Laying the foundations for financial supervision reform

Details of European Commission plans for the reform of financial supervision will emerge on 27 May, ahead of formal discussions between EU leaders in June and legislative proposals in the autumn. 

The Commission will publish an outline of the arrangements for the two new bodies recommended by its high-level group on financial reform led by former International Monetary Fund managing director Jacques de Larosière.

It is expected to propose a legal structure for the European Systemic Risk Council (ESRC) as an EU body and to indicate how it will function in providing early warnings of risks to the EU financial system.

An accompanying road-map is likely to fix the end of next year as a deadline for completing preparatory work on the ESRC and on the European System of Financial Supervision (ESFS), so that they can both come into operation early in 2013.

The de Larosière recommendations will be followed by giving the new authorities binding powers over national supervisory bodies – a major shift from the current system of advisory EU committees on financial regulation (the Committee of European Securities Regulators, the Committee of European Banking Supervisors and the Committee of European Insurance and Occupational Pensions Supervisors). Finance ministers will discuss the proposed reforms at a meeting on 8-9 June, before discussions between EU leaders the following week.

Reluctance

Member states' differences of opinion over the de Larosière proposals are expected to flare up as talks proceed. The UK opposes subordinating the ESRC to the European Central Bank, as well as giving the new authorities binding powers of mediation when national supervisors disagree. Several other member states have also expressed reluctance over the transfer of powers away from national supervisors to bodies outside their borders.

Robert Priester, head of banking supervision at the European Banking Federation, sees the upcoming debate as “one of the most challenging moments in the EU integration process”, perhaps marking a shift to power sharing between national supervisors and EU bodies. In his view, despite the “politically realistic” approach of the high-level group, binding mediation would be a hot issue in the discussions. Priester also pointed to gaps that the Commission will still need to fill – notably “indispensable” arrangements for member states to share the cost of bailing out banks (known as burden-sharing) and further harmonisation of insolvency rules.