bank agreed to provide short-term funding to Northern Rock PLC (NRK.LN), one of the U.K.'s largest mortgage lenders. That move didn't calm the bank's customers, who formed long lines to withdraw their deposits and overloaded the lender's Web site. During their meeting, the central bankers and finance ministers talked about contingency plans to bail out an even larger bank, if needed. The discussion was part of a long-running debate about banking supervision in Europe and was planned before the recent market turbulence. Earlier this summer, before the credit crisis started, the International Monetary Fund warned that Europe wasn't adequately prepared to deal with the collapse of a large bank operating across borders. Italian and Swedish officials called for a detailed, pre-arranged system for sharing the costs of a bank bailout among European countries, according to an E.U. official present during the meeting. Trichet and German Bundesbank President Axel Weber said such a system was a bad idea, since a readily available bailout might encourage banks to take immoderate risks. The officials didn't reach an agreement and are expected to debate this issue again at a meeting next year.