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An exit interview with the outgoing chairman of France's financial market regulator.
Eila Rana, CFO Europe Magazine
September 3, 2008
It's been a rocky home stretch for Michel Prada, who completes his five-year term as chairman of the Autorité des Marchés Financiers (AMF), France's market regulator, in November. Corporate France, as elsewhere in Europe, has suffered from the global financial downturn triggered by the US's subprime-mortgage crisis that exploded a year ago. French heavyweights Crédit Agricole, Natixis and Société Générale have all been forced to write down billions of euros because of their exposure to the high-risk loans. For the AMF, the subprime fallout has been the "dominant event" of the past year, "putting an abrupt halt to previously positive market trends," says Prada. To help find a way out of the current crisis and put in place measures to help prevent one in the future, he's spent the past few months in global discussions, with the Financial Stability Forum (FSF) and the International Organization of Securities Commissions (IOSCO).
He would like these efforts to be viewed as his legacy, but will they be enough to restore the confidence and trust of investors back home? Perhaps not. Longer term, Prada believes the AMF must play its part in national efforts to educate the public — and politicians — about the intricacies of a market economy. Only then will investor confidence be restored fully.
Prada hasn't decided what lies ahead for him. But as he wraps up his final weeks as the first chairman of the AMF — the regulator was formed five years ago through the merger of three organisations — he tells CFO Europe why he's feeling bullish.
How deeply has the French financial market been affected by the subprime crisis?
It may have affected the market a little less than in other countries, mainly because French banks were a little less connected to this kind of business and their business model provides a diversification that made the consequences of the crisis a little less severe. We haven't, up to now, had any casualties.
We will probably suffer from the global consequences of the crisis. It will impact the rate of growth and exports. One of the difficulties is that besides the subprime crisis and the destabilisation of the credit-risk transfer model, we must now contemplate the consequences of the commodities shock.
How has the AMF responded to the crisis?
When you look at this crisis, there were signs well ahead of it. There were lots of analyses in 2004 and 2005 that identified some of the risks. It's always difficult to know whether regulators can anticipate without the risk of slowing down the rate of growth, hampering innovation or hindering competition but, at the same time, I believe we should try to be more proactive.
Credit ratings agencies have been criticised for their role in the subprime fallout. To what extent do you think they're to blame?
Although they undoubtedly share part of the burden, they shouldn't be the scapegoat. They are part of the dysfunction of the originate-to-distribute model and for that reason we have to deal with the difficulties that come from their activities. But they are not the only ones. It is a chain and each of the links of the chain has to be analysed, starting with the way credit was being distributed, packaged and securitised.
We [the regulators] have worked very hard, together with the industry, to identify the rules of conduct credit ratings agencies should respect in order to deliver a better judgment on the products they rate. This has produced the complementary part of the code of conduct IOSCO had published in 2004, which addresses the issue of structured-product ratings.
Having built this code of conduct, how do we make sure that it is implemented? I have always supported the view that we should have some kind of global monitoring, a bit similar to the kind we have for auditors, involving the main regulatory organisations at the global level. This is something IOSCO will contemplate at our next technical committee meeting this month.
Charlie McCreevy [European Commissioner for Internal Markets] and [French finance minister] Christine Lagarde have expressed the view that there should be some kind of registration of credit ratings agencies at the EU level. My proposal would be that we have a registration process at the EU level and the enforcement should be done at the level of national authorities.
The last point I want to mention is a very personal view and I haven't yet seen people ready to contemplate it. Credit ratings agencies are, to my knowledge, the only financial profession that has no organisation of any kind. We have to talk to them bilaterally. I would advise that the agencies create some kind of organisation that would be able to talk both with them and the regulators. [For more on future regulation of the rating agencies, see "Over Rated?"]
How do you think Société Générale's €4.9 billion rogue trading scandal in February has affected perceptions of the quality of corporate governance and financial regulation in France?
This serious accident has been dealt with extremely rapidly, without the involvement of the government or the authorities. The company has taken care of itself. It has built a market solution, which has been implemented efficiently. These events haven't had severe consequences in the market from the point of view of confidence in this country. Of course, the event occurred owing to serious flaws in internal control.
The AMF recently had to deal with press leaks of an investigation into allegations of insider trading at EADS. Has that hurt confidence in the AMF?
Not at all. I'm undoubtedly worried about the fact that leaks got out. It's always unpleasant, first and foremost, for the persons under investigation because we should never lose sight of the principle of the presumption of innocence and the principle of a fair trial.
Leaking information to the press is always detrimental when things are developing normally according to organised procedures and sound principles. So I'm very sorry about that. But now I'm calm about it. We did our job properly, we know the leaks didn't come from us and we know the Enforcement Committee [a unit of the AMF] will analyse the facts, organise the contradictions with the people involved and hopefully make a decision within a year or so. I'm absolutely convinced that processes at the AMF are watertight.
Have all of these problems led to a general lack of trust in the financial markets and financial regulation?
I don't think this has had a significant effect on the functioning of the markets in France. The market is not booming but I don't know of any country where it is. We haven't seen a loss of confidence in the market, and the fact that we have had problems that have been solved shows that the regulatory system is resilient and that people can have confidence that it does work.
In France there is still a lack of understanding of the fundamentals of a market economy and of the fundamentals of a financial system. This is not linked to the recent turmoil — it is the consequence of years during which the economy functioned very differently. The role of the state was bigger and the role of the markets less significant.
Since the late 1980s, the system has progressively developed in the direction of a market economy through privatisation, deregulation and competition. The public, and possibly some politicians, are not yet totally aware of what's going on and are not always ready to understand how the new system functions. So when something goes wrong, people tend to criticise the system. Crises and bubbles are part of the game. We need to educate the public.
The AMF can play a role in this but we're not equipped to deal with it alone. We favoured the creation of a special body (l'Institut pour l'Education Financière du Public), two years ago, which is devoted to public education. Now we're striving to obtain more resources to support this.