European Union states clashed on Tuesday over how far they should overhaul financial supervision to apply lessons from the worst market turmoil in 80 years.
The bloc’s 27 finance ministers endorsed a compromise that watered down two sets of European Commission plans that would have radically overhauled oversight of insurers and banks. The draft Solvency II insurance reform and banks Capital Requirements Directive (CRD) both involved the setting up of colleges of supervisors for cross-border groups, with regulators from each country they operate in and giving the home watchdog the biggest say.
Poland and about 10 other EU states, however, blocked the move, fearing their regulators would play second fiddle to watchdogs in London, Paris and Frankfurt, where many big groups are based. The countries which forced the changes were worried that, in difficult times, they would not be able to force a branch of a big foreign bank or insurer active in their country to top up capital.
EU finance ministers endorsed on Tuesday a compromise brokered by EU president France that diluted the power of a home supervisor in the colleges, to the dismay of Britain and others. “When we consider banking problems, there is general consensus that group support [the colleges of supervisors] could be helpful,” said British Finance Minister, Alistair Darling. “To take it out of this particular industry does not make sense,” Darling said, referring to the decision to lessen the power of the home regulator. The compromise would also lead to lower capital requirements for insurers that fall “well below” what is accepted by UK supervisors, Darling said.
Many EU states have called for a revamp of financial supervision on a global as well as European level. “I believe it’s not very credible that in view of the banking crisis, and everybody is concerned about effective supervision, we now here have the first opportunity to accept a directive that enables us to coordinate supervision across country borders and we don’t take that opportunity,” Dutch Finance Minister, Wouter Bos told the meeting. “I really think that’s a lost opportunity,” Bos said.
ALL EYES ON LAROSIERE
The European Commission has set up a “high level” group headed by former IMF director general and ex-governor of the Bank of France, Jacques de Larosiere, to bring forward ideas on revamping EU financial supervision by next March. “Poland would be open to returning to the issue of group support once we have a much stronger European level of supervision, which is what we expect to come out of the de Larosiere committee,” Polish Finance Minister Jan Rostowski said.
McCreevy said the Commission could not support the deal reached by EU states on Tuesday as it ditched a core element of the proposals and Europe should not be seen as not being willing to take the first step in reforming supervision. “It’s wrong to believe de Larosiere will provide instant solutions,” McCreevy added.
An EU diplomat involved in brokering a deal on Solvency II said a compromise avoided losing the whole reform. The Larosiere group could help the EU “go beyond these problems and find ideas from the top down and have an authentic European supervisor”, he said. “What we think the Larosiere group might do is bring about consensus on these issues and we might come back to group support from a European supervisor rather than discussions of power sharing between head office and subsidiary,” the EU diplomat said.
EU states now face hard bargaining with the European Parliament, which has joint say on the Solvency II and CRD reforms. A parliamentary committee has already voted in favor of giving a cross-border insurer’s home watchdog the final say on key decisions. (Reuters)