EU struggles with tools to tackle Lehman-style crisis

A meeting of European finance ministers in Nice over the weekend highlighted the EU’s lack of common tools to prevent or deal with a collective catastrophe like that currently occurring in US financial markets with the failure of two of the world’s largest investment banks, Lehman Brothers and Merrill Lynch.

The weekend saw deepening financial turmoil in the United States, with another symbol of Wall Street, the investment bank Lehman Brothers, announcing its intention to file for bankruptcy. What’s more, Merill Lynch, another giant of investment banking, agreed to be sold to the Bank of America in an attempt to avoid a similar fate.

Amid what is being termed a ‘tectonic shift’ in the global financial services market, European finance ministers were under pressure to identify new tools to allow more coordinated supervision of similarly powerful European cross-border groups, such as AXA or Unicredit, at their informal meeting in Nice on Saturday (13 September).

But the only concrete agreement they reached on the subject was a promise to introduce a harmonised reporting system for multinational companies by 2012. This would enable cross-border banks and insurance firms to file common – and simpler – financial reports to national supervisory authorities.

However, questions related to how the supervision will actually be carried out and how the burden will be shared in the event of failure were left unanswered. 

At the Nice meeting, French Finance Minister Christine Lagarde, whose country currently holds the EU Presidency, circulated a paper proposing integrated supervision based on collegial work by national authorities.

According to the proposal, tabled in conjunction with the European Commission, every financial group with a cross-border dimension would be monitored by an ad hoc college of supervisors, made up by authorities from the countries it operates in. Within the college, the supervisor of the home country would have more power due to its better knowledge of the multinational company’s overall financial activities and exposure (EURACTIV 12/09/08).

Lagarde was jubilant after the meeting, saying: “We found the basis for unified supervision. We moved towards a more integrated Europe today.” But other officials appeared more cautious, referring to a “conciliatory” mood among ministers.

Indeed, a number of member states still appear rather reluctant to offer their concrete support to more integrated supervision. 

Those hosting multinationals despite only being the mother country to a few (or indeed to none) of them are in fact unhappy with the idea of reform that would effectively decrease the power of local authorities. Eastern and Central European countries fear that they will lose control of the financial activities carried out on their territories, despite these being key employers of their labour force.

What’s more, the actual procedure for sharing powers among national authorities remains unclear and would be subject to lengthy negotiations over two key legal texts, the Capital Requirements Directive for the banking sector and the Solvency II Directive for insurance.

The idea of a unique EU supervisor has so far been ruled out on every possible occasion. Lagarde again stressed over the weekend that more integrated EU supervision need not involve a centralised authority. 

Yet, a unique supervisory body – a role that could fit the European Central Bank – would avoid the complex decision-making process foreseen by collegial monitoring. Ultimately it would also be able to share the burden across Europe if a European multinational institution ever did face bankruptcy – an event that the sub-prime crisis in the US is increasingly demonstrating is a possibility.

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