EU Backs New Financial Agencies to Unify Oversight

European Union leaders agreed to their most sweeping overhaul of financial regulation, sharpening scrutiny of banks and risks after spending more than half a trillion dollars propping up lenders in the credit crisis.
The heads of the 27 countries backed the creation of an economic-risk watchdog led by central bankers, plus agencies to unify oversight of banks, insurers, investment firms and credit- rating companies. The U.K. won a compromise trimming the power of the new authorities to make decisions involving national money.
The accord gives the EU its most centralized power over financial firms, after national supervision failed to contain the crisis sparked in the U.S. housing market. The region’s governments and central banks are on the hook for more than 3.7 trillion euros ($5.2 trillion) of guarantees and funding.
“For the first time you will have a place where the most powerful” central bankers and regulators “sit down together to discuss common issues,” David Green, former head of international affairs at the U.K. Financial Services Authority and a former Bank of England official, said in a Bloomberg Television interview.
In a statement, the leaders said closing gaps in oversight will prevent future crises, boost confidence and help spur recovery from the deepest recession since World War II.
The new regulatory agencies will have authority to ensure EU market laws are implemented the same in every country. They also may gain a greater role in crisis management in the future, the leaders said.
U.K. Sovereignty
At the U.K.’s insistence, the EU scaled back the agencies’ proposed powers to override national regulators and order changes to capital or other measures that could put government funds at risk.
“Stronger cross-border supervision is in our interest,” British Prime Minister Gordon Brown said in a news conference at the summit meeting. “I’ve ensured that our taxpayers will be protected.”
Under political pressure at home, Brown cannot afford “to be seen to have U.K. regulators bending to the decisions of an EU body,” Philip Whyte, senior research fellow at the Centre for European Reform, said in a telephone interview from London. “There’s a perception that the other countries don’t always have the best interests of the City at heart.”
Britain still supported the goal of creating a unified EU rulebook to benefit the cross-border businesses run from the City of London, Europe’s largest financial center with some 600 foreign banks plus the bulk of the domestic industry.
Evolving Powers
“Getting identical supervisory practices is something that London has been pressing for, for a long time, and that’s probably the most important thing here,” said Green, who is now an adviser to the U.K. Financial Reporting Council.
The agencies may evolve into a greater role through future practice and legal developments, French President Nicolas Sarkozy said after the meeting.
“It’s a starting point,” Sarkozy told reporters. “We may still be able to expand the scope.”
While industry groups have largely lined up behind initiatives for more uniform regulation, some bankers voiced doubts over the proposal to give new agencies binding powers to mediate disputes between regulators.
Executives from Credit Suisse Group AG, HSBC Holdings Plc and Royal Bank of Scotland Group Plc dissented from a statement of support this week by the European Financial Services Round Table. The proposal was backed by others members of the Brussels-based group, including leaders of BNP Paribas SA, Deutsche Bank AG and UniCredit SpA.
Systemic Risk Board
The EU overhaul also creates a European Systemic Risk Board of central bankers and financial regulators to share information and monitor hazards that cut across borders and industries. While its recommendations won’t be legally binding, the body is designed to flag problems such as the build-up of investments in U.S. subprime mortgages -- the issue that sparked the turmoil in which banks have absorbed almost $1.5 trillion of losses and writedowns.
In another compromise pushed by the U.K., the EU agreed for the board’s chairman to be elected by the general council of the European Central Bank, instead of always handing it to the ECB president as proposed by the EU’s executive arm.
The EU initiative is one of several shakeups around the world, almost two years since the collapse of two Bear Stearns Cos. hedge funds marked the outbreak of the crisis. President Barack Obama this week proposed to revamp U.S. oversight along different lines, giving more power to the Federal Reserve.
Hedge-Fund Regulation
The European leaders also called for action on separate proposals to regulate hedge funds and rewrite bank-capital standards.
The agreement by the prime ministers doesn’t guarantee easy passage for the regulatory revamp. The EU’s executive arm, the European Commission, will propose legislation to enact it in the second half of the year, setting off further debate among the governments and members of the European Parliament. Both those groups must agree for the initiative to become law.