With the advent of 2011, a new EU regulatory framework for securities and banking has been born, including a European Systemic Risk Board similar to the Financial Stability Oversight Council created by the Dodd-Frank Wall Street Reform and Consumer Protection Act. 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. The European Securities and Markets Authority will replace CESR and the European Banking Authority will replace CEBS.
According to Commissioner Barnier, the new authorities will not replace national regulators like BaFin and the Financial Services Authority. Rather, the goal is to create a comprehensive regulatory framework under which national regulators are responsible for the daily surveillance, and the European authorities, using the expertise of the national authorities and working hand in hand with them, are responsible for coordination, monitoring and if need be arbitration between national regulators, and will contribute to the harmonization of technical rules applicable to financial institutions.
Financial companies and markets operate mostly at a European level, and now the Commission will have solid authorities to monitor macroeconomic financial risks and supervise financial markets and banks. 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 legislation to regulating derivatives and short-selling will build on the powers of the new authorities.
The new European Supervisory Authorities for securities and banking 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.
The new securities authority will exercise direct supervision of credit rating agencies since rating services are not linked to a particular territory and the ratings issued by a CRA can be used by financial institutions all around Europe. Also, the securities authority 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 total cost of the European Supervisory Authorities has been estimated at about € 37 million in the first full year of operations (2011), reaching just over € 68 million after three years (2014), given increases in activity and staff levels. The share of this cost for Member States and the Community budget should respectively be 60% and 40%. The authorities will be accountable to the European Council and Parliament, not to the Commission. The Chairpersons of the Boards will be selected on merit after an open selection procedure and subject to conformation by the European Parliament. The EU's Court of Auditors and Anti-Fraud Office will have full competence to inspect the books of the authorities.
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.