The European Union should set up two new bodies to coordinate supervision of financial institutions in Europe, according to an influential report on Wednesday that stopped short of proposing a single, all-powerful watchdog.
Even so, coming after the worst financial crisis in decades revealed flaws in Europe’s current patchwork of national regulators, the report to the European Commission proposed remedies that would require some loss of regulatory sovereignty by the EU’s 27 member states.
The report, compiled by a group headed by former Bank of France Governor, Jacques de Larosiere, will form the basis for a debate by EU leaders next month on financial supervision and could help shape Europe’s position at the G20 summit in April.
“In essence, we have two alternatives: the first ‘chacun pour soi’ beggar-thy-neighbor solutions or the second, enhanced, pragmatic, sensible European cooperation for the benefit of all,” de Larosiere said in the report.
The report sets out a two-phase process towards reforming supervision by beefing up existing frameworks this year and next before setting up the new bodies in 2011 and the year after. Just 45 banks, such as BNP Paribas, Deutsche Bank and HSBC, hold 70% of EU deposits.
The report was handed to the European Commission on Wednesday, a body that has sole power to propose pan-EU financial reforms. EU states and the European Parliament must give their backing for changes to become law.
“Let me be very clear, the report confirms my belief that a European system of financial supervision is indispensable. I am committed to engage immediately in its preparation,” Commission President Jose Manuel Barroso told a news conference. “In advance of broader proposals on supervision later in the year, the Commission will present detailed concrete proposals during April on private equity, hedge funds and remuneration schemes,” Barroso said.
Attempts to forge a European approach to supervision have been deadlocked for years as countries don’t want to delegate oversight powers over key players on their financial market. Policymakers hope the worst market crisis in 80 years will help change mindsets.
Big banks want a more streamlined system of supervision to cut down on the costly reporting requirements they face in all the EU countries where they have branches.
Hard lobbying by ECB President Jean-Claude Trichet and other board members for a role in macro prudential supervision of the banking system has paid off. The report recommended a new “European Systemic Risk Council”, or ESRC, to be chaired by the European Central Bank, and include representatives of banking, insurance and securities supervisors.
The ESRC would pool and analyze all information relevant for financial stability, it suggested. “A proper flow of information between the ESRC and the micro-prudential supervisors must be ensured,” the report said. The ESRC could ultimately act at a local level if it judged that national measures were deemed inadequate.
Change was needed in day-to-day supervision of individual banks through better coordination among the bloc’s national watchdogs, it added. “A European System of Financial Supervisors should be set up. This ESFS should be a decentralized network,” it concluded, noting however that existing national supervisors should continue to carry out day-to-day supervision.
The ESFS would replace the current three committees made up respectively of the national insurance, securities and banking supervisors. The report also looks at other parts of the financial market already being dealt with at the EU and global levels.
These include recommending tougher oversight of credit rating agencies, accounting reforms, more demanding bank capital rules, central clearing of credit derivatives and the need to regulate all parts of the market such as hedge funds. (Reuters)