Brussels, 19/06/2009 (Agence Europe) - In Brussels on Thursday 18 and Friday 19, EU heads of state and government laid the foundations of the imminent reform of the European financial supervision system. The detailed conclusions they adopted set clear guidelines for the European Commission on both macro- and micro-prudential chapters. Legislative proposals have to be brought forward by the start of autumn 2009 and rapidly adopted so that the new architecture can be in place in the course of 2010. The European Council has undertaken to take stock of progress made at its next informal meeting in October.
Swedish Prime Minister Frederik Reinfeldt said he thought that a balance had been found between the various views on how to reform the European system of financial supervision. Responsibility for getting agreement on the legislative texts that the Commission will bring forward will be with the Swedish Presidency in the second half of the year, he said, expressing the hope that the whole process would be completed by December. French President Nicolas Sarkozy spoke of his satisfaction on the “binding nature of the European supervisors' system” which will have responsibility for micro-prudential supervision of financial institutions. Speaking about the UK refusal to allow decisions by the future European supervisory authorities to have any effect on member states' budgets, he acknowledged that “it's not just Gordon Brown who had concerns, Germany too”. Nevertheless, he went on, “the agreement reached is major, particularly since we agreed that it is a starting point with possible development in the future”. German Chancellor Angela Merkel stated that the new European supervisory authorities would have binding powers: they would take decisions when there were differences of interpretation among national authorities in instances where a bank is active in more than one member state. Luxembourg Prime Minister Jean-Claude Juncker said that the main points had been decided. “We could have been more ambitious, but we can't be more ambitious than the biggest of us,” he said ironically. It would appear that the European Council agreement was sealed at a trilateral meeting on the Summit sidelines between Germany, France and the United Kingdom. Belgian Prime Minister Herman Van Rompuy was pleased that the lessons of the financial crisis had been learned. Pleased with the outcome, Commission President José Manual Durão Barroso welcomed “the consensus for a European approached based on Commission proposals” achieved by the European Council.
The political crux of the reform had to do with micro-prudential supervision, and, in particular, the transfer of some monitoring powers from national supervisors to the future European supervisory authorities. It was clear at the last Ecofin Council, at the start of June, that the overwhelming majority of member states supported such a transfer of sovereignty, with the United Kingdom, backed by Romania, Slovenia and Slovakia, arguing for decision-making powers to be retained at national level, where the budgetary power was to be found (see EUROPE 9917). The political agreement reached in the European Council treads a path somewhere between the two positions: the European supervisory authorities - which will replace the three European committees of national regulators (CESR, CEBS and CEIOPS) - will have “binding and proportionate decision-making powers” over national supervisors if they fail to meet their obligations deriving from European law. This binding power will also apply in the event of disagreement between the supervisor from the country of origin of the cross-border financial institutions and the supervisors of the countries with subsidiaries of these institutions. However, decisions taken by the European Supervisory Authorities “should not impinge in any way on the fiscal responsibilities of Member States”. In other words, a European authority may impose a decision on a national regulator on the need for a bank to increase its own funds because of its exposure to certain risks, but it will not be able to force national public authorities to come to the rescue of a failing bank.
“It is in Britain's interest that we have improved cross-border supervision of financial institutions. … It is only logical that, where a supervisory decision would have an impact on the tax payer, that that decision should be for the national relevant authority,” British Prime Minister Gordon Brown said on Thursday evening, referring to the outcome of the G20 Summit in London. He added, “When we had to take action (to save) the Royal Bank of Scotland, Lloyds, Northern Rock, it was our money, British public money, that had to be used to do so. This is why the decision about any fiscal action is one that is taken, in my view, by the authority that has the resources to enable them to do so - and that is the national government. I think people understand that and it was what was agreed at the last Ecofin, only a few days ago”.
This begs the question of strengthening the framework governing the cross-border management of a financial crisis, which currently comes under a non-binding Memorandum of Understanding (MoU) at European level. The Council, then, called on the Commission to make “concrete proposals” on how the European System of Financial Supervisors (ESFS) - made up of the three European supervisory authorities, national supervisors and colleges of national supervisors - “could play a strong coordinating role among supervisors in crisis situations”. Here, too, budget responsibilities of national authorities will have to be respected, as will the powers of central banks in particular with regard to the provision of emergency liquidity assistance.
The European securities supervisory authority will be responsible for the oversight of credit rating agencies. This will help the Commission in its report on supervision of such agencies, which is expected by the end of July, in line with the European regulation governing financial rating agencies (see EUROPE 9883). “We will respect our commitment,” the spokesman for Internal Market Commissioner Charlie McCreevy told EUROPE on Friday.
With regard to macro-prudential supervision, the European Council supports the creation of a European Systemic Risk Board (ESRB) which will monitor and assess potential threats to financial stability and, where necessary, issue risk warnings and recommendations for action and monitor their implementation. In order to allay UK opposition, Europe's largest financial centre and not in the euro area, not very keen to see the chairmanship of the ESRB simply given to the President of the European Central Bank (ECB), European leaders decided that it would be for the members of the General Council of the ECB to elect the chair of the European Systemic Risk Board. It was “difficult for the euro area countries to say that (the ESRB President) would be the head of the ECB,” said President Sarkozy, adding that “it may turn out that way”, even though “it cannot be made the rule”.
The European Council noted the “significant progress” already made on improving financial services legislation. It noted the political agreements on: - the Basel II directive on capital requirements (new draft amendment in July); - the Credit Rating Agencies Regulation; - the Solvency II Directive, governing the insurance sector. The European Council called for further progress to be made in the regulation of financial markets, notably on the regulation of alternative investment funds, the role and responsibilities of depositaries and on transparency and stability of derivatives markets. It wanted rapid progress on countering, in particular, accounting, procyclical effects. It also invited the Member States to “take action rapidly on executives' pay and on remunerations in the financial sector, taking account of the recommendations made by the Commission”.
The EU intends to continue to play a leading role on the reform of international financial rules within the G20. Calling on its international partners to fully implement the commitments made at the Summits in Washington and London (for example, on increasing resources allocated to international financial institutions), it argued for a “coordinated position” ahead of the G20 Summit in Pittsburgh in September. Lastly, the Council reminds member states that they had “already stated their readiness to provide fast temporary support to a total amount of €75 billion” to increase the financial resources of the International Monetary Fund. (M.B./transl.rt)