EU ministers outline bank supervision shake-up

Pressure to streamline supervision has become intense as multinational banks and insurers dominate the market while supervision is still largely divided between countries. “We need a pilot in the plane,” Christine Lagarde, economy minister of EU president France, told a news conference at the end of a two-day meeting of EU finance ministers and central bankers.

The EU is updating two sets of rules that ensure banks and insurers have enough capital to withstand shocks, such as a dramatic slide in stock markets. The rules lay out what roles each supervisor of big cross-border banks and insurers, such as Deutsche Bank, Barclays, or AXA, will play to keep companies stable and customers protected.

European Internal Market Commissioner Charlie McCreevy has proposed a radical solution for insurers known as Solvency II whereby the company’s home regulator has the last say on how much solvency capital the group must hold. It has proved controversial with smaller EU states who host branches of big insurers and fear playing second fiddle in supervisory terms.

McCreevy will publish his proposals on banking capital requirements next month. These were expected to involve a consensual system of a “college of supervisors” for each bank, whereby regulators swap information with none having the last word, formalizing existing practices.

LEAD SUPERVISOR

Ministers now want a bank’s home supervisor to take the lead, but how it would work on the ground remains sketchy. Solvency II “will govern our progress” on the banking capital requirements rules, Lagarde said. But European Economic and Monetary Affairs Commissioner, Joaquin Almunia said the Commission would take into account differences between banks and insurers. “These sectors are not identical so the way these play out in actual draft proposals does not necessarily have to be identical, but the basic principles have to be the same,” Almunia said.

Diplomats said many questions remain unanswered if banks were to have a lead supervisor-type model, like insurers. “In Solvency II you have checks and balances between home and host because you have shifted responsibilities between them. For example there is a legal requirement for funds to be transferred in the case where the subsidiary needs it,” a diplomat said. “In the case of banking, obviously funds will need to move faster as people start queuing up. It’s a whole different ball game,” the diplomat added.

Separately, ministers agreed on a single regulatory reporting format for financial institutions from 2012. “A common reporting framework ... will simplify the reporting requirements and reduce the burden (on institutions),” said European Central Bank Vice-President Lucas Papademos.

Multinational banks have to provide 18 different sets of reports with on average 22,000 items to declare to regulators. “You can imagine how much time and energy can be saved from the benefits of common reporting,” Lagarde said. (Reuters)