UK's Darling proposes EU super-regulator for micro-prudential supervision

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LONDON - Alistair Darling, the UK chancellor of the exchequer, has written a letter to the current Czech holders of the presidency of the European Union (EU), suggesting a single regulatory authority should take powers from national regulators, European Commission and Level 3 committees.

The letter, responding to Jacques de Larosiere's report, is addressed to the Czech Republic's finance minister, Miroslav Kalousek, and sets out four proposals to form the basis for an EU response to Larosiere's recommendations for the future of EU financial supervision.

Darling says Larosiere's proposed division of microeconomic supervision between the three bodies for banking, insurance and securities should be brought together under one body.

Most surprisingly, Darling goes on to say this authority should take over current responsibilities of national supervisors and also the European Commission.

"Over time, this body should become the source of technical financial rules, rather than national authorities or the Commission... I also propose that the new body be given an independent status, separate from the Commission, but with clear lines of responsibility to the Council," says Darling.

Larosiere's report called for three bodies, the European Banking Authority, European Insurance Authority and the European Securities Authority, to take the reins for micro-prudential supervision. These bodies would form a European System of Financial Supervision, evolved from the current Level 3 committees; the Committee of European Banking Supervisors, the Committee of European Securities Regulators and the Committee of European Insurance and Occupational Pensions Supervisors.

The chancellor says an early warning system should be created to co-ordinate macro-supervisionary and market risks, with representation for central banks and finance ministries. He says there should be an "important role" for the European Central Bank (ECB), alongside the Bank of England and others national banks. Larosiere called for a European Systemic Risk Council, to be chaired by the ECB.
Darling makes clearing and settlement rules his third priority, saying a lack of current EU regulation for payment, clearing and settlement platforms meant it was a priority to develop rules for harmonisation across the EU.

Lastly, Darling proposes a fundamental review of cross-border supervision for EU banking and insurance groups to co-ordinate deposit guarantee schemes and groups' financial strength. He selected the 'home/host' issue as most important, using for an example the lack of guarantee schemes in many member states for the failure of a cross-border insurance company. Home/host controversy between member states is currently stalling the passing of Solvency II, the proposed new capital requirements for EU insurers.

The letter can be read in full here: http://www.hm-treasury.gov.uk/d/chxletter_ecofin030309.pdf