European Commission Adopts Legislation On New EU Financial Supervision System

The European Commission has adopted a package of legislation to strengthen financial supervision in the European Union as the ongoing financial crisis has revealed the weaknesses of the European supervision system, according to Commissioner for Economy and Monetary Affairs Joaquin Almunia.

"Financial markets are European and global, not only national. Their supervision must also be European and global. Today we are proposing a new European supervisory system, with the political backing of the Member States and based on the de Larosiere report. 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," European Commission President Jose Manuel Barroso said, making reference to the forthcoming G20 Summit in Pittsburgh, USA.

The changes stipulated in the legal package include the implementation of a European Systemic Risk Board to monitor and assess risks to the stability of the financial system as a whole. The Board will provide early warning of systemic risks that may be building up and, where necessary, recommendations for action to deal with these risks.

The European Systemic Risk Board will be coordinated in turns by one of the Members of the General Board, which will comprise Governors of the national Central Banks in the EU, the President and the Vice-President of the European Central Bank, a Member of the European Commission and the Chairpersons of the three European Supervisory Authorities to be established in order to ensure supervision over the financial system at institutional level.

When the European Systemic Risk Board identifies a risk to the European financial system, it will have the power to issue recommendations and warnings to Member States. If the addressee agrees with the recommendation, it must communicate the actions undertaken to deal with the potential problem. If it does not agree and chooses not to act, the reasons for that must also be properly explained. If the Board feels that the explanations are not convincing, it shall inform the Council of Ministers.

The decision to make public such warnings and recommendations will be made by the General Board on a case-by-case basis, having regard to the potential consequences of the publication.

Micro-prudential supervision will be ensured by the new European System of Financial Supervisors, consisting of a network of national financial supervisors (Central Banks) working in tandem with new European Supervisory Authorities to be created. The new authorities will replace the existing Committees for the Banking Securities and Insurance and Occupational Pensions Sectors. Thus, there will be a European Banking Authority (EBA), a European Insurance and Occupational Pensions Authority (EIOPA), and a European Securities and Markets Authority (ESMA). These authorities will only have the power to make recommendations to the exposed financial institutions.

The new authorities will take over all of the functions of the former Committees, and in addition have certain extra competences, including: resolving cases of disagreement between national supervisors and a coordination role in emergency situations. Additionally, the European Securities and Markets Authority will exercise direct supervisory powers for credit rating agencies.

"I commend this package to the Council and Parliament for rapid adoption, so that the new structures can begin functioning in 2010," said EU Internal Market and Services Commissioner Charlie McCreevy.