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12 May 2010

A push for ‘more Europe’ on supervision

The de Larosière Group (DLG) was created in late 2008 to respond to the turmoil in the financial markets – then at its height. The EU has moved rapidly to turn these concepts into legislative reality so that the new supervisory system will operate from January 2011.

Graham Bishop

The de Larosière Group (DLG) was created in late 2008 to respond to the turmoil in the financial markets – then at its height. The EU has moved rapidly to turn these concepts into legislative reality so that the new supervisory system will operate from January 2011. But an extra crisis has intruded since then: government debt. The 2009 European Commission proposal is therefore suffering from a sudden need to switch focus. Simultaneously, it is caught in the middle of yet another constitutional power struggle between the European Parliament and European Council. The plan is to resolve all these issues in time for a vote during the parliament’s mid-June plenary session.

The DLG proposed a structure that included a macro-prudential oversight body – European Systemic Risk Board (ESRB) – and a set of micro-prudential bodies. The European System of Financial Supervisors (ESFS) consists of a network of national financial supervisors that deal with supervision of individual firms and work in tandem with the new European Supervisory Authorities (ESAs). There is one ESA for each sector – banking, securities/asset management and insurance/pensions.

The ESRB was originally conceived to sound alerts if credit bubbles were appearing but that seems unlikely to be a problem in the next few years. A second task was to observe any dysfunctioning of the financial system.

The DLG also proposed that any concerns about fiscal matters would be referred to the political authorities, but even that weak formulation disappeared in the Commission plans. But the parliament’s Committee on Economic and Monetary Affairs (ECON) voted that “the ESRB should be empowered not only to warn of an imminent emergency in the economy, but also to declare its existence”. How extensively will that be defined to include public finance? Can the Council accept that?

For the ESAs, the Commission proposed that they retain the existing functions of CESR/CEBS/CEIOPS and add the following:

      The ability to develop proposals for technical standards;

      The ability to resolve cases of disagreement between national supervisors, where legislation requires them to co-operate or to agree;

      The power to contribute to ensuring consistent application of technical EU rules (including through peer reviews);

      The European Securities and Markets Authority will exercise direct supervisory powers for Credit Rating Agencies;

      A co-ordination role in emergencies.

These powers were eviscerated by the Council in December, leaving only the actual power to impose “binding mediation” – though that is still a significant transfer of powers to the EU level. But the ECON vote beefed up the original plans. It would: “Base all the proposed supervisory bodies in Frankfurt and make them part of a tightly-integrated system, replacing the looser network of supervisors in various European cities.

“Give new powers, such as the possibility of drawing up draft regulatory financial standards which could then be made legally binding by the European Commission. They [the supervisory bodies] would also be able to address decisions with legal effect to supervisory authorities that do not conform to EU laws.

“Create a power to supervise directly systemically-important cross-border financial institutions, whereby national supervisors would act as agents of the EU authority.

“Institutions directly supervised at EU level would be obliged to contribute to a European deposit guarantee fund and a European stability fund.

“Considerably reduce the latitude for a member state to invoke the ‘safeguard clause’ that allows it to avoid implementing a decision of one of the bodies if it considers that the decision creates budgetary problems. ... Require the member state to provide much clearer proof than had been previously proposed by the Commission and the Council as to how the body’s decision creates budgetary problems for it.”

This is a string of major proposals that might appear to be very difficult for the Council to accept. Essentially, the parliament has replied to the Lord Turner question of “more Europe or less Europe?” with a decisive answer of “More”. However, today this also chimes with the spirit behind the agreement on a massive financing facility for member states in difficulty. The EU 27 came up with a €60bn ($76bn) package whereas the Eurogroup came forward with €440bn. But the conditionality is strong and can only be triggered by the Eurogroup – so it is in control of a fundamental change in the nature of economic power within the EU.

There will be further proposals on financial regulation and these must deal with the fact that the ECB was blackmailed into giving liquidity support to banks that were over-exposed to the public debts of member states that seemed to be hitting difficulty. The fall-out from the fiscal crisis will cast a shadow over the EU’s financial system in the years ahead and I proposed remedies, first aired more than 20 years ago, that would have avoided much of this problem.


This article appears in the Financial World

© Financial World

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