Brussels, 25/02/2009 (Agence Europe) - Jacques de Larosière de Champfeu presented the European Commission on Wednesday 25 February with the report from the group of eight experts he chairs and which is in charge of setting out a European financial supervisory system adapted (EUROPE 9847). Mr de Larosière declared that they had set out an “ambitious but not unrealistic construction”. This includes two headings: implementation of a European Council on systemic risk, chaired by the European Central Bank (ECB) and based in Frankfurt, which is in charge of sounding an early warning to prevent crisis; creation of a European financial supervisory system that has a supervisory remit in micro-prudential matters by way of transforming the three European regulators (CESR) Committee of European Securities Regulators, Committee of European Banking Supervisors (CEBS) and Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) into independent European authorities with expanded powers.
The Larosière report also includes an analysis on the causes of the financial crisis and links its recommendations to work being carried out at an international level. It also suggests ways (some have been tried already through legislative proposals) to consolidate the regulatory framework for the financial sector: European rating agencies, capping remuneration in the sector, fighting poly-cyclic nature of accounting rules, regulation of financial actors that have a systemic impact, such as hedge funds. The former governor of the Bank of France said that it was remarkable that the proposals contained in the report were supported unanimously by group members. He pointed out that a number of the systematic problems resumed from existing rules that had been badly devised and in the differing interpretation of these rules at national levels. He appealed for a joint effort from the European institutions and member states for guaranteeing a coherent regulatory system.
Asked about the Commission's determination to put the recommendations of the Larosière group into practice, José Manuel Barroso indicated that the Commission would adopt a communication on 4 March that made an initial assessment of the expert group's proposal and indicated how it would proceed, “We all agree that significant financial reform is necessary and urgent - at global level; in the EU; and at national level. In the G20 whether EU is playing a leading role. We must now strengthen our own European House. Following last Sunday's meeting in Berlin, the EU now needs to come up with a solid, common position reflecting the views of all 27 member states and the Commission in view of the London G20 summit”. He provided assurances that at the beginning of April, the Commission would produce legislative proposals on hedge funds and private equity funds.
Macro-prudential supervision. The report appeals for a greater ECB role on macro-prudential supervision but does not support the allocation of a role for the ECB in micro-prudential affairs. The wise men consider that the ECB should focus on monetary stability and cannot tackle questions linked to the insurance sector and certain central banks had not competence in supervisory matters. The report therefore suggests that a European Council is set up on systemic risk that will replace the current banking supervisory committee within the ECB. Presided by the ECB, the body will consist the General Council of the ECB (president-vice president-governors of the EU27 central banks), the presidents of the CESR, CEBS, EIOPS and a representative from the Commission. It will elaborate recommendations on macro-economic policy and provide warnings as early as possible about market risk, such as excessive debt and the level effect of financial actors or off-balance sheet operations.
According to the experts, two conditions are indispensable to the effective functioning of this new body: communication of information between national supervisors and all central banks must be made compulsory; an early warning system to be implemented and combined with a mechanism guaranteeing swift corrective action. Mr de Larosière confirmed that they had to look at how an emerging systemic deviation can be sufficiently examined early on by an early warning system and how this can be translated into action. In the event of serious risk to financial stability, the European Council on systemic risk will have to inform the president of the Economic and Financial Committee (EFC), indicates the report. Bringing national experts together in the EU Council, the EFC seek to build, together with the Commission a strategy to tackle the risk revealed. In the even of overall dysfunction, the European systemic risk council will alert international bodies such as the International Monetary Fund and the Financial Stability Forum.
Micro-prudential supervision. The Larosière report calls for a European System of financial Supervisors to be set up, independent of political power but responsible to it, which would operate through harmonised rules and according to a mechanism for compulsorily sharing information. This “decentralised network” would be made up of: - national supervisors would continue to monitor the day-to-day activities of the financial entities on the countries; - three new “European authorities”, to replace the CESR, CEBS and CEIOPS committees, would coordinate the implementation of supervision standards and would ensure close cooperation between national supervisors; - colleges of supervisors would monitor the 50 or so cross-border financial institutions in Europe.
The three European supervision authorities, which should be in place between 2011 and 2013, would continue to fulfil the tasks of the three European national regulators committees, such as providing advice to the Commission on regulatory issues, promoting convergence of supervision, practices and following up the work of the college of supervisors. The Laroisère report identifies new tasks which could be assigned the European authorities: - they would have a legally binding arbitration role in the event of disagreement between national supervisors; - they could take complaints for financial institutions on competition distortion; - they would be responsible for registering credit rating agencies and back office infrastructure; - their technical interpretations of European legislation could become legally applicable throughout the EU, under a mechanism still to be decided; - they would have the power to challenge the performance of national supervisors, and require them to amend the weaknesses noted through a series of graduated sanctions (fines, launch of infringement procedures), or even take the place of a failing national supervisor; - they would represent European interest in supervision-related discussions with third countries. These three European authorities would be chaired by independent professionals appointed for periods of eight years.
The experts of the Larosière group believe that the changes they recommend be brought to the European financial supervision system would deal seriously with the lack of confidence that affects current relations between the countries of origin and host countries of cross-border financial institutions. These recommendations, the experts say, could go a long way to reducing these suspicions and providing effective, practical and legally binding mechanisms for resolving disputes. It is, they say, probably the only way, at this point, of combining effectiveness and the needs of the major groups on the one hand, and the necessary protection for host countries on the other. Today, there are no irrefutable arguments, the Larosière group says, for a single EU supervision authority for reasons of political will, cost and complexity. (M.B./tfl)