EU cuts deal to set up banking watchdogs

From EurActive:

EU negotiators reached agreement yesterday (2 September) on a package of measures to beef up supervision of the bloc's banks, giving new EU watchdogs a mandate to overrule national authorities and ban risky financial products that were widely blamed for the world's worst recession in decades.

Background

EU leaders agreed in June 2009 on the main issues concerning financial supervision and gave the European Commission a mandate to propose a solution for burden-sharing cross-border banks' rescue plans (EurActiv 19/06/09).

The Commission drafted two proposals for financial supervision: a European Systemic Risk Board for macro-prudential supervision (ESRB) and European Supervisory Authorities (ESAs) for micro-prudential supervision. 

The ESAs would be divided into three sub-groups to oversee different kinds of financial institution: the European Banking Authority (EBA), the European Securities and Market Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA).

Negotiators from the EU's three institutions - the EU Council of Ministers, the European Parliament and the European Commission - reached a political consensus last night on the package.

"This is not light-touch regulation. It is comprehensive and intelligent," the chair of the Parliament's economics committee, UK Liberal Democrat MEP Sharon Bowles, told journalists.

A European Systemic Risk Board (ESRB) and three new European Supervisory Authorities - a European Banking Authority (EBA), a European Insurance and Occupational Pensions Authority (EIOPA) and a European Securities and Markets Authority (ESMA) - will form part of the new architecture of financial supervision agreed yesterday.

The trio of new financial watchdogs will be complemented by a group attached to the European Central Bank that will keep watch for other economic risks, like a property price bubble.

"We will have the control tower and the radar screens needed to identify risks," said Michel Barnier, the European commissioner in charge of the internal market, giving his blessing to the four new bodies.

But how tough or independent these bodies will be remains to be seen, say officials.

Delays

The package has suffered long delays over fears, mainly voiced by Britain, that it would impinge member states' fiscal sovereignty. On the other hand, others warned it would produce only decorative changes to financial supervision.

According to last night's deal, the three supervisory bodies will be able to overrule their national counterparts in three agreed scenarios: when the supervisor is in breach of EU law, when there is a disagreement between two or more national supervisors and when an emergency has been called by member states.

The question of who calls an emergency in the EU's banking sector was a point of great contention, with all three institutions haggling for some of the decision-making.

However, it became clear that the Council - which represents the 27 EU member states - would not allow discussions to go forward unless national governments had the sole responsibility to declare a crisis.

Parliament claims glory

MEPs are largely claiming ownership of the fact that the supervisors will have more power than earlier talks had indicated, in particular that the authorities may ban or restrict certain financial products.

"At the insistence of the Parliament, these authorities will now have real teeth. Importantly, with the risks of speculation on financial markets ever present, a Green proposal to ensure the authorities can suspend trading of risky products in certain cases was accepted," said Sven Giegold, a German Green MEP who helped steer the negotiations in Parliament.

The presidency of the ESRB was also a veritable bugbear, with the Council finally conceding a point to Parliament and allowing the head of the ECB to also chair the ESRB.

"We fought hard for the Systemic Risk Board to be chaired by the president of the European Central Bank - a European personality who will bring independence and moral authority to the position as well as a clear identification of responsibility to citizens," said Sylvie Goulard, a French liberal MEP.

The legislation will now be formally adopted by the Parliament in the coming weeks, to be up and running by January 2011.

Doubts remain

On the sidelines of the talks, a Commission official cast some doubt on how important the ESRB is and how effective the institutions will be in practice.

"The ESRB is not the big deal here. The big deal is that the supervision of banks will be subject to stronger common European supervisors," the official told EurActiv.

As promising as the authorities and their respective powers seem on paper, the official also pointed out that how well the bodies perform will depend on how good their staff are.

In addition, more cynical observers note that the same political pressures and infighting that currently exist between the European strongholds of finance - London, Frankfurt and Paris - will still play their part in the functioning of the new system.

The three bodies will in fact be spread across these three trading centres, with the EBA situated in London, the EIOPA in Frankfurt and the ESMA in Paris.

The agreement is now scheduled to be approved by finance ministers on 7 September and be put to an parliamentary vote at the second session in September.

Positions

Michel Barnier, European commissioner for the internal market, welcomed the deal. "Thanks to the progress made today, financial supervision is moving to a different level: it is taken on a European dimension. Financial companies and markets operate mostly at a European level, and we'll now have four solid authorities to monitor macro-economic financial risks and to supervise financial markets, banks and insurance companies."

"This deal, which paves the way for a new EU financial architecture, is an important, if long-overdue, step in strengthening the regulation of Europe's financial markets. The ultimate goal must be to prevent a return to the financial chaos of the past few years but clearly more regulatory reform will be needed to guarantee this," said Green MEP Sven Giegold, one of the package's rapporteurs in the European Parliament. 

Criticising some parts of last night's deal, Giegold said "it was a source of regret that the Council insisted on it having the right to declare an emergency. It is also unfortunate that the Council insisted on the illogical and inefficient proposal to spread the authorities across three cities (London, Paris and Frankfurt)."

"We fought hard for the Systemic Risk Board to be chaired by the president of the European Central Bank - a European personality who will bring independence and moral authority to the position as well as a clear identification of responsibility to citizens," added Sylvie Goulard MEP, a French Democrat and member of the liberal ALDE group who was also a rapporteur for the package.

Another rapporteur from the liberal ALDE group, Spanish MEP Ramon Tremosa, added: "In our view, it is essential that the president of the Central Bank also preside over the Systemic Risk Board. It would have been inconceivable to have different individuals, subject to possible political pressures, and differing views on such an important task."

Spanish MEP José Manuel Garcia-Margallo, vice-chairman of the economic and monetary affairs committee in the European Parliament, said the political deal will ensure that "the 'main street' no longer pays for the 'irrational exuberance' of financial entities and avoid more systemic financial crises".

"There is a very simple reason for all this new supervisory architecture," explained García-Margallo, who was the Parliament's rapporteur on the creation of a European Banking Authority (EBA).

"National supervisors do not have jurisdiction to control financial entities able to operate without obstacles throughout the whole European continent. We need to learn from what has happened and build a system so that, in the case of a new crisis, we do not find ourselves as vulnerable as now."

The Socialists and Democrats (S&D) group in the European Parliament expressed its satisfaction with the deal but said more needed to be done to regulate other parts of the banking system. "By designing this new architecture, the EU has made a huge step forward in avoiding any new financial crisis. Nevertheless, more needs to be done," said German MEP Udo Bullmann, S&D spokesman for economic and monetary affairs.

"We expect European leaders to show the same level of ambition in securing a deal to regulate hedge funds and private equity as well as the markets for derivatives."