Syracuse.com (Link) - AP - Aoife White (May 27, 2009)
The European Central Bank president should head a new oversight agency to monitor risks to the European Union economy and help prevent a repeat of the financial crisis that has dragged the region into recession, the EU executive said Wednesday.
It also proposed giving the central banker for the 16-nation euro zone a say over EU countries that don't use the euro, including Britain. London, the center of a once-vibrant and lucrative financial services industry, has for decades fiercely opposed more EU oversight of its financial sector.
The EU's top economy official Joaquin Almunia told reporters "it was logical" that a new European Systemic Risk Council organized around the EU's 27 central banks "is chaired by the president of the European Central Bank."
He said a deputy chairman could come from outside the euro zone but any appointment would have to be decided by the central banks themselves.
The new oversight body will assess potential threats to financial stability triggered by economy-wide trends, issue early warnings and tell governments what to do if they see problems such as a ballooning public debt that could destabilize a nation's economy.
It also would be able to issue recommendations to the finance ministers of EU member states. The EU executive said governments would be "expected to act on them unless inaction could be adequately justified." These recommendations would not always be made public.
The European Commission hopes EU governments back its ideas at a June 18-19 summit so it can draw up legislation later this year and put the reforms into place in 2010.
"Now it is time for action. It will be now or never," said EU Commission President Jose Manuel Barroso. "If we cannot reform the financial sector, financial supervision, when we have a real crisis, when will we reform it?"
Regulators also want to overhaul the supervision of banks, financial markets and insurance companies, setting up three new authorities that could overrule national supervisors if they can't jointly agree on monitoring a financial group that operates in several countries.
The new EU supervisors will be able to set binding technical standards for the financial sector and tell countries how to interpret them. Only the European Commission will be able to oppose these decisions. The supervisors will also monitor credit rating agencies and any new EU-based clearing houses for credit default swaps.
These changes will see the new EU banking agency join national supervisors in policing some 40 major European banks operating in different countries. They are currently overseen by "colleges of supervisors" that gather supervisors from each country where a bank is active.
The new move will formalize this arrangement and set rules when supervisors can't cooperate. In that case, the new EU supervisor will jump in and make a binding decision as a last resort. The decision could be appealed in the EU courts.
EU financial services commissioner Charlie McCreevy said these reforms would have helped curb the Icelandic banking crisis because supervisors who were worried that foreign banks didn't have enough capital to cover loans could have demanded action from Iceland's supervisor.
Britain last year froze assets belonging to Iceland's Landsbanki, which collapsed in October, to ensure British savers would get some of their money back. McCreevy said British supervisors had flagged worries about Icelandic banks long before the crisis "but nothing was done."
"If this proposal had been in operation then ... this would have been dealt with," he said.
Iceland is not a member of the EU but is subject to many of its rules.
The "college of supervisors" system is a template for tighter global supervision of financial groups discussed by the G-20 group of the world's leading economies.
The financial crisis has focused attention on Britain's "light touch" regulatory practices, but British Prime Minister Gordon Brown is now leading a global call for tighter oversight and crisis management.
The British government made no overt criticism of the Commission's plans on Wednesday, saying only that the proposed reforms were a starting point.
"Any reforms we make within the EU need to be workable, practical and consistent with the approach we are taking internationally," the British government said.