EU reaches deal on new financial supervision architecture
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Negotiators from European Union ( EU) member states and the European Parliament reached a deal late Thursday to establish a new financial supervision architecture across the 27-nation bloc.
"We have reached a crucial milestone. We have reached a political consensus on the creation of a European financial supervisory framework," said Michel Barnier, EU commissioner for market regulation and a mediator in the talks.
Under the compromised agreement, three new pan-EU financial watchdogs will be created by the start of next year to oversee banks, insurance companies and trading on markets.
The three new watchdogs will enjoy limited power to overrule decisions made by national regulators and have a final say when arbitrating a dispute between EU member states, such as the multinational bailout of Fortis at the beginning of the financial crisis. If no agreement can be reached, they can even impose supervisory decisions on the financial institution concerned.
The new watchdogs will also be able to monitor how national supervisors implement their obligations under EU law. If these obligations are implemented incorrectly, they may raise the alarm, issue instructions to the national supervisor concerned and, if these go unheeded, directly instruct the financial institution to remedy any breach of EU law.
Acting as police in EU financial markets, the new watchdogs will have the power to investigate specific types of financial institution, financial product, such as a "toxic" product, or financial activity such as naked short selling, to assess what risks they pose to a financial market.
When specific financial legislation regulates these areas of activity, or in emergency situations, they may temporarily prohibit or restrict harmful financial activities or products, and may also ask the European Commission, the EU's executive arm, to introduce legislative acts to prohibit such activities or products permanently.
Barnier said he was ready to present legislative texts in the coming days to regulate derivatives and short-selling which would build on the powers of the new authorities.
Naked short selling was blamed for worsening the financial crisis and the ongoing European debt crisis.
Besides the strengthening of micro-level supervision, a new European Systemic Risk Board (ESRB) will also be set up to detect risks to the financial system and the economy as a whole.
The ESRB will develop a common set of indicators to permit uniform ratings of the riskiness of specific cross-border financial institutions and make it easier to identify the types of risks they carry.
It will also be responsible for establishing color-coded grades to reflect different risk levels. When making warnings or recommendations on risk build-up, the ESRB is to use the color- grade to indicate the level of risk.
The ESRB will be attached to the European Central Bank and presided by ECB President Jean-Claude Trichet for the first five years.
The EU hopes the new financial supervision architecture, the first one in the world that has a super-national nature, would allow itself to better identify the risks building up in the financial system before they develop in a full-blown crisis.
"We did not have the monitoring tools to detect the risk which was accumulating across the system. And when the crisis hit, we did not have effective tools to act," Barnier said. "With the new supervisory framework that we are creating, we will be equipped to face the future."
"The reform of financial supervision is unique to Europe -- no where else in the world are we seeing the establishment of such a new supervisory framework," he added.
The political deal was reached after months of struggling within the EU since Britain and Germany had been concerned the new regulatory bodies would undermine their national authorities.
It still needs formal approval of EU governments and the European Parliament to become law, which is expected to be finalized within this month. If everything goes well, the first- ever pan-EU financial supervision system would be in place as early as January 2011.
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