A report concerning the European Banking Authority was adopted by ECON Committee last week. What are the main objectives of the proposals in the report?

For a number of years, many reports have been drawn, and many discussions have come up time and again, regarding the lack of adequate financial regulation and supervision within Europe’s financial markets. It is not just now that Europe started working to improve on the deficiencies of the supervisor market mechanisms. Quite obviously, the current financial crisis that has encapsulated Europe has brought this issue to the fore. The scrutinising of the serious repercussions brought about by this financial crisis have focused mainly on the exorbitant remuneration of financial sector workers, as we have seen in this column a few weeks ago. Yet it is a holistic supervision that is really necessary at this point.

The vast majority of reports stressed that coordination between national supervisors whose jurisdiction stopped at their own country’s borders would not be sufficient to control financial institutions that consider the internal market one whole region. A group of experts was commissioned and headed by Jacques de Larosière, the former managing director of the International Monetary Fund, to draw up its proposals for the new supervisory system. This report is meant to draw on the lessons learnt from the crisis and come up with the necessary recommendations that would hinder or exclude the possibility of another such crisis occurring.

First and foremost, the Commission has recommended that a network of national supervisors be set up. These would perform best working hand in hand with a new European Supervisory Authority (ESA). This authority would work in liaison with three crucial micro-prudential authorities with binding powers. One authority would deal with the banks (EBA), another parallel authority would deal with Insurance and Occupational Pensions (EIOPA), and another for Securities and Markets (ESMA). The Commission also recommended setting a European Systematic Risk Board (ESRB) which would effectively be an extension of the European Central Bank, tasked with monitoring and assessing potential threats to financial stability that arise from macro-economic developments. The need to introduce an effective instrument to establish harmonised technical standards for financial services was also highlighted. In this manner, a level-playing field can be created, with sufficient protection for depositors, investors and consumers in the European Union, consequently bolstering people’s confidence in the financial mechanisms.

The Report being referred to deals with the setting up of a European Banking Authority and was adopted by the Committee of Economic and Monetary Affairs last week. Predictably, banking regulators have been trying to influence the European Parliament to amend elements within the proposal for this new system of financial supervision in the EU. Their concern is that there is a big possibility of this mechanism becoming too powerful. They can already feel that there may be a shift of power from their hands to the Commission. The common refrain that there is a straight choice between complete shift of power or not, is of course, a banal over-simplification.

What must be accomplished is the striking of a balance, yet cushioned with the necessary regulations and supervision. And these new standards are supposed to ensure that European banking regulations are practised uniformly across the EU, which would then lead to the reduction in scope for regulatory arbitrage.

A number of important policies are based on the principles of mutual recognition and as quoted, the principle of the “single passport”. This system permits financial services operators that would be legally recognised in one Member State to provide their services in the other Member States without further authorisation requirements. Apart from this notion, we have come to realise that a common framework based on prudence is essential in ensuring customer protection across the European Union.

Soundly regulated and safe financial institutions are crucial for financial stability in the EU and require the establishment of a common framework ensuring prudential oversight and consumer protection all over the European Internal Market.

This work is important in the quest to locate synergies in an increasingly globalised world market. The aim of this Report was ultimately to be a catalyst to the setting up of a truly European Authority, with clear powers. Together with other proposals, this recommendation is part of the mechanisms and systems being put into pace to protect us from another crisis, or prevent it altogether. The key is to base our new financial architecture on a system of prudential rules and on national and European supervisory authorities. We’re right on track.