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.
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 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).