Europe's post-Enron response: how EU policymakers are desperately speeding up market integration and supervision--with, once again, the central bankers the losers.

• Author: Engelen, von Klaus C.

For Europe's actors in financial markets--particularly for internationally active banks--streamlining of supervision and regulation on the European level cannot occur fast enough. One leading German banker, Rolf E. Breuer, head of Deutsche Bank's supervisory board and president of the Association of German Banks, is calling for a full-fledged pan-European supervisory agency to reduce the complexity of coping with more than 40 European supervisory bodies. Some benefits of speeding up EU legislative procedures are in easy reach. Fast implementation of the new risk-based capital adequacy rules (Basel II) ranks on top of the list.

Frits Bolkestein, European Commissioner in charge of internal markets, set the tone when calling on EU governments to respond to the "quantity and magnitude of the accounting and corporate scandals in the U.S." To his European constituency he sends a note of caution: "Only the very foolish would pretend that recent events in America could not or will not happen here. The issues raised by Enron, WorldCom, Xerox, and others are issues for us all, and issues that we must address urgently. There are not only dangers of complacency by companies and investors but also complacency by governments and regulators."

When calling a meeting of EU finance ministries on July 23, Bolkestein made clear, as a result of the U.S. scandals, that he EU Commission is pushing for five specific actions:

First, to speed up the corporate governance report by a high level group of experts under Professor Jaap Winter that deals with issues such as management renumeration, the role of non-executive directors, and the responsibility of management for the preparation of financial information;

Second, to ensure that International Accounting Standards (IAS) are implemented and enforced effectively and evenly across jurisdictions. "I also want to see IAS and U.S. GAAP converge by 2005 so that there may be full reconciliation between them," says Bolkestein. "This is why, when I was in Washington two months ago, I agreed with Chairman Harvey Pitt of the SEC that we should now begin an intensive and detailed technical dialogue to resolve our differences on accounting standards and trading screens and to bring about convergence or, at the very least, mutual acceptance";

Third, the EU is looking "even more intensively at the way the audit profession is regulated. The EU Commission will address in particular the use of international standards on auditing (ISA) for all EU audits by 2005, minimum requirements for proper public oversight of the profession at national and possibly EU levels, and other corporate governance issues, including the future role of audit committees in European-listed companies." The Commission will also explore whether a code of ethics should be established at the EU level to underpin professional integrity within the ever-expanding borders;

Fourth, the drive to implement rigorously determined and agreed to risk-based prudential rules will be intensified. At the center of these efforts to improve the long-term health of companies will be the speedy implementation of the risk-based Basel II capital rules, as well as the occupational pension funds directive that requires funds to properly and prudently diversify their investments; and

Fifth, there will be tougher disclosure requirements for all listed companies--in new directives on take-overs, on prospectuses, and on investment services. Warns Bolkestein: "Investors have a right to all the necessary up-to-date and accurate information so as to allow them to make informed choices, not blind guesses. The market increasingly savages those companies that fail this test."

For Bolkestein, getting all member states in one boat on so many issues on internal market matters is at times an impossible mission: Take the new demand by the U.S. authorities to have top managers of European companies listed at U.S. bourses to swear in front of a notary that to the best of their knowledge their latest annual or quarterly company report contains no "untrue statement" nor omits any "material fact." The fact that German Justice Minister Herta Daubler-Gmelin advised the EC Commissioner that the German government would not tolerate this American request puts Bolkestein on the spot. Here is another...