Don’t expect the earth to tremble: this is evolution not revolution. New rules on supervision of Europe’s financial markets, which ECOFIN ministers were expected to approve on Tuesday (September 7) will certainly strengthen Europe’s capacity to anticipate trouble and to handle it when it comes, but the armoury remains firmly in the hands of intergovernmental bodies – the European Central Bank and the three sector bodies created years ago under the Financial Services Action Plan, suitably revamped to provide stronger supervisory functions at an EU level. Supervision of individual firms essentially remains the responsibility of national regulators.
The biggest innovation is creation of the European Systemic Risk Board, designed to blow the whistle on dangers building up in European financial markets and hopefully to trigger action to avert the risk, but not to take action itself. Its role will be similar to the US Financial Stability Oversight Council.
The ECOFIN decision falls just two years after the full force of the global credit crisis hit Europe. It follows last week’s draft agreement between Council, Commission and the Parliament, whose members should approve the package in plenary later this month. The new system can then take effect on January 1 2011.
The three sector bodies are to be known as the European Supervisory Authorities and distributed in the classic geographic division-of-the-spoils demanded by the Big Three. Thus CEBS becomes the European Banking Authority based in London, CEIOPS becomes the European Insurance and Occupational Pensions Authority based in Frankfurt and CESR the European Securities and Markets Authority based in Paris. They are elevated from committee status to become EU institutions, each with a staff of 40-50, building to 100 over the next few years.
The role of the European Central Bank is certainly strengthened by the new measures. Not only will the ECB provide the secretariat of the European Systemic Risk Board as originally proposed by the Commission; it will also provide its president, at least for its first five years, as demanded by the European Parliament delegation in last week’s talks. This will give ECB president Jean-Claude Trichet time to build the new body before he stands down in October 2011, when he will probably be handing over to the Bundesbank’s Axel Weber.
The Commission emerges from these negotiations with no new powers, as far as I can see. Whereas the original proposals would have given the Commission exclusive responsibility for declaring an emergency situation, this right is given to the member states, while empowering the three ESAs to intervene on a short term basis, in particular where there are cross-border issues or clear breaches of EU rules. However, these bodies will be specifically excluded from any action which could impinge on national budgets. That seems to me to be an exclusion which could cover much more than bank bail-outs.
Commissioner Michel Barnier seems well pleased with the outcome. We now have the radar and the control tower for financial supervision, he says, and to give credit where it’s due, the Commission’s original proposals have broadly survived. Jonathan Faull, Director General of the Internal Market since mid-summer, must also take some satisfaction from the result. His people can now get to grips with more contentious issues, such as finalising the new proposals for regulating derivatives and short selling, and settling reciprocity and “passport” issues for non-EU operators. Barnier is off to Washington to explain the plan and discuss a co-ordinated approach.
Some critics in the UK complain of the risk of “mission creep”, fearing that European regulation will mount an insidious invasion and undermine London’s position as a global financial centre, but reports suggest that domestic policy could have a bigger impact on the future of the City than the heavy hand of Brussels will ever have.