European authorities have reached a consensus on legislation creating a European financial regulatory framework with separate regulators for securities, banking and insurance, as well as a European Systemic Risk Board similar to the Financial Stability Oversight Council created by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The final legislation is expected to receive European Parliament approval by the end of September and the regulatory framework should be fully operational by January 1, 2011. Praising the new regulatory regime, EU Commissioner for the Internal Market Michel Barnier said that the new regime will give the EU monitoring tools to detect risk which is accumulating across the financial system and provide effective tools to act. The new framework gives the EU the ``control tower and the radar screens’’ needed to identify risks, he said, and the tools to better control financial players, as well as the means to act quickly in a coordinated and timely fashion.
Financial companies and markets operate mostly at a European level, and now the Commission will have four solid authorities to monitor macroeconomic financial risks and supervise financial markets, banks, and insurance companies. These authorities will be able to benefit from the on-the-ground expertise of national regulators and propose any necessary measures at a European level. Commissioner Barnier said that he will soon present legislation to regulate derivatives and short-selling which will build on the powers of the new authorities.
The three new European Supervisory Authorities for securities, banking and insurance are responsible for ensuring that a single set of harmonized regulations are applied by national
regulators. The authorities will also ensure a common regulatory culture and consistent practices. They will collect micro-prudential information and ensure a coordinated response in crisis situations. Decisions taken by the ESAs would not impinge in any way on the fiscal responsibilities of the member states. Any binding decision taken by the ESAs would be subject to review by the EU courts.
Also, the new securities authority, for example, will work with national financial regulators like Germany’s BaFin to ensure tighter regulation of global cross-border financial institutions. If there is a regulatory disagreement between national regulators, the new EU securities authority can impose legally-binding mediation. If there is still an inability to reach agreement, the authority can impose a decision on the subject financial institution. The authorities are also empowered to monitor how national regulators like the UK FSA implement their obligations under EU legislation. If a national regulator fails to properly implement EU law, the securities authority can issue instructions to the regulator and, if the instructions go unheeded, direct a subject financial institution to remedy any breach of EU law.
The new securities regulator is authorized to investigate toxic financial products and financial activities such as naked short selling in order to assess risk to the financial markets. When there is specific legislative oversight of these products and activities, or in an emergency situation, the new regulator is authorized to temporarily prohibit or restrict harmful financial activities or products and may recommend to the Commission legislation to permanently prohibit them.
The new financial regulatory regime essentially implements the vision of an earlier report by the European Union High Level Group that set forth a broad blueprint for a complete overhaul of financial regulation in the European Union based on the twin pillars of harmonization and transparency. The Group envisioned an EU systemic risk regulator, as well as a European Securities Authority and a European Banking Authority. The High Level Group was chaired by Jacques de Larosiere, a former IMF Managing Director and Governor of the Banque de France. Other members of the Group were Callum McCarthy, former Chair of the UK Financial Services Authority and Otmar Issing, a former member of the executive board of the European Central Bank.
In its report, the Group asserted that the EU needs a macro financial stability regulator. To this end, the group recommended the creation of the European Systemic Risk Council under the auspices of the European Central Bank to form judgments and make recommendations on macro prudential policy and issue risk warnings.The report emphasized the need for an effective early warning mechanism as soon as signs of weaknesses are detected in the financial system. And a graduated risk warning framework for ensuring that, in the future, the identification of risks translates intoappropriate action.