EU lets financial watchdogs off the leash

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An array of new European financial supervisory bodies designed to monitor and avert future economic crises on the continent have opened their doors for business.

Michel Barnier, the European commissioner for the Internal Market and Services, said in a statement that the new surveillance structures would give Europe "the control tower and the radar screens that the financial sector needs".

As well as scanning markets, banks, insurance and stock, the new agencies can alert EU countries to potential risks to financial stability, such as speculative bubbles. They will also have the power to recommend Europe-wide technical standards and, in emergency situations, temporarily ban or restrict trade in financial products and services.  

Initially though, their focus will be on creating a common rule book, establishing coordination with national authorities, and ensuring a smooth handover of power from the previous regulatory agencies.

Recruiting "the right people" is also a priority, according to Chantal Hughes, Barnier's spokesperson. "It will take a bit of time until the authorities are fully up to strength in terms of personnel," she told EURACTIV.

The Commission has received around 300 applications for the top six posts.

Already though, market practices such as short selling and high frequency trading have been identified as areas of particular concern.

"Last year Germany took unilateral action to suspend short selling at one point when it felt under pressure," Hughes said. "We would hope that [under a repeat scenario] in the new system, there would be much more coordinated and structured action [taken] upfront and across the board."

The Internal Markets Commission is currently considering proposals to meet its objective of inverting the current ratio of derivatives monitoring, approximately 90% of which is traded 'over the counter' and so completely unregulated. In December 2009, the total value of the derivatives market was estimated at $615 trillion.

Hughes singled out credit default swaps as a trading practice that could be suspended in an emergency situation, and noted their position in a bigger puzzle. "We have proposals on the table that are being negotiated on derivatives, short selling or credit default swaps and those would fit into the wider foundation," she said.

A European Commission proposal unveiled last September suggested that derivatives trading be brought under the regulations of stock exchanges and processed by clearing houses or central counter-parties, which would have to comply with stricter governance rules.

Positions

Background

After the economic crisis began in the US, European Commission President José Manuel Barroso set up an expert panel in October 2008 to advise on the future of European business regulation. The group identified serious shortcomings in financial oversight and concluded that national supervision alone could not effectively regulate a single market in which financial institutions operated across borders.

They proposed a rapid and effective mechanism to consistently apply technical rules, as well as coordinated decision-making in crisis situations. Based on their report, the new supervisory framework for financial regulation was approved by the European Parliament in September 2009.

The result is that Frankfurt will now host a European Systemic Risk Board (ESRB) and European Insurance Occupational Pensions Authority (EIOPA), London will get a European Banking Authority (EBA) and Paris a European Securities and Markets Authority (ESMA).

The ESRB, which will operate under the aegis of the European Central Bank, will be co-chaired by former Bank of England Governor Mervyn King. The new regulatory authorities will be made up of national supervisors from the 27 EU member states.

In contrast to the three previous EU financial services, the new European Supervisory Authorities (ESAs) can monitor and assess potential threats to financial stability that arise from macro-economic developments and from developments within the financial system as a whole. The ESRB can issue recommendations for action to deal with these risks.

The ESAs will also work in a coordinated 'early warning system' in collaboration with nationally-based supervisors to foster harmonised rules and enforcement.

They will also have additional powers to draw up rules, guidelines and standards for national authorities and financial institutions, mediate and settle disputes between national supervisors and authorities, ensure the consistent application of EU law and take action in emergencies, including the banning of certain products and services.

Timeline

Further Reading

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