“The financial crisis is transforming some longstanding British assumptions” about the EU, according to Philip Whyte, a senior research fellow at the Centre for European Reform.
Lord Turner, chairman of the UK’s Financial Services Authority (FSA), recently promised a “revolution” in financial regulation, with “tougher capital rules for banks and capital and liquidity rules for previously large, unregulated institutions, such as hedge funds,” Whyte recalls in a February paper.
A report by Jacques de Larosière on financial supervision in the EU, presented by the European Commission on 25 February, proposes building two separate structures, Whyte explains:
- First, a means of dealing with traditional micro-prudential supervision: Supervision of institutions would be left to national regulators, and international colleges of regulators would continue to oversee cross-border banks, with greater central coordination (creation of new authorities for the banking, insurance and security industries), and;
- Second, a means of dealing with macro-prudential issues: A new body, the European Systemic Risk Council (chaired by the European Central Bank and composed of national central banks and regulators), would collate and analyse information related to systemic risk and financial stability.
Successive British governments’ reluctance to accept EU integration can partly be explained by “the UK’s ‘light touch’ regulatory regime,” according to Whyte. Nevertheless, if “domestic opposition to joining the single currency remains as strong as ever, the crisis has [still] called into question the merits of ‘light touch’ regulation,” he claims.
“Although de Larosière’s report does not recommend the establishment of a single, pan-European regulator, the British government may still find it difficult to cede new powers to EU bodies,” Whyte concludes.
“This is a shame, because there may be no way to reconcile political constraints with the needs of the moment,” he adds.