Two years almost to the day from the collapse of the Lehman Brothers Bank that unleashed an unprecedented global financial and economic collapse, the European Parliament last week adopted, in a historic vote, a set of laws that is intended to help us avoid a repeat situation.
I am privileged to have been there to vote in favour.
The proposals came to us last September and considering the complexity of the issues at stake and the difficult negotiations with the Council of Ministers, the legislative process has been concluded in a relatively short span of time.
The new system will be in place on January 1.
The set of laws seek to establish a more integrated or united European supervisory system for financial institutions both on a general (macro) level as well as within specific sectors (micro), namely the banks, insurance and the markets.
It seems difficult to believe but it is true. Despite having one single market for these services, Europe did not have one single regulator that could supervise the operators. This means that different operators in different EU countries were submitted to different regulators with different standards and priorities. The likelihood that the failure of one authority in one country could have an impact on the financial stability of other countries is now clear for all to see.
Hence the need for an integrated approach to regulation at European level.
The new package will lead to the establishment of a European Systemic Risk Board (ESRB) and three European supervisory authorities, one each for banking, insurance and occupational pensions and securities and markets, based in London, Frankfurt and Paris. There will also be a European System of Financial Supervisors (ESFS) which will consist of a network of national financial supervisors working closely with the new European supervisory authorities.
The ESRB is perhaps the most interesting and innovative part of the package.
Its function will be to monitor potential threats to financial stability that may arise from macro-economic developments as well as from developments in the financial system. The board, which will be composed in the main of national central bank governors, would provide early warnings on potential risks – especially risks which have a systemic nature – and advise on how to deal with them.
Although the board will not have binding decision-making powers, it is expected to play an immensely influential role in overseeing the European financial system. The European Parliament has insisted that its risk assessments are such as to be able to be easily understood and rapidly communicated. Thus, for instance, colour-coded grids will be used to indicate different risk levels.
Also on the insistence of the European Parliament it was decided that, at least for the first five years, the ESRB will be chaired by the president of the European Central Bank so that there will be close coordination between the two.
The three European supervisory authorities will replace a much looser set-up that currently exists today in the form of the advisory European supervisory committees. The new authorities will have the role of real watchdogs over the sectors and the power to decide and even overrule national authorities, especially in cases of conflict or in cases where national authorities fail to act.
In particular, the new authorities will have a brief to put consumer protection at the forefront of their agenda.
This stands to reason because we all know that all too often it is consumers and the small investors who end up footing the bill for certain errors or even profligacy in this sector.
The authorities may even impose temporary bans of financial products that are particularly nefarious from a consumers’ point of view – the so-called “toxic” or unreliable financial products that are difficult to tell from plain gambling with someone else’s money. Or even financial activities such as naked short selling which, in layman’s terms, means the sale of a financial product without the seller even owning it in the first place or even checking whether it can be borrowed.
Although the European Parliament wanted all European supervisory authorities to be combined into one single coherent entity, this was resisted by the Council and a compromise was found to review this matter in a few years’ time with the prospect of integrating them all into one single body based in one city rather than three.
When the new European financial supervisory architecture becomes fully operational from January, the European Parliament intends to keep a close watch on how it will work.
We intend to do our part to ensure that the lessons of the tsunami that hit Europe and the world two years ago will be avoided or at least foreseen in the future.
Today week, during Malta Week in the European Parliament, Commissioner Michel Barnier and Finance Minister Tonio Fenech will be the keynote speakers in a public forum on the new European financial supervision package.
www.simonbusuttil.eu
Dr Busuttil is a Nationalist member of the European Parliament.