On 4 March, the European Commission adopted a Communication to the Spring European Council presenting its next steps in dealing with the crisis. The European Commission has called on EU leaders for a EU coordinated action to fight the economic crisis. The Commission President, José Manuel Barroso, said: “(…) Today we are asking EU leaders to agree on a comprehensive action plan. To do everything possible to protect our citizens from unemployment. To clean up financial markets on the basis of the de Larosière Report. And to pave the way for Europe to lead by example and by persuasion as we approach the G20 summit in London."
On 25 February, Jacques de Larosière, the chairman of the EU’s high-level group on financial supervision, has proposed a new European system of financial supervision complemented by a European Central Bank led early warning mechanism. The Commission welcomed the report and agrees with the Group's analysis of the causes of the financial crisis. In fact, the Commission has unveiled, in its Communication, a reform of the financial system based on the de Larosière report.
During 2009, the Commission will propose a reform of the European financial system. The Commission has stressed that “The reform will ensure that all relevant actors and all types of financial instrument are subject to appropriate regulation and oversight.”
In order to improve financial market regulation the report recommends more harmonization to remove national exemptions. The Commission endorsed the report’s recommendation on developing a harmonised core set of standards to be applied within the EU. The Commission has pointed out that differences in national legislation coming from exceptions, derogations should be identified and removed. Consequently, it will launch an initiative to achieve this aim.
As regards macrosupervision, the report recommends a new body to be established within the European System of Central Banks. It would be made up of governors of national central banks and representatives of financial market supervisors and it should be chaired by the president of the ECB. It would be in charge of pooling and analysing “all information relevant for financial stability.” The Commission has welcomed the Group's recommendation for a new European body, under the auspices of the ECB intending to gather and assess information on all risks to the sector as a whole. It would identify systemic risks at European level and issue early warnings.
The Group has also recommended the establishment of a European System of Financial Supervision (ESFS) through a two-stage approach. In a first phase, 2009-2010, the powers of the three Committees of European Supervisors would be strengthened, and it would be introduced a more harmonised set of supervisory powers and sanctioning regimes. In a second phase, 2011-2012 the Committees for banking, insurance and securities would be transformed into Authorities with EU wide powers to ensure better co-ordination between the national supervisors. They will have legally binding powers which will allow them to mediate between national supervisors, to ensure the adoption of binding supervisory standards for national regulators and to issue licences to credit-rating agencies. After three years there would be a review to consider the need for further consolidation of the ESFS.
The Commission concurs with the Group's opinion that the existing Committee’s structure is not adequate to ensure financial stability in the EU and its Member States. According to the Commission “(…) there are merits in a system which combines certain centralised responsibilities at European level with maintaining a clear role for national supervisors who are closest to the day-to-day operation of companies.” However, the Commission does not want to wait for a three year transition period since is planning to put forward proposals to immediately establish the new authorities. José Manuel Barroso said “De Larosière suggested a trial period of three years. We suggest this should be done immediately.” The Commission has said “By combining the two phases proposed by the Group, it should be possible to move more quickly to both improve the quality and coherence of supervision in Europe, and to transform the three existing Committees into authorities within a European financial supervision system.” Such authorities would be responsible to oversight and would have decision-making powers concerning colleges of supervisors for cross-border groups. According to the Commission they would have a “(…) key role in early warning mechanisms and crisis management, working with the body set up to look at the overall picture.”
The De Larosière’s report has not called for a single regulator of financial institutions at the European level. Barroso has said “We feel it would be unrealistic at this stage to think in terms of a single supervisor for Europe. We would need to reform the treaty. Even if we take a minimalist approach, there are still some states in the eurozone and some that are not in it. There would never be agreement on this.”
According to the Financial Times Alistair Darling is willing to support a single rule-making body “with a specific objective to iron out national divergences.” Alistair Darling believes that such body should not have strong powers over national supervisors and should not prescribe “detailed supervisory practices” as suggested in the report. Moreover, he supports the idea of an EU body to monitor systemic risks and provide an early warning system for other European regulators however he argues that such body should not fall under the auspices of the European Central Bank but it should be independent.
According to Bill Cash “(…) a European supervisory scheme for banks and financial bodies is potentially disastrous for the UK and the City of London in particular. (…) This will inevitably mean that the United Kingdom financial services and banking arrangements, however much they need reform, would be run on lines dictated by the interests of other countries rather than our own national interests and must be resisted.”
The Commission soon will put forward proposals based on the recommendations of the de Larosière Group to set up a new European financial supervision system.
In May, the Commission will present a European financial supervision package for decision at the June European Council. Such package will contain, as regards macro-prudential supervision, measures to establish a European body to oversee the stability of the financial system as a whole and in what concerns micro-prudential supervision, proposals on the architecture of a European financial supervision system.
In April 2009, the Commission will propose a legislative instrument establishing regulatory and supervisory standards for hedge funds, private equity. It should be recall that the European Parliament has been asking the Commission to regulate private equity more closely however McCreevy has been reluctant to regulate private equity funds. The EU internal market commissioner Charlie McCreevy has been saying that no regulation is need to hedge funds and private equity.
The Commission will also present legislative proposals to increase “the quality and quantity of prudential capital for trading book activities and tackle complex securitization” as well as to “address liquidity risk and excessive leverage.” It will also put forward further measures to reinforce bank depositor, investor and insurance policy holder protection and measures on responsible lending and borrowing.
In Autumn 2009, the Commission will present legislative proposals to include remuneration schemes within the scope of prudential oversight. The Commission is also planning to review the Market Abuse Directive as well as presenting proposals on how sanctions could be strengthened in a harmonised manner.
Moreover, the Commission's contribution for the EU summit calls upon EU leaders to step up efforts to deal with unemployment and social exclusion. The Commission has called on Member States to put forward measures such as financial support for temporary working-time arrangements and enhancing income support for unemployed people. The Commission has also called for rapid approval of its proposal to allow an immediate increase of €1.8 billion in advance payments under the European Social Fund.
The Commission urges the EU leaders to agree on several areas and, in particular, to endorse the proposed reform ahead of the G- 20 London Summit. Barroso has said "The G20 is a forum, but it has no direct enforcement competence. That is why it is important that we at European level take decisions that are binding."
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An informal Ecofin meeting took place on 3 and 4 April where the EU Member State’s finance ministers broadly agreed that financial market supervision will have to be reformed at EU level. They broadly agreed with the recommendations made in the Jacques de Larosière´s report.
The report foresees the creation of a European Systemic Risk Council (ESRC) and a European system of financial supervision, which would reform the current committees (Level 3 in the Lamfalussy process) on banking, securities and insurance. However, the final model and the new powers of the committees are controversial issues as they will have legally binding powers.
The Member States are divided over several parts of the de Larosière report such as dispute resolution and the sharing of power between home and host regulators.
Presently, the existing current Level 3 committees use peer review to solve disputes, but the decisions are taken by the home authorities.
The report has proposed a system of binding mediation. Whereas for the UK binding mediation is a step too far and it is against investing more powers in a supranational regulator, Poland believes that the de Larosière report had not gone far enough as it favours a pan-EU body.
Another controversial issue is how information should be shared between the new institutions. The European Council of Systemic Risk would fall under the auspices of the European Central Bank, it would be chaired by the president of the ECB. Obviously, the UK does not favour such idea. Paul Myners, UK financial services secretary, has said “The ECB clearly has an important role to play in strengthening and enhancing macro-prudential supervision, but the precise role has yet to be determined.”
The EU Member States are divided over how far EU-level regulation should go. The UK has raised concerns over the plans since too much power would be concentrated in EU bodies. According to the EuropeanVoice Jan Kees de Jager, the Dutch minister for fiscal affairs, has said “the British have a somewhat different view. (…) We hope that in the next couple of weeks these hesitations can be overcome.”
It remains to be seen the Commission´s proposals on a new system of financial regulation and supervision.
In the meantime the conservatives called on Gordon Brown to veto proposals for a European Systemic Risk Council, which may intervene in national financial markets. According to The Telegraph, Shadow Chancellor George Osborne has said “Yes, we need greater international co-operation on banking but that shouldn’t be an excuse for another power grab by the EU.”
France and Germany have been calling for the quick implementation of the De Larosière report on financial regulation, they priority is to tighter regulation whereas the UK has not fully endorsed the report. However, Gordon Brown at the European Council has endorsed plans for tougher regulation across the EU.
On 20 March, the EU leaders agreed on the need to improve the regulation and supervision of financial institutions in the EU and they described the Jacques de Larosière´s report as “the basis for action.”
The European Council welcomed the De Larosière report on financial supervision and has included some of its recommendations in its position to the G20.
The European Commission timetable for reform of supervisory structures for the EU financial sector was endorsed by the European Council. The Commission will present the principles for a new EU supervisory system for financial markets which should be agreed in June by the European Council.
So, in June, the European Council may take the first decisions to strengthen EU financial sector regulation and supervision.
The European Council has stressed that “More detailed legislative proposals will follow in the autumn.”
The EU leaders also stressed that “Work should also be taken forward speedily on the forthcoming Commission proposals on hedge funds and private equity, on executive remunerations and on further strengthening capital requirements.”