Europe Agree On Financial Supervision Compromise

The EU parliament have agreed on a package of legislative proposals on financial supervision. This is the final approval needed for the 27-member states to set up a new system of financial watchdogs, designed to guard against a repeat of the recent financial crisis.

“This is a historic watershed moment.”

Didier Reynders


Sitting in plenary in Strasbourg, the euro deputies Wednesday passed the new legislation by a large majority after months of political wrangling with member states. The new set of financial regulation is a highly compromised package.

Voting against the new legislation were the UK who is not that keen on the new EU-level bodies due to fears of weakened national sovereignty.

“This is a historic watershed moment,” Belgian finance minister Didier Reynders said before the vote.

As holders of the EU’s rotating presidency, Belgian officials have been conducting difficult talks with representatives of the European Parliament over the past few months in a bid to narrow their differences.

Following proposals from the European Commission, member states reached a political agreement last December, but several MEPs quickly voiced their opposition, arguing that the deal as overly watered-down, and riddled with vetoes.

3 New Authorities

Wednesday’s vote on a compromise text means three new European Supervisory Authorities (ESAs) will start work in January next year, coordinating national supervisors in the areas of banking, pensions and financial markets.

Part of their role will be to improve the flow of information between national regulators, after the financial crisis in 2008 exposed the vulnerability of national financial systems to the collapse of large cross-border firms

Europe will now have a supervisory model that is adapted to its needs. You have to remember that half the banks in Europe come from other states,” EU financial services commissioner Michel Barnier says.

A European Systemic Risk Board will monitor for the build-up of risks in the EU financial system as a whole, and will issue “recommendations” whenever it detects a threat such as a housing or stock market bubble.

Its will be headed by the European Central Bank chief for the first five years, then the arrangements will be evaluated.

Banning Products And Activity

Under the final deal, the new ESAs will get powers to settle disputes among national financial supervisors if they fail to agree on a cross border issue, such as the Fortis bank collapse in 2008 which saw arguing between the Netherlands and Belgium delay the rescue operations.

They will also be able to impose temporary bans on risky financial products and activities, as well as propose the setting up of new Europe-wide technical standards in the different areas.

If national supervisors fail to act, then the new bodies in theory can also impose decisions directly on financial institutions in extreme cases, although it remains to be seen how this will work, the EUobserver writes.

“The new regulators must be responsible,” cautioned center-left MEP Peter Skinner who won support for a strong powers to the pensions authority and was one of the MEPs who steered the legislation through parliament.

Bankers Won Another Round

In general however, MEPs did not win the power for the authorities to directly supervise banks and other financial players, leaving that task to national regulators, although a review after three years we could see the new supervision authorities powers grow stronger.

Parliament’s call for all three authorities to be located in Frankfurt close to the European Central Bank was also dropped in the final compromise.

Instead, the European Banking Authority (EBA) will be based in London, and a European Securities and Markets Authority (ESMA) in Paris, with only the European Insurance and Occupational Pensions Authority (EIOPA) set up in Frankfurt.

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