The European Systemic Risk Board, Europe's proposed solution to avoid a repeat of the financial crisis, held its first meeting on Thursday (20 January). But some analysts are questioning its relevance.
The new 'super-watchdog' is designed to take an overview of Europe's financial system and highlight emerging problems for relevant authorities to act on. It has no formal enforcement powers.
"Will they say something about the hot issues of today? Do they want to do that or will it be too politically sensitive? If they don't, and just make some quiet recommendations, this will just become another irrelevant European institution," said Daniel Gros, director of the Brussels-based Centre for European Policy Studies.
If the European Systemic Risk Board (ESRB) is not satisfied, it has the option of going public with its fears and leaving the rest to the persuasive powers of financial markets.
The watchdog brings together the continent's top central bankers, seating them on a 37-member board alongside the heads of banking, trading and insurance authorities and EU Economic and Monetary Affairs Commissioner Olli Rehn.
While critics complain that without any teeth it will be too weak to force countries or authorities to adhere to its warnings, others say it may carry clout.
"Warnings by themselves are a sort of sanctions," said Nomura economist Laurent Bilke. "It's a little bit dangerous if we jump directly to warnings […] if they come at the end of a process in which any other means of discussion have failed, then it's fine."
Sensitivities may also hamper its effectiveness, with politicians likely to argue a major warning could be a catalyst for a crisis.
"The key question is whether it can handle the problems that are relevant now, such as the sovereign debt crisis and whether bond holders can be forced to take losses without a new crisis following," Gros said.
ESRB warnings will be colour-coded to reflect the urgency of the threat. They will draw on information such as stress tests carried out by members such as the European Banking Authority and analysis of information already available.
Other analysts said the ESRB is not doomed to irrelevancy.
"The power of influence of regulators can be very high," Deutsche Bank economist Gilles Moec said. "This may force decisions upon national governments that otherwise would never happen."
It has personnel that should command attention from financial markets. Europe's top two central bankers will head the new body: ECB President Jean-Claude Trichet and Bank of England Governor Mervyn King.
It will be heavily dominated by the ECB in other areas, posing a potential reputational issue for the ECB which could in future be criticised for perceived regulatory failures as well as monetary policy ones.
ECB policymakers will hold a majority on the board. One of the bank's division heads, Francesco Mazzaferro, leads the secretariat in charge of day-to-day running, while ECB staff will provide much of its information and analysis.
There will be four meetings a year, all dovetailing with the ECB General Council meetings that include Europe's 27 central bank governors.
Many issues are still to be ironed out, however. The working processes are yet to be finalised, the frequency and style of warnings remains largely unknown – it doesn't even have a public phone number yet.
The Austrian National Bank said in a statement that Thursday's meeting will centre on personnel and administrative topics, but also include discussions of risks.
The ESRB is likely to issue warnings about public debt as well as banks, potentially treading on the European Commission's toes.
Some economists expect the ESRB is likely to have a low bar for warnings, reflecting the understandable nervousness about missing a crisis. However, with its bloated structure and political sensitivities it also looks set to be steady rather than a dynamic mover.
"I wouldn't expect them to write fiery missives every day," said RBS economist Richard Barwell. "It is likely to be a gradual approach going through the traffic light system from green to amber to red.
"With Trichet and King you have a lot of clout […] The big question is how willing will they be to intervene and will the authorities follow their advice."
One key issue to avoid is increasing market nervousness in times of tension and to be taken seriously when the good times roll.
"Their impact in times of financial crisis or risk aversion may be dramatic on financial markets, whereas in the good times they may not be listened to," Nomura's Bilke said.
(EurActiv with Reuters.)
The EU's financial supervision architecture was decided in June 2009, at the height of the global financial crisis.
It comprises a European Systemic Risk Board for macro-prudential supervision (ESRB) and European Supervisory Authorities (ESA) for micro-prudential supervision.
Since the ESRB's inception, the body has been heavily criticised for aligning itself too closely with the European Central Bank (ECB) and national central banks. Critics also point out that the new body has no binding legal powers.
The ESRB "has been conceived as a 'reputational' body with a high-level composition that should influence the actions of policymakers and supervisors by means of its moral authority," according to the European Commission proposal.
Observers say that the board's authority will depend on the eminence of the people on the General Board, the ESRB's decision-maker.
The board will be made up of governors from the 27 national central banks, the president and vice-president of the ECB, a member of the European Commission and the chairpersons of the three ESAs.
- European Systemic Risk Board
- European Central Bank:European Systemic Risk Board holds inaugural meeting(20 Jan. 2011)
- European Central Bank:The establishment of the European Systemic Risk Board: challenges and opportunities(29 Sept. 2010)
- European Commission:Q&A on the European Systemic Risk Board(23 Sept. 2009) [FR] [FR] [DE]
- European Commission:Financial Supervision - Overview [FR] [FR] [DE]