EU Proposes Stronger Financial Oversight

The European Commission came forward with a package of legal proposals for strengthened regulation of the financial sector on Wednesday (23 September), as the EU seeks to prevent a repeat of the last year's meltdown.

The bundle of draft regulations is a direct result of political decisions taken by EU leaders meeting in Brussels in June and a meeting of finance ministers earlier the same month.

"In Brussels' time, this rapid progress is equivalent to the speed of light," said internal market commissioner Charlie McCreevy, referring to the frequently torturous speed of legislation coming out of the EU institutions.

The proposals put forward a two-tier approach to supervision of Europe's financial sector. At the level of the individual firm, national supervisors will continue to carry out much of the day-to-day work, but three new authorities in the areas of banking, insurance, and securities and occupational pensions will play a co-ordinating role.

Plans to equip the three authorities with powers to settle disputes between national supervisors, for example on the need to recapitalise a bank registered in one country but with branches in another, caused consternation in the UK early this year, with Slovakia, Slovenia, the Czech Republic and Romania also raising concerns.

Addressing the fear that the new banking authority could, for example, force a member state government to recapitalise a bank with taxpayers money against its will, the new commission proposals contain a safeguard mechanism where member states can appeal a decision to the Council of Ministers (representing member states).

At which point however, the appealing country would need to convince a qualified majority of member states to back its position, in order to successful reject a decision by one of the authorities.

"I anticipate that there will be further heavy discussion about this in the Council of Ministers and the European Parliament [where the draft legislation now goes]. Certainly in the Council of Ministers," said Mr McCreevy in acknowledgement of the rocky road still to be travelled if the new system is to be up and running by next year as hoped.

Under the proposals, the new authorities will draw up a single rulebook for the three areas, so that the same standards apply to all institutions, big or small, national or cross-border.

Voting by authority boards would be on a qualified majority basis for the development of these guidelines and budgetary matters, but a simple majority for enforcement and implementation matters such as ruling in disputes between national supervisors.

A provision within Wednesday's proposals calls for a review to be carried out after three years of operation of the new system, in order to see whether a further move to a single European supervisor should be taken.

However, Mr McCreevy ruled this out in the short term, firstly as a treaty change would likely be needed, but secondly due to a lack of practicality. "There are 7,000 banks in the EU, from small to big. For 98 percent of which, their total action is within their own domestic border," he said.

"So why would you have a single supervisory authority, say for example located in Dublin, dealing with all of those? I don't think it would make sense."

European Systemic Risk Board

The EU commissioner for economic and monetary affairs, Joaquin Almunia, was also on hand to present plans to set up a new European Systemic Risk Board (ESRB) that will monitor the European financial system as a whole.

The board will not have powers to enforce the warnings and recommendations it issues to member states, but Mr Almunia insisted that EU governments and national supervisors would heed any warnings given to them.

"Now we have a crisis and we have to learn from this crisis," said Mr Almunia, adding that systemic advice in the past had come from an array of disparate voices.

"There was no body to convey the systemic warnings. This [new board] will increase the credibility of the warnings," he said, hinting that the markets would also play their role in punishing member states that did not take action on recommendations.

One area where the new board could have acted in the past, had it existed, was the dangerous situation in which families, especially in eastern Europe, had run up debts in foreign currencies.

"In some member states, people took out mortgages in euros, yen, and Swiss francs. This not only endangered them but also the financial institutions involved. That would have received a warning [from the ESRB]," said Mr Almunia.

Before it's here, it's on the Bloomberg Terminal.