How the new European Union Financial Institutions plan will work

The European Union has recently unveiled a blueprint for overhauling the way financial institutions and financial markets are policed, a central part of these new rules and regulations designed to prevent a repeat of the economic crisis. The Outline of this plan is as follows:

European Systematic Risk Board

• It will sound its sirens if it sees threats to the financial system, such as those that triggered the present economic crisis.

• It will be able to issue warnings, saying what should be done about risks in the financial system. It could order a member state to take action and that the member state would be obliged to explain itself if it didn’t do so.

• The warnings will be weighty and those who receive them must act although the board will have no binding power in a legal sense, relying rather on political pressure for influence.

• Warnings could be made public after a vote by the committee in charge of the Risk Board.

• The body would in effect, be an arm of the European Central Bank (ECB). Staff will mostly come from the European Central Bank, which will also appoint the head of it secretariat.

• It will be managed by a so-called general board including the European Central Bank President, governors of the regions central banks and a member of the European Commission.

• Its chair shall be elected by the European Union central bankers. Many observer believe that the current head of the European Central Bank, Jean Claude Trichet, is the most likely to get the obtain the post.

• The chair will be the most powerful and will have the power to call extraordinary meetings of the board, where he or she also has a casting vote. The chairperson will be the public face of the board.

Pan-EU Super-Watchdogs

• Three new groups will watch financial institutions, insurers and exchanges

 The European Banking Authority
 The European Securities and Markets Authority
 The European Insurance and Occupational Pensions Authority

• They will set the standard for supervision standards and establish uniform rules around Europe- their rule book shall become European Law.

• They can tell national supervisors such as Britain’s Financial Services Authority (FSA), how they should be operating.

• If the European Banking Authority, for example, believed the Financial Standards Authority was not meeting the relevant European Union Standards for supervision, it could order it to take action within a specified amount of time.

• If the Situation persisted, the European Commission could step in and demand the national watchdog take specific action. That supervisor would have to oblige, or explain when it intended to do so within 10 days.

• A lack of co-ordination among national supervisors has been blamed, in part, for the financial crisis. In future emergencies, The European Banking Authority will be able to tell a group of country supervisors to take joint action.

• If a country watchdog challenges such an order, the Banking authority can ultimately overrule it, but only in cases where the local supervisors “action or inaction” for example, threatened investors or depositors.

• The securities and markets watchdog will exercise direct power over credit rating agencies, whose generous ratings on packaged of loans that later unraveled have been blamed for helping cause the crisis.

• The Systematic Risk Board will be able to ask these super watchdogs or country supervisors for information such as what a troubled banks exposure is to a risky region such as Eastern Europe or a country such as Iceland.

• There is an obligation on the new supervisory authorities and European countries to hand over information to the Board, which can drill down as far as specific companies.

 

 

 

 

 

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