EU expert group calls for tightened financial supervision

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Supervision of cross-border financial groups should remain a national affair, despite shortfalls revealed by the ongoing crisis, an EU expert group suggested yesterday (25 February) in an eagerly anticipated report. Three new EU authorities are to be set up to enforce decisions, but the role of the European Central Bank remains unclear.

Appointed by the European Commission, the high-level group chaired by Jacques de Larosière (see background) decided to dismiss the ECB's pleas for more power over so-called micro-supervision, or the oversight of banks and insurance firms (EurActiv 13/02/09). 

"The group does not support any role for the ECB for micro-prudential supervision," reads the report, arguing that these new duties could "impinge" the ECB's main role of ensuring monetary stability in the euro zone.

The ECB's desire to put itself forward for the new role stemmed from a lack of sound monitoring of multinational financial institutions. According to experts, national supervisors failed to exchange information, but the idea of creating colleges of domestic watchdogs for each cross-border group is also opposed by many EU states. Nevertheless, the current legal battle resulting from the crash of transnational group Fortis is considered as an example of the negative effects of neglecting to establish clear rules.

De Larosière wants to establish three new EU authorities, independent of national bodies, by 2012 (for banks, securities and insurance firms). The new authorities would be in charge of "legally binding mediation between national supervisors": in other words, if "host" watchdogs (for branches) and "home" ones (for headquarters) fail to agree on an issue, one of the authorities will step in by imposing a solution.

Macro-supervision

The De Larosière group presented bolder suggestions for the oversight of risks affecting the entire financial system, so-called macro-supervision. A new body should be established within the European System of Central Banks, which includes every EU member state. The ECB should chair the body, called the European Systemic Risk Council (ESRC), argues the report. The ESRC would replace the existing Banking Supervision Committee.

To guarantee the stability of the system, the enhanced body should issue early warnings and "shall have access to all necessary macro- and micro-information," reads the report. This might imply that ESRC experts will have to participate in the colleges of supervisors of major banking groups. 

Credit rating agencies, hedge funds and derivatives

The group also proposed a range of measures to address EU regulatory shortfalls revealed by the ongoing turmoil. Financial institutions should increase and improve the capital they hold as a buffer against risks, reviewing the so-called 'Basel 2' capital requirements that have just entered into force in the EU.

Credit rating agencies should register and be supervised by the new authority in charge of securities, a strengthened version of the existing CESR (Committee of European Securities Regulators). This goes beyond the proposals made by the European Commission in the aftermath of the crisis, which are currently being debated by the Parliament. The EU executive is opposed to the idea of a single watchdog for credit rating agencies (EurActiv 13/11/08).

Despite recognising their lack of responsibility for the current crisis, the De Larosière group calls for a significant increase in disclosure obligations for hedge fund managers, which for the sake of transparency should be forced to reveal "strategies, methods and leverage", which until now have been considered crucial secrets, favouring performance while avoiding dissemination of sensible data to competitors.

For derivatives, and in particular credit default swaps, "at least one central clearing house" should be created, the report suggests, avoiding meddling in controversy concerning the seat of the clearer (EurActiv 20/02/09).

Commission reaction

Commission President Josè Manuel Barroso welcomed the report as a "good basis" for further proposals to be published by the EU executive next week (4 March), before the Spring European Summit on 19-20 March.

He also announced new regulatory actions in April over the remuneration of managers, which are set to be reduced and linked to long-term objectives rather than current immediate and often short-sighted targets. 

The Commission is also planning to adopt proposals to regulate hedge funds and private equity funds. European Socialist Party chief Poul Nyrup Rasmussen wondered if the plan represents a "deliberate delay", since a proposal in April would prevent Europe from taking a common position on hedge funds and private equity to the G20 summit in London on 2 April (see EurActiv interview with Rasmussen).

Positions: 

European Commission President Josè Manuel Barroso said: "This report is an important contribution for our work. It includes a number of significant proposals in areas where the Commission believes we need to act. Above all, this is a balanced and rich report which provides a good basis for further Commission work."

Party of European Socialists President Poul Nyrup Rasmussen said: "The de Larosière group proposals represent an essential step forward. They are ambitious but practical. The spotlight is now on the European Commission. It is a test of Barroso's courage and conviction. Today should be an important day in the history of international financial markets – but we shall see if the current conservative European Commission is capable of taking the recommended steps."

John Purvis MEP, Conservative vice-chairman of the European Parliament's economic and monetary affairs committee, said: "Greater transparency and prudence in the financial markets should be stressed by the European Commission but we must never forget that we live in a global economy and overzealous interventionist reactions could be detrimental to our international competitiveness."

European Banking Federation (EBFSecretary-General Guido Ravoet said: "Most of the concerns of the EBF are dealt with in the report with regard to a more robust and consistent regulatory framework first on EU level and also globally. We hope the political momentum will be maintained and look forward to the European Commission's follow-up of this report – we will of course follow developments closely."

EU insurers echoed banks in welcoming the report: "We welcome this timely, thorough and far-reaching review of financial services supervision in Europe, particularly against the background of the current economic crisis," said Tommy Persson, president of the CEA, the European Insurance and Reinsurance Federation.

The Hedge Funds Association  (AIMAreacted positively to the report, underlining that it will support the principle of "full transparency and supervisory disclosure". Nevertheless, it will only do so for "systemically significant positions and risk exposures".

"Regulation of private equity must be proportionate and recognise that it is not a homogeneous asset class," claimed the Private Equity and Venture Capital Association (EVCA).

Timeline: 
  • 4 March 2009: Commission to present communication based on De Larosière report.
  • 19-20 March 2009: Spring European Council.
  • 2 April 2009: G20 summit in London on overhaul of global financial sector.
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