Will EU watchdogs have any bite?

“To prevent a future repeat of the Fortis debacle.” With this idea in mind, on 7 September the finance ministers of Europe’s 27 member states approved a “historic agreement” for reinforced financial supervison in the EU, which will establish three new European supervisory authorities. But will the new watchdogs have any bite?

“Certainly, they will," insists Karel Lannoo, chief executive of the Centre for European Policy Studies (CEPS), which is a critical observer of financial policy in the EU. “It is in many ways a historic agreement that will amount to a major step forward.” But what exactly will it change? Here is a rundown on the pros and cons.

1. The strong points

For the first time, we will have three European supervisory authorities – one for banks, one for insurers and one for financial markets – which will have the final say in the event of disagreement with national level watchdogs.

The power to intervene and take decisions is indispensable, because national supervisors do not always see eye-to-eye -- a case in point was the nationalisation of Fortis in 2008, when rescue plans for the bank were hampered by the self-interested approaches adopted by the Netherlands and Belgium. At the time, there was no formal agreement on how to cope with such a situation. But starting in 2011, things will be different.

To ensure sufficient monitoring and early warning of systemic risks, a fourth European watchdog will be established with a mandate to collect data from banks, markets and insurance companies. So major financial risks on European marketes – in Europe, there are no less than 14 banks with more than one billion euros on their balance sheets – will no longer be shrouded in mystery. Much to the regret of British, the current President of the European Central Bank (ECB), Jean-Claude Trichet, has been appointed to lead the new European Systemic Risk Board (ESRB).

The goal of the system is to ensure that "European watchdogs" will not have to deal with national regulators except in time of crisis. But pressure for appropriate compliance will not be limited to such occasions, and Europe will now be able to intervene if a national regulator fails to respect EU criteria. “In cases where a major division of a financial institution operates outside of its home country – for example the investment division of Deutsche Bank, which is based in London – European authorities may opt to place it under the supervision of another national regulator,” explains Lannoo.

It will also be possible to introduce temporary restrictions on toxic financial products, and the new European supervisory authorities will consult on such initiatives with European Commission which could modify legislation to ensure that such bans are made permanent.

2. The weak points

“We run the risk of not having the sufficient staff and resources to ensure the correct monitoring of European banks," warns Lannoo. "The new organisations will not have the necessary personnel to conduct the huge number of new controls they will be required to implement, and the details of how they are to be financed have not yet to be made clear.”

As a result, Europe’s banking watchdogs could turn out to be sheep in wolves clothing. By way of example: as it stands, only 40 to 50 people will be employed by the new European agency, which is drop in the ocean when compared to the British Financial Services Authority (FSA) which has a staff of 3,000. Worse still, the new European regulators are supposed to be operational in a few months time. “This is simply impossible. It took seven years for the ECB to work effectively,” points out Lannoo.

At the same time, the British government has insisted that member states be given the right to veto decisions by the new supervisory authorities if they "have an impact on national budgets." As a result, Europe will not be able for example to order a member state to inject the billions of euros that may be needed to save a bank in difficulty.

3. Employment opportunities

As the supervisory authorities are mainly to be financed by the European Commission, EU regulators’ salaries will be much more attractive than those offered to national regulators. “This will probably have a positive impact on the quality of operations,” adds Lannoo.

In the course of a review of most of these measures, which is scheduled for the three years time, “The new authorities could be granted further powers for example to supervise derivatives markets, or clearing and accounting operations."

4. Threats to effectiveness

The potential impact of budget related vetos could be significant and should be discusssed. How exactly will we measure the impact of decisions on member state budgets? Yesterday’s British press was clearly pleased that member states will still have this option. “We have not given away the keys to the Bank of England,” remarked the Financial Times. However Karel Lannoo is unperturbed. “In the event of a disagreement, Europe will be the one to decide.”

From London

City fears “mission creep” to Brussels

The British press is leery of the new European Supervisory Authorities (ESAs) approved in Brussels, even if the banking regulator will be based in London. The two other watchdog agencies will be sited in Paris and Frankfurt,explains the Daily Telegraph, stressing that the UK is hell bent on safeguarding the interests of the City. “London fears power shift to Brussels”,headlines the Financial Times, foreseeing that future EU legislation will be grafted onto this regulatory “skeleton”. The FT also airs “concerns” about “the cultural separation between London and places like Paris and Frankfurt", as well as “fears about a continental drift in rule-making – and a suspicion this will help other financial centres to grab business from ­London”.