Europe Takes a Big Step to Avert Economic Crises
By JAMES KANTER
Published: September 3, 2010
WITH the creation of a clutch of new financial watchdog agencies, the European Union this week took its biggest step yet to prevent a recurrence of the economic crises that have thrown the future of the euro into question.
But the overhaul will not eliminate bickering among countries over how to run their economies, and it could take time for some of the more far-reaching powers — like the imposition of temporary bans on harmful financial products — to gain acceptance.
The new agencies also could influence policy in a range of areas that concern European citizens, by issuing warnings against products like dubious life insurance policies, and even banning them in extreme cases.
The rules, which were given preliminary approval Thursday by European diplomats and lawmakers, establish three agencies to monitor banks, insurance companies and trading on markets starting next year.
The rules also create a group attached to the European Central Bank called the European Systemic Risk Board. It would watch for asset bubbles and other dangers to the financial system.
The rules still must win the formal approval of European government ministers and the European Parliament. European Union officials expect those decisions to be made this month.
The bloc must also agree on rules governing hedge funds and short-selling, and on whether to establish European-based credit rating agencies to counter the dominance of American companies.
The banking agency would be based in London, the market trading watchdog would be in Paris and the insurance regulator in Frankfurt.
Agreeing on London as the base for the banking agency was a significant factor in support for the system from Britain, where the government has long been prickly about European Union regulation of its financial sector.
“Subject to final confirmation by ministers next week, this is a very good outcome for the U.K.,” the British Treasury said. Each agency is likely to have a staff of 50 to 70 officials at first, growing to 90 to 110 after about three years, although that still would make each smaller than many national agencies.
In a crisis similar to the one that struck two years ago, the banking agency would have authority to instruct the national supervisors to share information and reach common positions. Agencies could also make binding decisions when arbitrating disputes involving national supervisors who cannot agree on how to regulate a bank that does business across European borders.
But governments could contest such decisions by saying that they violate their fiscal sovereignty, for example, by forcing them to raise taxes to bail out banks.Such disputes ultimately would be resolved in meetings of economy and finance ministers — although officials at the European Commission, which helped draft the rules, said they expected such showdowns in exceptional circumstances only.
In future crises concerning market trading practices, the Paris-based agency could order temporary bans on products or transactions it deemed potentially dangerous to the bloc’s economy and consumers.
But the agency probably would not have jurisdiction over products unless they already were regulated — potentially leaving a gap. European officials are racing to pass additional legislation on short-selling to ensure that the practice is covered by the new system and to prevent a recurrence of events in May, when Germany unilaterally banned one form of short-selling.
Who will run the three agencies must still be determined before they start work on Jan. 1. But a decision was made Thursday to make the first leader of the European Systemic Risk Board the president of the European Central Bank, now Jean-Claude Trichet of France.
A member of the bank’s executive board, José Manuel González-Páramo, said Friday that the Central Bank supported the creation of the board. But he warned that central banks would have to guard their independence as they became more involved in bank supervision. For example, the bank might recommend politically unpopular restrictions on credit to prevent excess borrowing.
“Being party to such recommendations will expose the central bank to political pressures,” Mr. González-Páramo told an audience in Cyprus. “The conduct of monetary policy in pursuit of price stability must be insulated from such pressures.”
Jack Ewing contributed reporting from Frankfurt and Matthew Saltmarsh from Paris.
By JAMES KANTER
Published: September 3, 2010
WITH the creation of a clutch of new financial watchdog agencies, the European Union this week took its biggest step yet to prevent a recurrence of the economic crises that have thrown the future of the euro into question.
But the overhaul will not eliminate bickering among countries over how to run their economies, and it could take time for some of the more far-reaching powers — like the imposition of temporary bans on harmful financial products — to gain acceptance.
The new agencies also could influence policy in a range of areas that concern European citizens, by issuing warnings against products like dubious life insurance policies, and even banning them in extreme cases.
The rules, which were given preliminary approval Thursday by European diplomats and lawmakers, establish three agencies to monitor banks, insurance companies and trading on markets starting next year.
The rules also create a group attached to the European Central Bank called the European Systemic Risk Board. It would watch for asset bubbles and other dangers to the financial system.
The rules still must win the formal approval of European government ministers and the European Parliament. European Union officials expect those decisions to be made this month.
The bloc must also agree on rules governing hedge funds and short-selling, and on whether to establish European-based credit rating agencies to counter the dominance of American companies.
The banking agency would be based in London, the market trading watchdog would be in Paris and the insurance regulator in Frankfurt.
Agreeing on London as the base for the banking agency was a significant factor in support for the system from Britain, where the government has long been prickly about European Union regulation of its financial sector.
“Subject to final confirmation by ministers next week, this is a very good outcome for the U.K.,” the British Treasury said. Each agency is likely to have a staff of 50 to 70 officials at first, growing to 90 to 110 after about three years, although that still would make each smaller than many national agencies.
In a crisis similar to the one that struck two years ago, the banking agency would have authority to instruct the national supervisors to share information and reach common positions. Agencies could also make binding decisions when arbitrating disputes involving national supervisors who cannot agree on how to regulate a bank that does business across European borders.
But governments could contest such decisions by saying that they violate their fiscal sovereignty, for example, by forcing them to raise taxes to bail out banks.Such disputes ultimately would be resolved in meetings of economy and finance ministers — although officials at the European Commission, which helped draft the rules, said they expected such showdowns in exceptional circumstances only.
In future crises concerning market trading practices, the Paris-based agency could order temporary bans on products or transactions it deemed potentially dangerous to the bloc’s economy and consumers.
But the agency probably would not have jurisdiction over products unless they already were regulated — potentially leaving a gap. European officials are racing to pass additional legislation on short-selling to ensure that the practice is covered by the new system and to prevent a recurrence of events in May, when Germany unilaterally banned one form of short-selling.
Who will run the three agencies must still be determined before they start work on Jan. 1. But a decision was made Thursday to make the first leader of the European Systemic Risk Board the president of the European Central Bank, now Jean-Claude Trichet of France.
A member of the bank’s executive board, José Manuel González-Páramo, said Friday that the Central Bank supported the creation of the board. But he warned that central banks would have to guard their independence as they became more involved in bank supervision. For example, the bank might recommend politically unpopular restrictions on credit to prevent excess borrowing.
“Being party to such recommendations will expose the central bank to political pressures,” Mr. González-Páramo told an audience in Cyprus. “The conduct of monetary policy in pursuit of price stability must be insulated from such pressures.”
Jack Ewing contributed reporting from Frankfurt and Matthew Saltmarsh from Paris.