20/09/2010

European financial supervision - an historic moment

By José Manuel García-Margallo

In an effort to learn all the lessons from the financial and economic crisis and to better protect our citizens and our economy, the European Parliament will this week approve the creation of a new system of supervision for financial institutions. A deal negotiated in record time and that will allow the EU to keep its promise that the new regulatory framework for the financial sector would be ready for January 1st, 2011.

The new system will have a European authority supervising banks in London, another one to oversee insurance and pensions in Frankfurt and a third one to control securities and markets in Paris. Above all there will be a European Systemic Risk Board (ESRB) - chaired during the first five years by the president of the European Central Bank - to provide warnings of crises to come. All these authorities will be firmly independent and will have strong powers in relation to national financial watchdogs.

The European Parliament has also secured the success of the system with a clause that provides for a review of its functioning after three years. That will allow an assessment of whether the new authorities need more powers or if all of them should share one seat to better coordinate their tasks. Also, the Parliament will have democratic control of the system as it will be entitled to veto the appointment of the authorities' chairmen, as well as have a say in the development of the implementing measures and standards. As happens already for monetary policy, MEPs will regularly meet the president of the ESRB.

These are, in a few words, the pillars of a deal that has not been easy to negotiate. The Parliament has been pushing to fight against the will of many Governments - some more than others - to have a 'light' reform of the supervision system. We wanted an in depth change, as was proposed to the Member States in the Jacques de Larosière report in 2009. There was no other solution than "more Europe", the report said, for tackling the gaps in the supervision system of the financial sector that arose during the crisis. With more than 8000 banks in Europe, but two-thirds of their assets in the hands of only 40 big multinational entities, financial supervision could no longer stay in the hands of national watchdogs whose authority ends at their national borders.

We needed to create a whole new system that would serve as a tool - should a new crisis arise - to avoid European taxpayers being forced, once again, to pay the bill. Some estimates show that, to prevent the collapse of the financial system during this crisis, the EU mobilized around 13% of its GDP. We needed a solution that would not aggravate this charge for next generations. We also needed a solution that would avoid what we experienced during the firsts weeks of the crisis, with every Member State taking national measures without any coordination with their partners.

The EU always faces criticism because of its reticence to react or the timidity of its solutions to critical situations. For once, and I hope it will generate a precedent, this will not be the case. Of course, there will be criticism of the solutions we have reached. They are not perfect. Some will say that our answer is to create more useless multinational institutions, but I believe that we have achieved an historic step on the path to European integration and that, with time, it will be considered as important as was the adoption of the euro.