In line with the suggestions of the de Larosière report, Brussels proposed a double layer of supervision. The European Central Bank (ECB) and EU central banks will deal with preventing systemic risks – so-called 'macro-supervision', while national supervisors supported by beefed up EU bodies will instead oversee specific financial institutions – so-called 'micro-supervision'.
ECB to steer macro-supervision
The newly-proposed European Systemic Risk Council (ESRC) woud be entitled to prevent major disruption in the EU financial markets, like that which has occurred in the recent months following the collapse of the US sub-prime market in mid-2007.
According to the proposal, the ESRC will be chaired by the president of the European Central Bank. However, since the main risks have so far been triggered by the UK financial market, which lies outside the ECB's grip, Brussels could not avoid including all the governors of EU central banks in the board of the ESRC, at the risk of complicating decision-making within the Council.
ESRC warnings will in any case only be indicative, and not binding. "The quality of the ESRC's work will provide a significant moral incentive to follow up ESRC recommendations, or give convincing reasons to do otherwise," says a document released by the Commission.
Three new authorities for micro-supervision
According to the Commission's plan, oversight of specific financial institutions will remain in the hands of national watchdogs, but three new EU authorities will be set up to better coordinate supervision of around 40 cross-border banks and insurance firms which alone hold two-thirds of the EU's total assets.
In a nutshell, a bank with interests in a single EU country will be monitored only by its national authority, while a bank with activities in different EU countries will be overseen by a college of national supervisors from each of the countries in which it operates. In case of a dispute within the college, one of the three EU authorities could, "as a last resort", settle the matter.
The three authorities will replace the existing committees supervising EU banks, insurances and securities, CEBS, CEIOPS and CESR respectively.
What the proposal lacks
As anticipated, the Commission ruled out the ambitious idea of establishing a single EU supervisor with binding powers, considered by some analysts as the only way to control a market which is increasingly integrated and borderless. The current system, which is mainly based on national supervision, has indeed proved to be incapable of forecasting the crisis.
Brussels decided to postpone the crucial problem of burden-sharing. The Commission's proposal does not make clear who will pay the the bill if a cross-border bank fails. "Member states do not agree on this," snapped Commission officials.
Some critics also questioned the postponement of the actual legislative proposal until the autumn. Indeed, the Commission yesterday proposed only general ideas, to be agreed upon by member states before concrete draft legislation is put forward.
"We did the same for the climate package," claimed Commission President José Manuel Barroso, referring to the comprehensive energy and environment reform backed by member states after tough negotiations.
The Commission is committed to getting the financial package in force within the next few months. "I would like the new architecture up and running during 2010," Barroso told journalists. This is the only element that the Commission took further than the de Larosière group, which had originally proposed 2012 as the deadline for implementing the overhaul.