Brussels, 21/09/2010 (Agence Europe) - The European Parliament is preparing to give the go-ahead on Wednesday 22 September to the introduction in January 2011 of the new EU financial supervisory structure. As the first major step in the reform of financial regulations launched by the EU after the 2008 financial crash, the new structure includes the setting up of: - a European Systemic Risk Board (ESRB) to detect macro-economic risks to financial stability and make recommendations about how to deal with them; - three European financial supervision authorities (ESAs) to replace the current European committees of national supervisors for the banking industry, insurance and securities. Day-to-day supervision of financial institutions will remain largely in the hands of national supervisory authorities, but the EU is transferring some supervisory powers for the first time to European level. The ESAs will have the power to take binding decisions in the face of opposing advance from national supervisors or even financial institutions in the event of failure to respect EU law, disagreement among various national authorities or crises on the markets, as long as the ESAs decisions do not trample on member states' sovereignty over their own budgets.
This is the first stage in the process. As recommended by EU Internal Market Commissioner Michel Barnier, the EU must now flesh out the bones of the new supervisory system. Genuine powers held by the European authorities must be incorporated in the relevant industry's legislation, as shown by the draft legislation that would give the ESA for the securities market (ESMA) the power to scrutinise financial ratings agencies (see EUROPE 10151) and various parts of the post-market industry, and the draft legalisation that would give ESMA the power to ban short selling of specific derivatives in the event of a financial crisis (see EUROPE 10215). Faced with flat refusal from the Council of Ministers, the supervisory package does not include an EU institution to monitor financial institutions that do business in more than one country (cross-border financial institutions). MEPs have managed to get agreement that this issue, along with the question of whether to create an EU bailout fund or a merger of the three ESAs into a single EU supervisory authority, will be looked at again in the 2013 progress report on the legislative package, hoping that in the meantime, significant progress will have been made in the debate about a putative EU crisis management system.
ESRB. Based in Frankfurt, Germany, the European Systemic Risk Board will be responsible for macro-prudential monitoring of the financial system. It will issue warnings, some of which will be made public, about serous risks and will draft recommendations about how to deal with them. In cooperation with the ESAs, it will draw up a list of quantitative and qualitative indicators for classifying potentially too-big-to-fail cross-border financial companies.
In the first five years of existence, the ESRB will be chaired by the president of the European Central Bank (ECB), a decision taken after a strong fight by the European Parliament but with which the United Kingdom is not happy. London sees it as setting a precedent and preventing a UK national from chairing an EU financial body. The ESRB chair will be backed up by a vice-president elected by the members of the ESRB's management body, the General Council.
Meeting at least four times a year, the General Council will comprise the ECB president and vice-president, governors of national central banks, a member of the European Commission, the chairs of the three ESAs, two representatives of an advisory committee of experts (itself comprising 15 leading lights from the business world and academia) and a representative from the advisory technical committee. The General Council will make decisions by a simple majority vote, with a two-thirds majority required if a warning is to be made public. Representatives of national supervisory bodies and the chair of the Council of Ministers' Economic and Financial Committee will be able to attend meetings of the General Council as observers (without voting rights).
The ESRB will be able to issue warnings and recommendations to member states, ESAs, the Council of Ministers and the European Parliament. The recipients of a recommendation will notify the ESRB of any corrective measures taken or explain why they have not acted. If the ESRB feels the measures do not go far enough, it will inform the Commission, Council of Ministers and EP. The ESRB chair will address a hearing at the European Parliament each year after publication of the ESRBs' annual report.
Microeconomic supervision. Three microeconomic financial surveillance authorities will be set up, one for banking, one for insurance and one for securities. Against the wishes of the EP, the three authorities will be located in the cities where the EU committees they are replacing are found, namely Paris for ESMA, London for the banking ESA and Frankfurt for the insurance ESA.
The three authorities will have the job of ensuring uniform application of EU rules, helping protect consumers and ensuring convergence in prudential monitoring practices across the EU. The ESAs in the banking and insurance industries will have an important coordination role to play in the colleges of national supervisors responsible for scrutinising the business of pan-European finance companies. The ESAs will be able to carry out crisis simulation exercises at EU level to test financial institutions' ability to withstand crises. In the event of a financial crisis, ESMA will have additional powers to ban credit derivatives and other products and transactions like short-selling. The ESAs will take most of their decisions by a simple majority vote unless disagreement emerges between national supervisors, in which case a weighted qualified majority system will apply. The ESAs will have around 100 members of staff and be chaired for a five-year term by an independent professional who has won the backing of the European Parliament.
Single rule book. In order to ensure uniform application of EU rules, ESAs will have the power to draw up regulation and implementing standards, which will need endorsement by the European Commission to obtain force of law. A process has been set up to allow the European Parliament and the Council of Ministers to make objections. If they object, then the procedure will not come into force and at the same time, the European legislator will start gradually removing exemptions and derogations from EU rules.
The granting of binding powers to the ESAs was one of the key sections of the negotiations between the European Parliament and the Council of Ministers. The MEPs exerted all their weight to get the member states to agree to ESAs having genuine powers as suggested by the Commission in its initial proposal following up on recommendations set out in the de Larosière Report. Initially, the Council of Ministers would only agree to ESAs having binding powers over issues relating to respect of EU rules (see EUROPE 10032). MEPs were also able to ensure that ESAs would have the ability to take decisions requiring national supervisors to act or decisions directly over financial institutions should two national supervisors disagree in the event of a crisis on the markets. For example, if a national supervisor does not force a bank to increase its capital in line with EU rules, then the banking ESA will itself be able to require the bank in question to respect EU bank solvency rules.
Emergencies. In consultation with the Commission and the ESRB and possibly the ESAs, finance ministers will be able to issue a decision to the effect that there is a financial crisis on the markets. The ministers will assess the decision at regular intervals, at least once a month. The ESRB and ESAs will have the power to issue confidential recommendations to the Council of Ministers, accompanied by an assessment of the situation. The Council of Ministers will decide whether a state of financial crisis should be announced.
Safeguard clauses. After tough negotiation from the United Kingdom at the June 2009 European Council, set out in the December 2009 Economic and Finance Ministers Council (see EUROPE 9925 and 10032), a safeguard clause bans any decisions by an EU supervisory authority that would infringe the budget powers of the member states in any way. An example frequently quoted here to illustrate how this clause might apply is the decision to organise public bailout of struggling financial institutions. Such decisions will remain in the hands of national governments.
The mechanism decided upon includes three situations where member states will be able to oppose an ESA's decision taken after national supervisors disagree in the event of an emergency. In the event of disagreement among national supervisors, the ECOFIN Council could be informed of a decision opposed by a member state that the ESA does not wish to withdraw. The Council of Ministers would have two months to decide on a majority voting basis (abstentions will not be taken into account) whether to back the ESA's decision. If the ESA's decision is not backed, then the decision will be ended. In an emergency situation, the Council of Ministers will have two weeks to decide by a simple majority vote of its members whether to revoke the ESA's decision. This the first safeguard negotiated by the British. In emergencies, if the ECOFIN Council confirms an ESA's decision but the objecting member state still believes that the decision tramples its budget sovereignty, then it can request that the ECOFIN Council re-examine the decision. The ECOFIN Council would then have four weeks (or eight weeks, depending on the case in hand) to decide again. This is the second British safeguard. Annexed to the December 2009 ECOFIN Council agreement is a political statement recognising that if a country feels it has been damaged by an ESA decision taken in an emergency and confirmed by the Council of Ministers, then the issue can be taken by the country in question to the European Council. This is the third British ringfence.
The MEPs have nevertheless managed to insert a clause banning any abuse of the safeguard clause, particularly over decisions by EU authorities that have limited impact on countries' budgets. (M.B./transl.fl)