The European Commission has adopted draft legislation to create a new European Systemic Risk Board (ESRB) to identify risks to the European financial system and act as an early warning system for risks that require a rapid response.
The Commission said it will also establish a European System of Financial Supervisors (ESFS), composed of national supervisors and three new European Supervisory Authorities (ESAs) for the banking, securities and insurance and occupational pensions sectors. It said the moves would
“significantly strengthen” the supervision of Europe’s financial sector.
The proposals follow a period of consultation on the recommendations issued by a group of experts chaired by former IMF managing director Jacques de Larosière and endorsed by a European Union summit in June. The announcement comes ahead of a meeting of the Group of 20 largest economies in Pittsburgh, US, to discuss a coordinated response to the global financial and economic crisis, starting 24 September.
The Commission said the aim of the new regulatory framework is to “sustainably reinforce financial stability throughout the EU; to ensure that the same basic technical rules are applied and enforced consistently; to identify risks in the system at an early stage; and to be able to act together far more effectively in emergency situations and in resolving disagreements among supervisors”.
According to the Commission, the legislative texts will be adopted early in the autumn in order for the new framework to be in place in the course of 2010.
EC president José Manuel Barroso said the new European system of regulation could serve as a blueprint for global financial supervision.
“Financial markets are European and global, not only national. Their supervision must also be European and global,” he said. “Our aim is to protect European taxpayers from a repeat of the dark days of autumn 2008, when governments had to pour billions of euros into the banks. This European system can also inspire a global one and we will argue for that in Pittsburgh”.
The Commission said the proposals address the weaknesses at the macro- and micro-prudential supervision levels that had been exposed by the financial crisis. Under the new legislation, the new European Systemic Risk Board will monitor and assess risks to the stability of the financial system as a whole and provide early warning of systemic risks that may be building up and make recommendations for action to deal with these risks.
On the “micro-prudential supervision” level, the ESFS will have responsibility for the supervision of individual financial institutions, consisting of a network of national financial supervisors working “in tandem” with new ESAs, created by the transformation of existing Level 3 committees for the banking, securities and insurance and occupational pensions sectors. Once the legislation is passed, the bodies will be given new powers and renamed as the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority.
The ESRB will have the power to issue recommendations and warnings to member states, their national supervisors and the ESAs, which will have to comply or else explain why they have not done so. Participants in the ESRB will include the heads of the European Central Bank, national central banks (including those outside the euro-zone), the ESAs and national supervisors.
The European Supervisory Authorities will take over the functions of existing Level 3 committees, but will also have extended powers, including the ability to develop proposals for technical standards, to resolve cases of disagreement between national supervisors ad contribute to ensuring consistent application of technical rules.