07 September 2010

EU to get new tough powers to deal with national financial supervisors

A new deal struck by the European Parliament and the Council negotiators  means that a New EU supervisory authority ( ESAs) and  European Systemic Risk Board( ESRB) which will be up and running by January 2011, are to get the powers to settle disputes among national financial supervisors and to ban risky financial products and activities, in a revamp of EU financial supervision plans agreed on Thursday. If national supervisors fail to act, then the authorities may also impose decisions directly on financial institutions, such as banks, so as to remedy breaches of EU law.

The agreement gives the ESAs a strong role within the current setup of colleges of national supervisors.  This will enable them to guide national supervisors to ensure tighter supervision of cross-border financial institutions.  In the event of disagreements between national supervisors, ESAs will also be able to impose legally binding mediation and, if no agreement can be reached within the relevant college of supervisors, to impose supervisory decisions on the financial institution concerned.  ESAs will also be able to intervene as mediators at their own discretion, rather than at the request of one of the national supervisors.
The ESAs will also be able to monitor how national supervisors implement their obligations under EU law.  If these obligations are implemented incorrectly, the ESAs 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.

ESAs 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  financial markets. When specific financial legislation regulates these areas of activity, or in the emergency situations, ESAs may temporarily prohibit or restrict harmful financial activities or products, and may also ask the Commission to introduce legislative acts to prohibit such activities or products permanently.


MEPs secured the inclusion of a strong review clause requiring the Commission to report back every three years on whether it is desirable to integrate the separate supervision of banking, securities, pensions, and insurance, on the benefits of having all the ESAs headquartered in one city, and on whether the ESAs should be entrusted with further supervisory powers, notably over financial institutions with pan-European reach.

MEPs inserted provisions to enable the ESRB to communicate rapidly and clearly.  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. To enhance the ESRB's ability to predict the risk build-up, a broader range of skills and experience, including academics, will be represented on its Advisory Scientific Committee.

The ECB president will preside over the ESRB for the first five years , while the European Parliament will play the role of improving democratic oversight of the whole supervisory system.

© ABBL - Luxembourg Bankers’ Association