EU Leaders Back Financial Supervision Blueprint for Banks

By | March 2, 2009

EU leaders backed a blueprint on Sunday for streamlining how banks are supervised designed to spot excessive risk earlier to better protect investors.

An emergency summit of European Union leaders on the economic crisis stressed the need to improve regulation and supervision of financial institutions.

They welcomed recommendations last week from a high level group headed by former Bank of France Governor Jacques de Larosiere and looked at how cross-border banks, insurers and markets could be better supervised.

That group recommended setting up two new broad supervisory bodies in the EU — one chaired by the ECB to monitor system-wide risks, the other to combine the efforts of national supervisors.

“We encourage the European Commission to rapidly implement the de Larosiere report,” German Chancellor, Angela Merkel told a news conference at the end of the summit.

French President Nicolas Sarkozy said everyone at the summit considered the report excellent and he wanted speedy action at the EU’s next summit on March 19-20. “We all agree it was important that this takes effect at the next European Council in March. We will take a decision,” Sarkozy told reporters.

Prime Minister Gordon Brown, of Britain, the bloc’s biggest financial center, also welcomed the de Larosiere report, an EU diplomat said.
The Commission, which has sole powers to propose changes to financial market laws, will publish its response to de Larosiere on March 4 for the March summit to discuss.

“There was general agreement on the findings of the high level group I established. For a Europe without barriers we need a Europe with rules,” European Commission President, Jose Manuel Barroso, told a news conference.

Sunday’s summit also agreed to back the Commission’s guidelines from last week on how EU states can deal with toxic assets on bank balance sheets which undermine investor confidence and leave banks fearful of lending to each other.

“On impaired assets, there was overall agreement, and I think a formal agreement can be taken now at the formal summit (mid-March) on those guidelines,” Barroso said.

The summit sought to reassure countries, which feared that the rescue of banks would affect the lending capacity of their branches elsewhere in the bloc. “Support for parent banks should not imply any restrictions on daughter banks. We were able to agree to that.”

Mirek Topolanek, Prime Minister of EU president the Czech Republic said: “We should now be able to move forward with a restructuring of the whole bank sector.”

The summit later in March will prepare the EU’s position for a G20 summit in April on financial regulatory reform.

“I think it is time to deal with the problems that arise both through regulatory havens and tax havens,” Brown told reporters.

His Irish counterpart, Brian Cowen, said leaders on Sunday saw regulatory reform as a matter of urgency.

EU rules that determine how much capital banks set aside to cover risk should also be changed to make lending to the economy easier, Merkel said.

The rules, known as Basel II, were globally agreed upon and are applied in the European Union through the bloc’s bank capital requirements law to make markets safer for investors.

Critics of Basel II say when a bank’s assets become untradeable or fall in value due to plunging stock markets, banks are forced to top up their capital and have less cash for lending to the economy.

“We must see if we can rein in the pro-cyclical effects of Basel II so that credit capabilities for the auto sector and other sectors in difficult situations are not made even worse by Basel II,” Merkel told reporters as she arrived at the summit.

The Basel Committee of banking supervisors and central bankers, which drew up the rules, is currently working on beefing them up.

The EU is already reforming its bank capital requirements rules to crack down on lightly regulated securitized products, and another wave of reforms are anticipated later this year.

(Additional reporting by Adrian Croft and Mark John; editing by Ingrid Melander, Will Waterman and Bernard Orr)

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