European Union to Establish New Financial ‘Watchdogs’ in January

By | September 22, 2010

European Union lawmakers gave their final approval on Wednesday for the creation of watchdogs to regulate European banking, insurance and trading, in one of the most far-reaching financial reforms of the decade.

Putting its stamp on an agreement sealed this month after a year of negotiation, the European Parliament voted overwhelmingly in favor of the new authorities, which will have the power to overrule national regulators.

The watchdogs, which will cover banks, the insurance industry and financial markets, will start work in January, three years after the onset of the financial crisis, which many politicians blame on banking excesses.

The reform establishes financial sheriffs who can overrule national agencies such as Britain’s Financial Services Authority, as well as a new body under the wing of the European Central Bank to watch for other risks like a property price bubble.

Although their powers will be limited when they open their doors next year, they will grow in authority as the EU rolls out its program of financial reform, covering everything from hedge funds to bankers’ bonuses.

Michel Barnier, the French commissioner in charge of a regulatory overhaul of finance, told parliamentarians the system could be a role model for the world. “We will build the best global regulatory and supervisory system,” he said.

Some are worried that the new authorities will struggle to get the money they need to be effective, in the face of opposition from countries like Britain, which is concerned about the dilution of its influence over London’s financial centre.

“The deal is done, but the next big conflicts are around the corner,” said Sven Giegold, a German member of the European Parliament who negotiated a deal. “How much money and staff will the new authorities get?”

Their formation nonetheless centralizes financial supervision in Europe, a more fundamental shift than any foreseen in Washington, and may have far-reaching implications for the way large banks and multinational insurance companies are regulated.

SUPER-TANKER
“Brussels is like a super tanker. Once it’s on course, it will be firm,” said Karel Lannoo of the Centre for European Policy Studies. “The new authorities are part of the EU machinery. This ultimately gives the European Commission direct control over financial supervisors.”

That view was echoed elsewhere. “These new authorities will start small but win in influence,” said Sony Kapoor, a banking expert with think tank Re-define.

“European countries agreed on condition the agencies’ powers would be limited, but the authorities are likely to take on a life of their own.”

The agreement clears a hurdle to writing many of the other rules for financial reform in Europe, which depend on the setting up of the new authorities.

It would, for example, be up to the new markets agency to impose any bans on short-selling if markets wobbled.

European countries and European parliamentarians have been bogged down in disagreement over how to reform much of the financial industry. Both have an equal say in writing new laws.

Talks aimed at ending a row over new rules for hedge funds and private equity have so far failed to break an impasse over the treatment of offshore and foreign funds.

Other questions, such as how to tax banks more after the crisis, also remain unanswered.

(Editing by Hugh Lawson)

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