Monday, September 20, 2010

EU Reached a Consensus on Financial Reform

Europa: Political consensus on supervisory package - remarks from Commissioner Michel Barnier
Financial Times: Deal paves way for pan-EU financial watchdogs; London fears power shift to Brussels; EU go-ahead for regulatory shake-up
WSJ: Europe's 4-Regulator Solution

In an effort to prevent a future financial crisis, the European Union (EU) agreed to create a European financial supervisory framework. "Financial companies and markets operate mostly at a European level, and we'll now have four solid authorities to monitor macroeconomic financial risks and to supervise financial markets, banks, and insurance companies," said Michel Barnier, the European Union Internal Market Commissioner.

The EU plans to establish four pan-EU financial supervisors: the European Systemic Risk Board (ESRB) and three European Supervision Authorities (ESAs). The ESRB will evaluate risks to financial stability across the EU and provide early warnings. Each of three ESAs will be responsible for overseeing banking, insurance and securities markets. The ESAs will develop common technical rules and standards. Although the ESAs will not directly supervise financial institutions, they will be able to investigate risky financial products and financial activities. And in "emergency situations," they will have power to ban or restrict risky products and activities.

Although this "European radar screen" is expected to provide better oversight of cross-border financial activities in Europe, some countries including the UK fear that national authorities may have less regulatory or supervisory power. The ESRB and ESAs will be operational by January 2011 after obtaining approvals from the European parliament and the member states. For the initial five years, the president of the European Central Bank will chair the ESRB.

1. One of the controversial issues is the chairmanship of the ESRB. The European parliament wants the ECB president to be the chairman while the member countries want to make the decision by themselves. Initially, the ECB president will chair the ESRB, but this issue will be reviewed in three years. What are the pros and cons of designating the ECB president as the chairman of the ESRB?
2. The status of financial market development is different for each member state. How can the new EU-level watchdogs develop common rules and standards while balancing different interests of each country?

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