EU leaders set for scramble on financial supervision

The financial crisis calls for “unprecedented EU action,” said Commission President José Manuel Barroso ahead of the European Council that starts today (15 October), urging leaders to adopt a more “integrated” approach to supervising financial institutions. But despite recent moves to better coordinate their bank rescue activities, member states remain broadly divided on the issue of oversight.

Speaking yesterday (14 October), Barroso stressed the necessity of a “fully integrated solution”, referring to the possibility of creating a unique European supervisor for financial institutions. The case for such a body (or function, assuming that it could be carried out by a pre-existing institution, such as the European Central Bank) has been growing since the start of the crisis, which has badly hit a number of large cross-border banks.

Belgian-Dutch giant Fortis, whose activities spread across a variety of European countries, was bailed out by concerted action by Belgium, the Netherlands and Luxembourg. While this particular operation went smoothly, there is no guarantee that states will agree on a coordinated response or on who should bear the burden of the bail-out in other similar cases in future. 

Moreover, if supervision is applied exclusively at national level, preventing a cross-border bank from collapsing becomes even harder, not least because it is very difficult for a local supervisor to understand the real exposure to risk of cross-border groups. 

Figures provided by the Commission make clear the urgent need for reform: in Europe, there are more than 8,000 banks but two-thirds of their total assets are held in only 44 multinational institutions. Europe “needs to remove the mismatch between European financial markets on the one hand, and purely national supervision on the other,” stressed Barroso.

Nevertheless, it is “highly unlikely” that European leaders will even approach the topic of a single supervisor in their summit starting today, according to diplomatic sources. 

“There are no real conditions to seriously discuss the issue,” said Barroso, underlining the “strong resistance” of several member states not only to “an integrated EU supervisor” but also even to a “minimalistic” solution of ad hoc colleges of supervisors for multinational groups.

In particular, new member states from Eastern Europe fear they would lose their national supervisory powers if the idea of more integrated European supervision is taken up. Indeed, Hungary and Poland tend to mainly host international groups rather than themselves be founding members of cross-border institutions. A model of supervision based on enhanced powers for the authorities of cross-border groups’ home countries would actually concentrate the safeguards in France or Britain.

Conversely, the idea of a European supervisor is also opposed by big countries, which are reluctant to give up such delicate national powers. The hopes of the most pro-integration commentators lie on a key sentence included in the conclusions of the Ecofin Council of 7 October. EU finance ministers agreed that: “Regarding supervision of financial groups, the Council emphasises the need for a more efficient system of European supervision of cross-border groups.”

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