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Financial supervisory reform-a significant step forward for Europe

Submitted by on 30 Nov 2010 – 15:09

By Sylvie Goulard MEP, in collaboration with Heather Bailey

Following the submission of the De Larosière report, and more than a year after the European Commission’s original proposal, legislative texts have been adopted. These texts were voted by Europe’s finance ministers at the ECOFIN meeting of the 7th September and by the European Parliament in Strasbourg on the 22nd September, following negotiations between the Parliament, the Commission and the Council.

This is an important stage in the evolution of financial supervisory regulation which should neither be over or underestimated. Before the crisis financial supervision was executed at a national level with simple coordination at European level. From 1st January 2011 four European authorities will exist, at both a macro and microeconomic level, with substantial supervisory powers.  The European Parliament has had to fight hard to maintain even the level of European supervision proposed in the De Larosière report; for some governments a return to ‘business as usual’ would ultimately have been sufficient. Although some battles have been won work remains to be done, for example increasing the powers of these European authorities as regards the supervision of cross-border entities such as credit rating agencies and clearing houses.
The creation of the European Systemic Risk Board (ESRB) endows the European Union with a macroeconomic supervisory body for the first time. The ESRB, made up of central bankers, will be responsible for detecting risks which threaten the financial system, for example a real estate bubble, and to raise the alarm about this potential risk. Thanks to the insistence of the European Parliament the ESRB will be presided by the president of the European Central Bank (ECB), a well recognised and respected figure whose voice carries political weight. On the other hand, the Member States demanded, in contrast to the wishes of the Parliament and the Commission, that it should be them that declare a ‘state of emergency’. Once an emergency is declared, the European authorities are responsible for ordering national regulators to act regarding cross-border establishments, which pose the greatest systemic risk. To counter balance the risk of bargaining between Member States, the president of the ECB will have the power to react if it is believed that they are ignoring the opinion of the ESRB. The Parliament has also successfully opened up the consultative bodies to ensure a greater range of financial expertise and a global level consultative scientific committee has been created.
At the micro level, in London there will be the European Banking Authority (EBA), in Paris there will be the European Securities and Markets Authority (ESMA) and in Frankfurt there will be the European Insurance and Occupational Pensions Authority (EIOPA). The creation of the Authorities marks the creation of the single European rule book, essential for supervision to be carried out at a European and not national level. It is for the European Supervisory Authorities to ensure that regulations are correctly implemented at Member State level. Other significant changes will occur from the 1st January 2011: in order to better protect consumers the European Parliament has imposed that these Authorities are able to temporarily ban dangerous financial products on the market. An important role of the future supervisory authorities will be that of mediators: the ESAs will be required to arbitrate between nation supervisors in the case of disagreement, seen for example in the Fortis case. This system should prevent the failure of national authorities, seen all too frequently in recent years.
Every step of the way the European Parliament has battled with the Member States to put in place effective European financial supervision. This is only the first stage. The European Parliament has co-decision in this domain with the Council and it will continue to be demanding in sectoral legislation, in order to ensure a healthy financial system and to protect tax payers’ money.