European Commission introduces new plans for the reorganisation of the financial regulation in the EU
The reality of the European banking system looks something like this: 45 major cross-border active banks administer around 70 percent of all bank equity funds in Europe. Hence, the internal market in the banking and financial sector in Europe is well advanced. A different picture, however, emerges with regard to supervising these banks, i.e. their regulation. Bank regulation is still by and large a purely national matter. A fact, experts in Europe such as the Bruegel economist Nicolas Véron for example have long warned against. The financial crisis has shown how dangerous this imbalance is. When cross-border institutes such as Fortis get into difficulties, the reaction in many cases is not fast and resolute enough; on the contrary, often the first thing that happens is that the regulators of the countries, where the institutes have branches begin to engage in disputes - with dangerous consequences.

Commission: First open the markets but leave the regulation to the market
It has been typical for the economic philosophy of the European Commission and some Member States for a long time that first the internal market was to be realized with European instruments in the interest of large corporations. However, when the markets were opened one was rather reluctant to waste much time thinking about regulating the businesses, which had been created that way. One assumed that the financial sector would impose its own rules. The major representative of this philosophy in the Commission: the Irishman Charlie McCreevy for the reputed benefit of the banking centres in Dublin and London.

McCreevy between light speed and intense discussions
It is not without a certain irony that it was McCreevy - together with the Commission President Barroso und the Spanish Economics Commissioner Almunia - who this week in Brussels introduced the new proposal of the Commission on the future financial regulation in Europe. The drafts for the reorganisation of the macro and micro regulation showed the speedy and decisive action of the Commission, virtually at “light speed”, said McCreevy. The Commissioner, however, also commented that he was expecting “intensive discussions” among the Member States.

London on the barricades
McCreevy knows what he is talking about. Strong resistance is once again coming from Great Britain. After the British have done everything on behalf of the City of London to torpedo the imminent regulation of hedge funds, they are now complaining that the plans submitted for the European financial regulation would go too far.

The concrete bone of contention is the creation of three “new” European authorities: the European Banking Authority (EBA), the European Security and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA). Together with the national supervisory authorities they form the so-called European System of Financial Supervisors (ESFS). Until recently they had only an advisory function; now they are supposed to have more responsibility and to take over new functions, such as the coordination in case of a crisis, the preparation of proposals for technical standards, or also the newly created direct supervision of rating agencies.

Someone should be able to decide in case of dispute
The most controversial issue, however, is the power of the new authorities, which enables them to settle disputes between national supervisory bodies. Currently the supervision of cross-border financial institutes works in such a way that the national supervisory bodies meet in colleges where they discuss any problems that arise. If this results in a dispute - example Fortis - there is no mechanism to reach a solution. The new proposal of the Commission is supposed to change this so that the dispute between the national supervisory bodies in the countries does not result in a collapse of banks, which would in turn be a danger for the entire financial system. In future, the authorities should be able to take decisions in emergency situations, which could force the national supervisory bodies to act. The Commission will decide whether an emergency situation exists or not.

Emergency aside - all of this is too much Europe for the British. They already asserted prior to the publication that the new authorities would not be able to take any decisions, which would have a fiscal impact on the Member States. For example, if a subsidiary of an Italian Bank in Great Britain would be in difficulty, the European regulator should not have the power to decide that Great Britain should rescue the bank from collapse.

New Committee at ECB supposed to recognize bubbles and crises in good time
Slightly less controversial is the newly proposed macro supervision. The new European Systemic Risk Board (ESRB) - situated at the European Central Bank - will recognize risks for the financial system as a whole, issue early warnings and - if required - propose concrete measures, which are to be followed by a speedy reaction. The warnings and recommendations of the ESRB go to the Member States and the national supervisory bodies, which either act on the warnings and recommendations or have to declare why they want to remain inactive. If the reasons provided are not convincing, the ESRB can inform the Council of Member States. Hence, according to the logic of the Commission there is something like a “moral” incentive to follow the recommendations of the Committee, if one does not want to be exposed in front of the other Member States.

AK welcomes the basic ambition of the Commission’s initiative, even if it is critical about some issues. What for example is true for the Systemic Risk Board is the fact that there is still no broader integration of economic players and that the ECB experts to a large extent keep themselves to themselves. What is also not clear is whether in case of a risk warning issued to a member State the “moral” incentive would be enough. AK thinks that the supervision of macroeconomic imbalances should take place within the scope of a comprehensive macroeconomic dialogue, which includes the European social partners. AK also welcomes the network approach of the European System of Financial Supervisors ESFS, demands, however, more democratic control by the EP and the European Court of Auditors.

Now the ball is in the corner of the Council and the EP. Renowned EP representatives such as the Social Democrat Udo Bullmann or the financial expert of the CSU Markus Ferber, who warned against letting the EU supervision deteriorate into a toothless tiger, have signalled that they will not agree to a softening of the Commission proposal.

Further information:

AK position paper on the European Financial Supervision