On February 25th, a Commission-appointed taskforce headed by Jacques de Larosière published a report on financial supervision in the EU. The same date, Lord Turner, the Chairman of the UK’s Financial Services Authority (FSA), gave evidence to a parliamentary committee. “What light does Lord Turner’s evidence shed on the UK’s likely reception on the Larosière report”, asks Philip Whyte.
Successive British governments’ reticence to EU integration can partly be explained by “UK’s ‘light touch’ regulatory regime”, says Philip Whyte. Nevertheless, if “domestic opposition to joining the single currency remains as strong as ever, the crisis has called into question the merits of ‘light touch’ regulation”, he explains.
Indeed, according to Lord Turner’s, “the era of light touch regulation [is] over”, quotes Philip Whyte. The Chairman of the UK’s FSA promised in his evidence a ‘revolution’ in financial regulation with “tougher capital rules for banks and capital, and liquidity rules for previously large, unregulated institutions such as hedge funds”.
The Larosière report proposes building two separate structures:
- One dealing with traditional micro-prudential supervision (the oversight of individual institutions): supervision of institutions would be left to national regulators, and international colleges of regulators would continue to oversee cross-border banks, with a greater central coordination (creation of new authorities for the banking, insurance and security industries)
- Another one dealing with macro-prudential issues (risks to the financial system as a whole): a new body, the European Systemic Risk Council (chaired by the European Central Bank and composed of national central banks and regulators) would collate and analyze information relating to system risk and financial stability
“Although Larosière’s report does not recommend the establishment of a single, pan-European regulator the British government may still find it difficult to cede new powers to EU bodies”, analyses Whyte. “This is a shame, because there may be no way to reconcile political constraints with the needs of the moment”, concludes Philip Whyte.
