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EU summit plans to overhaul financial supervision

(Xinhua)
Updated: 2009-06-18 14:13

BRUSSELS -- European Union (EU) leaders are set to adopt an ambitious plan to strengthen financial supervision across the 27-nation bloc at a two-day summit starting Thursday.

European Commission President Jose Manuel Barroso (C) smiles after signing an agreement on the Baltic Energy Market Interconnection Plan with the Baltic Sea Region states at the European Commission headquarters in Brussels, June 17, 2009. [Agencies]

Two-track Approach

As a key part of wider efforts to prevent the recurrence of the ongoing financial crisis, the new plan would in essence improve pan-European regulation of cross-border financial markets within the EU.

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Currently, financial supervision is virtually in the hands of EU member states, but the nationally-based supervisory model has lagged behind the transnational reality of today's European financial markets, in which many financial firms operate across borders.

The EU said the financial crisis exposed serious failings in the cooperation, coordination, consistency and trust between supervisors of different member states, making reform necessary.

According to a proposal tabled by the European Commission for the summit, the reform would adopt a two-track approach by strengthening financial supervision at both macro- and micro-level.

On the macro-level, a European Systemic Risk Board (ESRB) comprising central bankers and national regulators would be established to monitor and address risks to the stability of the financial system as a whole.

By providing analysis, issuing early warnings of system-wide risks and recommendations to deal with these risks, the new body would for the first time equip the EU with a prudential pan-European supervision system.

On the micro-level, a European System of Financial Supervisors (ESFS) would be formed to supervise individual financial institutions, which consists of a robust network of national financial supervisors working in tandem with new European Supervisory Authorities. It is created by transforming existing committees for the banking securities and insurance and occupational pensions sectors.

The new system aims to foster harmonized rules and coherent supervisory practice and enforcement across the EU.

Contentious Issues Remain

Although EU member states all agree that there should be stronger supervision at the European level, their finance ministers failed to reach a political agreement on the reform at a pre-summit meeting last week, leaving two contentious issues to the EU leaders.

One of the sticking points is related to the composition of the future European Systemic Risk Board.

Under the draft plan, the president of the European Central Bank (ECB) will automatically chair the board, which was deemed unfair by EU countries outside the euro zone, notably Britain.

However, EU Economic and Monetary Affairs Commissioner Joaquin Almunia has voiced confidence that Britain's opposition to the ECB chairing the new risk watchdog could be overcome.

"The ECB is not only the central bank of the 16 countries of the euro area," he said. "The ECB is the head of the European system of central banks that includes the 27 member states."

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