There were few surprises last week when the European Commission published its long-awaited response to the de Larosiere report. Perhaps most significantly, the announcement certainly added fuel to the More Europe faction.
The European Commission and European Parliament made clear their intention to be the lead policy players in Europes Financial Services landscape, which although largely expected, no doubt caused widespread dissent amongst the Less Europe camp, mainly led by the UK. And Im sure the UKs frustration did not stop there. The announcement that 27 national regulators will become supervisors working with three new pan-European super-regulators must have further ruffled the UK governments feathers, as the FSA will simply become one supervisory voice in a large college of national supervisors.
Undoubtedly, the two winners from the ECs proposals are the ECB, that will be entrenched as the key regulator in securities markets; and CESR that will become the most important regulatory body in Europe, with a new title of European Securities Authority (ESA). The ESA along with the European Banking Authority and European Insurance and Occupational Pensions Authority, will ensure a single set of harmonised rules and a consistent application of these rules for Europes financial markets, as well as exercising full supervisory powers for some specific entities with a pan-European reach. Moreover, the ESA will be chiefly responsible for the management of a European database held centrally that will ensure a co-ordinated response to crisis situations.
As far as the ECBs role is concerned, as operator of the European Systematic Risk Council (ESRC), it has been given the daunting job of collating and analysing all information relevant for monitoring and assessing potential threats to financial stability at a macro-economic level and from developments within the financial system as whole. This will enable it to identify and prioritise such risks; issue risk warnings where necessary; and provide recommendations on measures to be taken to manage the risks identified. No small task.
While the proposal answered many burning questions, it also created many new, important ones. There was little detail about the micro-prudential information that will need to be gathered by national supervisors will it include data from the buy-side, as well as the sell-side? What kind of data does the micro-prudential information comprise and how will this be used to create macro-information? How will such a complex data collection process be implemented by the end of 2010?
The biggest hole in the ECs plans was around global co-operation will it happen and if so, how will it happen? If we are to prevent a global, financial disaster on the scale of the credit crunch from ever taking place again, Europes current initiative must be co-ordinated with North America and Asia. This was an area that the European Commissions proposals did not cover.