Response to EC’s supervisory overhaul plans remains lukewarm

Industry leaders have continued to express caution over plans drawn up by the European Commission (EC) to transform the three level-three committees into powerful supervisory authorities and to create a European Systemic Risk Board (ESRB).

The EC unveiled its legislative proposals on September 23, with little substantive change from the plans first outlined in a February report by former Banque de France governor Jacques de Larosière and developed in an EC communication on May 27 (Risk July 2009, pages 27-29; Risk August 2009, pages 21-23).

"Today we are proposing a new European supervisory system, with the political backing of the member states and based on the de Larosière report. Our aim is to protect European taxpayers from a repeat of the dark days of autumn 2008, when governments had to pour billions of euros into the banks," says EC president José Manuel Barroso.

But national supervisors expressed concern in May that the three new authorities - the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority - could erode some of their discretion, as they would be empowered to enact blanket measures during future crises and even arbitrate in disputes between supervisors if necessary.

Such concerns persisted after the publication of the legislative proposals in September. The British Bankers' Association (BBA) warned the new framework would only be effective if the new authorities co-ordinate the implementation of European Union (EU) rules in future while ensuring the independence of national supervisors is maintained.

"The creation of the new framework and a single rulebook will also require care if we are to achieve an outcome that does not result in a tick-box culture of supervision. We believe the Financial Services Authority (FSA) and the Bank of England should now start preparing the ground for the new authorities to ensure the UK financial services sector is properly represented on these new European bodies," says Angela Knight, chief executive of the BBA.

The FSA declined to comment on the EC proposals, but financial services secretary to the UK Treasury, Paul Myners, confirmed he would be working closely with bodies such as the EC to ensure national interests are maintained in any supervisory overhaul. EU leaders made clear at the European Council meeting in June that decisions taken by the new authorities should not impinge in any way on the fiscal responsibilities of member states. "Our goal in negotiations in the months ahead will be to ensure the final proposals align with the council's instructions in June," says Myners.

While national regulators may be uneasy about losing their long-held discretion in the transposition of EU directives and the supervision of institutions, some suggest the new agencies are a necessary step to bring regulators into line. "The essential approach of the authorities is the power to criticise and make recommendations to national supervisors, and the requirement on them to comply or explain why they are not complying with those recommendations," says John Tattersall, partner in the financial services regulatory practice at PricewaterhouseCoopers in London.

The EC also plans to create the ESRB, comprised mainly of central bankers and national supervisors, to monitor risks to the stability of the financial system as a whole and provide early warnings on systemic problems. But some observers have said the ESRB may lack the force to take meaningful action to prevent a crisis and could also overlap with the activities of other transnational entities such as the Financial Stability Board.

The EC would like all four new bodies to become operational in 2010, but the legislative proposals will now pass to the European Parliament and the Council of the European Union for approval.