European Union to Overhaul Financial Supervision After `Milestone' Accord

European Union governments and lawmakers agreed to create new banking, securities and insurance supervisors that will start work on Jan. 1, 2011.

Yesterday’s agreement at talks in Brussels also paves the way for a new systemic-risk watchdog, chaired by the European Central Bank President Jean-Claude Trichet or his successor for its first five years, tasked with issuing color-coded warnings to governments on risks to the economy such as swelling asset bubbles.

“We have reached a crucial milestone,” EU Financial Services Commissioner Michel Barnier said in an e-mailed statement. “We will have the control tower and the radar screens needed to identify risks.”

The new authorities will overhaul oversight in the 27- nation bloc to avoid a repeat of the 2008 crisis when EU states struggled to coordinate moves to shore up financial institutions. The regulators will be able to investigate financial activities or products and, in emergency situations, put in place temporary bans.

The EU agencies could also intervene in supervisory disputes between states, force them into talks and ultimately make a direct order to a cross-border financial group at the center of a clash between national authorities.

Credit-Rating Companies

Under yesterday’s accord, the European Securities and Markets Authority will take charge of supervising credit-rating companies.

The EU should ensure that the new authorities have an adequate budget and staff to do their job, said Karel Lannoo, chief executive officer of the Centre for European Policy Studies in Brussels.

Current proposals for the agencies’ budgets are “very limited,” Lannoo said in a phone interview.

Sylvie Goulard, a French lawmaker involved in the talks, said she had “fought hard” for the ECB’s chief to chair the systemic-risk board because that would “bring independence and moral authority.”

EU ministers and the full European Parliament must formally sign off on the agreement before the measures can become law. Governments will likely approve it on Sept. 7, said Didier Reynders, Belgium’s finance minister. Lawmakers will vote on the accord in the week starting Sept. 20, the Parliament said in an e-mailed statement.

The European Commission will review every three years the need for the banking, securities and insurance supervisors to be merged into one and based in the same city. The Parliament will also have the right to veto the head of each agency.

Yesterday’s agreement is a “massive step forward,” Peter Skinner, a British Labour Party member involved in the talks in Brussels, said in an e-mailed statement. “It is totally necessary. It may not have prevented the previous crisis, but hopefully it will help prevent the next crisis.”

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