In late May, the European Union announced plans to create a "systemic risk council" to monitor stresses in the financial system and call for action when it felt that was needed. The ECB, a pan-European institution in which Britain does not have a seat on the governing council, is set to play a core role (EurActiv 28/05/09). The UK opposed the strengthened role for the Bank, but a wide majority of EU states support the plan.
"The ECB has had a good war. If there is one clear winner in Europe from all this, it's them," said Graham Bishop, a former banker who advises the 27-nation bloc on financial regulation.
In public meetings and closed-door negotiations, European policymakers no longer defer readily on financial regulation issues to Britain, the EU's top banking centre. The near-meltdown of the British banking system, which forced it to nationalise lenders, has made it a lot harder for Britain to lecture pro-regulation states such as France and Germany.
"The UK government is not going to be in a position to argue the toss at EU finance ministers' meetings," Bishop said.
Hedge funds
The EU's proposal to crack down on hedge funds is one of its most high-profile regulatory initiatives. Hedge fund managers would be required to register and be subject to close scrutiny if they wanted to operate in the bloc (EurActiv 30/04/09).
That has drawn howls of protest from some fund managers and alarmed Britain, a big centre for the hedge fund industry. But Britain faces an uphill battle in trying to dilute the proposal.
More important in the long term may be the EU's plans to establish new regulatory authorities with binding powers over member states, a move which Britain also opposes.
"The Europeanisation of the regulatory regime is no doubt going to cause a shift in the balance of power away from the incumbents (London, Luxembourg and Dublin) as one stares down the barrel of a more dirigiste, more socialist approach in regulation," said Bob Penn of Allen & Overy, a law firm.
Some think Britain's setback won't be permanent, because no regulatory model has covered itself in glory during the credit crunch. "The UK has the most tainted model, but it will also be the quickest to reinvent itself. Is there long-term harm? I am not so sure," said Barbara Ridpath, chief executive of the International Centre for Financial Regulation.
New EU authorities
In addition to the ECB, other EU regulatory bodies are likely to emerge enhanced from the crisis, especially EU committees which group national securities, insurance and banking supervisors (EurActiv 10/06/09).
A broader change expected to result from the crisis is that the financial industry will have less power in shaping the rules governing it. EU policymakers will care less about narrow cost-benefit analyses of draft rules and more about the system's overall stability.
Ultimately, the EU's post-crisis approach to financial regulation may help to shape rule-making in banking, insurance, mutual funds and the securities industry around the world, just as European product safety rules in sectors such as chemicals have had a growing influence on global production.
The result may be greater financial stability, but at the potential cost of higher fees for investors and less innovative and lucrative financial products.
(EurActiv with Reuters.)
