Report Urges Phased Reform of EU Financial Oversight

By | February 25, 2009

The European Union should set up two bodies to coordinate oversight of financial institutions across Europe, according to a report on Wednesday which disappointed those seeking simpler structures with more teeth.

Part of efforts to restore investors’ confidence burnt by the worst financial crisis in decades, the recommendations could also run up against national resistance because they would entail some loss of regulatory control by the 27 EU capitals.

Separately, the European Commission published guidelines for a common EU-wide approach to dealing with toxic assets at banks, saying that national schemes should be open to all banks with toxic assets and that nationalisation was an option.

The report on supervision, compiled by a group headed by former Bank of France Governor and ex-IMF managing director Jacques de Larosiere, will form the basis for a debate by EU leaders next month and could help to shape Europe’s position at the G20 summit in April.

“In essence, we have two alternatives: the first … beggar-thy-neighbour solutions or the second, enhanced, pragmatic, sensible European cooperation for the benefit of all,” de Larosiere said in the report.

A single, all-powerful regulator would have been a non-starter in the face of EU member state opposition, and de Larosiere stressed he did not want the report to be left to gather dust in an archive. “We prefer our report to remain dust-free,” he told a news conference.

The report sets out a two-phase process towards reforming supervision by beefing up existing frameworks this year and next before setting up the new bodies in 2011 and the year after.

Just 45 banks, such as BNP Paribas, Deutsche Bank and HSBC, hold 70 percent of EU deposits.

The report was handed to the European Commission, which has sole power to propose pan-EU financial reforms. However, EU states and the European Parliament must give their backing for changes to become law.

“Let me be very clear, the report confirms my belief that a European system of financial supervision is indispensable,” Commission President Jose Manuel Barroso said.

But some experts feared the structure recommended would be too unwieldy for rapid decision-making in a crisis.

“Who pulls the trigger? Who will finally be in charge and says when a bank is in trouble. How will the systemic risk council function?” said Karel Lannoo, chief executive of Brussels think tank CEPS.

The Association of British Insurers and the European Insurance Federation welcomed the recommendation for a new EU insurance supervisor, while the French Banking Association said the recommendations would improve a fragmented system.

Attempts to forge a European approach to supervision have been deadlocked for years as countries don’t want to delegate oversight powers over key players on their financial market.

Policymakers hope the worst market crisis in 80 years will help to change mindsets.

Big banks want a more streamlined system of supervision to cut down on the costly reporting requirements they face in all the EU countries where they have branches.

BARK AND BITE

Hard lobbying by European Central Bank President Jean-Claude Trichet and other ECB board members for a role in macro prudential supervision of the banking system has paid off.

The report recommended a new “European Systemic Risk Council”, or ESRC, to be chaired by the ECB, and include representatives of banking, insurance and securities supervisors. The ESRC would pool and analyse all information relevant for financial stability, it suggested.

“A proper flow of information between the ESRC and the micro-prudential supervisors must be ensured,” the report said.

The ESRC could ultimately act at a local level if it judged that national measures were deemed inadequate.

Robert Wardle, former head of Britain’s Serious Fraud Office and now consultant to lawfirm DLA Piper, said the report was a step forward but much will hinge on powers in practice.

“You can’t help but think that any such council will have an impossible and thankless task — the use of any organisation such as this is measured in its bark and bite,” Wardle said.

Change was needed in day-to-day supervision of individual banks through better coordination among the bloc’s national watchdogs, it added.

“A European System of Financial Supervisors should be set up. This ESFS should be a decentralised network,” it concluded, noting however that existing national supervisors should continue to carry out day-to-day supervision.

The ESFS would replace the current three committees made up respectively of the national insurance, securities and banking supervisors. The report looks at other parts of the financial market already being dealt with at the EU and global levels. (Reporting by Huw Jones, editing by David Stamp)

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