A single European regulator – ever?
By Graham Bishop
5 January 2006
A politically-charged debate seems to be getting underway rapidly about the future shape of regulation of the banking industry. Moreover, it is spreading to include the insurance industry and deepening to reflect the technical details that would need to be resolved as part of any move towards possible European-level regulation.
But, paradoxically, “official” Europe keeps saying there is no need for any of this. The Secretary-General of CESR recently rejected the view that the EU needs its own SEC. Moreover, the Commission’s White paper on Financial Services Policy was explicit “The central policy of the Commission is to keep faith with this [Lamfalussy] process and develop it over the next 5 years to fulfil its maximum potential.” But it did concede that “obligations to cooperate and exchange information between supervisors have to be reinforced. Co-operation in crisis situations has to be secure.” Then it listed some practical supervisory challenges including the “needs” to:
- optimise home-host responsibilities as integration accelerates
- explore delegation of tasks and responsibilities
- improve the efficiency of supervision by avoiding duplicative reporting and information requirements
- more consistent and timely cooperation and to develop a real pan-EU supervisory culture
So why has the debate not died away? No-one foresees a financial crisis of a magnitude that could suddenly change the entire game and even recent scandals have only led to a tightening of accounting and auditing rules. Is there a deep-seated force working towards converting the discussion into reality? Certainly there is the minimum necessary requirement of a powerful industrial lobby group – the European Financial Roundtable (EFR) – pushing for a “lead supervisor”. But is that sufficient?
“The EFR has argued that a more efficient and effective supervision of financial institutions is a key element to improve growth and integration of European financial markets… the appointment of a fully empowered lead supervisor for each financial institution is considered to be a realistic way to achieve this goal.”
However, the European Shadow Financial Regulatory Committee (ESFRC) has challenged the EFR’s view on the grounds that it is currently not feasible mainly because deposit insurance and bail outs are the responsibility of the EU national Member States. So the deposit guarantee aspect emerges immediately as a crucial component of the debate and is already under examination – with a recent CEBS advice to the European Commission and a Commission report on the existing systems.
The insurance industry may find that CEIOPS has already pushed it down the road of a “lead” regulator – at least for companies operating cross-border. Could the corollary be insurance guarantee schemes? The Comité Européen des Assurances (CEA) has started arguing against this idea almost before it has surfaced. Moreover, ECB President Trichet recently warned that the increased links between different types of financial institution can increase risks to financial stability. “The increased linkages between banks, insurance companies and pension funds may also increase potential vulnerabilities.”
An eventual necessity for a single regulator could flow from the manifest political wish to see more cross-border integration, bringing closer the need to grapple with cross-border regulation. The November 2005 ECOFIN meeting was clear again - noting “the Commission study into the obstacles to cross-border consolidation in the financial services sector and ENCOURAGES further discussion on these issues in 2006.”
Naturally, that consolidation is not going to flow just through one industry so President Trichet’s concerns are only likely to be enhanced as the years go by and a small group of pan-European financial institutions appears. On current rankings, there may only be 30-50 firms demanding that they be subject only to a single supervisor. But they are the systemically important players, and have the political clout to voice their concerns about the impact of regulatory costs on their profitability.
The EU’s financial regulatory system is evolving rapidly so the White Paper proposals seem to be pushing at an open door. The supervisors are busy enhancing co-operation and regulatory convergence in the EU and all Level Three committees have just signed an agreement which will see them aligning their operating procedures more closely. Its practical objectives are to share and exchange information which will facilitate their ability to cooperate, to ensure that the basic functioning of the three committees develops along parallel lines, to reduce supervisory burdens and streamline processes and exchange experience which can facilitate supervisors’ ability to co-operate.
Inexorably, cross-border business collides with differing interpretations of detailed rules, requiring the differences between the regulators to be ironed out in some way. CESR already accepts that there should be a new mediation system to resolve these disputes between regulators.
Meeting the committees’ “practical objectives” would be a pre-requisite for the existence of a single regulator. But that proposition can be reversed: if the objectives are met and the mediation is working, most commentators are likely to describe it as a single regulatory system. If serious tasks and responsibilities (especially ones like deposit guarantees that may engage the member states’ public purses) have been delegated to this community of regulators, then an evolutionary transformation may be complete because the new system would actually be taking supra-national decisions.
CEIOPS Chairman Bjerre-Nielsen was asked recently if the Level 3 committees could, in the future, form the basis for a single European financial services regulator. He replied that that was “very hypothetical”… "It's difficult to make a prediction for what will happen in 20 years time.” It would be a pity if it took that long for the full benefits of a single market in financial services to flow through to the electors of Europe.
© Graham Bishop
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