EU parliament gives final nod to new financial watchdogs (2nd Roundup)

Sep 22, 2010, 16:31 GMT

Strasbourg, France - The European Parliament gave its final approval Wednesday to wide-ranging financial supervision reforms that are meant to put markets on a tighter leash and prevent a repetition of the 2008 financial crash.

At stake is the creation of three European Supervisory Authorities (ESAs) overseeing banking, markets and insurance, as well as a European Systemic Risk Board - attached to the European Central Bank - tasked with monitoring risk across the financial system.

'The banking crisis exposed the gaps in financial services supervision in Europe. Our market was interdependent, but oversight was purely national,' the head of the EU's executive, Jose Manuel Barroso, said in a statement welcoming the vote.

All four new EU watchdogs are due to begin work on January 1.

'With this reform, Europe is the first region in the world to put in place top-notch supervision that is up to the challenges of the future,' said Barroso, whose organisation first proposed the reforms.

EU lawmakers meeting in Strasbourg, France, approved the package in a series of overwhelming majority votes.

'This is a historic achievement,' said Belgian Finance Minister Didier Reynders, whose country holds the EU's rotating presidency.

'We are demonstrating that Europe can act quickly but efficiently and remain at the helm of (the group of) G20 countries when it comes to financial reforms,' the EU's market regulation commissioner, Michel Barnier, added.

Wednesday's vote, sealing an informal deal reached earlier this month, put an end to a long negotiating battle, where EU deputies were pushing for tougher rules, while Britain battled from within the EU Council of Ministers to defend London's position as Europe's largest financial centre.

In the end, the new ESAs - the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority - did not win the power to directly supervise banks and other financial players, leaving that task to national regulators.

'The new authorities are not a substitute for national supervision,' said the EU's market regulation commissioner, Michel Barnier.

While that represented a victory for the British point of view, deputies warned that the powers of the ESRB and ESAs could grow as a result of a three-year review clause inserted in the final package.

The current set-up allows the new EU agencies to intervene on national regulators if they disagree on how to tackle a cross-border crisis, such as the Fortis bank collapse which the Netherlands and Belgium agonized over in 2008, delaying rescue operations.

If such a crisis were to develop again, ESAs would coordinate any necessary rescue measures between the governments involved. In extreme cases, they could also impose a rescue, although this power is limited by a number of appeal mechanisms.

EU deputies also saw to it that ESAs should be allowed to impose temporary bans on risky financial products and activities, such as short selling, and insisted that the ESRB should be chaired by the European Central Bank president, for the next five years at least.

This was seen as crucial to ensure consistency between EU monetary policy and financial supervision, giving regulators a better viewpoint from which to watch out against asset bubbles and other threats to financial stability.

The various authorities are seen as central to the EU's efforts to regulate markets, as other measures in the pipeline such as tighter rules on derivates depend on them being being already in place.