EU executive unveils plan to reshape financial supervision

Banks will be more closely scrutinised under European Union plans unveiled on Wednesday to apply lessons from the credit crunch and better protect investors hit by the worst financial crisis in decades.
The European Commission's plans to create a series of pan-European supervisory bodies form a core plank of the EU's response to the market debacle. They are aimed at spotting any build-up of risk earlier and avoiding a need for governments again to fork out billions of euros to prop up banks.
Britain, Europe's biggest banking centre, has already signalled its unease with the plans, fearing a loss of regulatory sovereignty to new, centralised bodies.
"It's now or never that we build a consensus on financial supervision. I think we will do it," Commission President Jose Manuel Barroso told a news conference.
The Commission's plans are based on a blueprint put forward by former Bank of France Governor Jacques de Larosiere and backed in principle by European Union leaders.
They represent an attempt to play regulatory catch-up with a financial market that is already integrated and dominated by cross-border banks such as HSBC, BNP Paribas and Santander, although supervision remains national.
Banks rapidly succumbed to the credit crunch partly because no overall picture existed of how easily instability in one institution could infect others.
The European Banking Federation said the plans, which the Commission wants in place by the end of 2010, were a realistic starting point for substantial reform.
But EBF Secretary General Guido Ravoet said: "We are disappointed that the involvement of the industry does not appear to have been given much consideration in the new framework."
The Commission has shied away from creating a simpler system with clear lines of responsibility, critics said.
"A crisis is a terrible thing to waste. The EU is not taking the opportunity enough to change the system of supervision," said Karel Lannoo, chief executive of the Centre for European Policy Studies, a Brussels think tank.
Among banking rescues, the German government has given Commerzbank 8.2 billion euros in new capital and pledged an extra 10 billion, while Britain used huge sums of taxpayer money to nationalise Northern Rock bank and take big stakes in Royal Bank of Scotland and Lloyds Banking Group.
PAN-EU BODIES
The Commission proposed setting up two pan-EU bodies to correct what it sees as gaping regulatory holes.
A European Systemic Risk Council comprising central bankers and national regulators would monitor any build-up of risks and call for action before they become unmanageable.
The European Central Bank would host and chair the council, a step Britain and national banking regulators throughout the EU say gives too much power to the Frankfurt-based institution.
"Serious risks to financial stability of a systemic nature were not addressed before the present crisis started," EU Economic and Monetary Affairs Commissioner Joaquin Almunia said.
He said the new steps should "ensure we can escape from the boom-bust dynamic that is at the origin of the systemic failure" of the crisis.
Although the council would have no binding power, an EU state would have to explain why it was not taking action.
The body would work with new global risk warning functions being set up by the International Monetary Fund and the Financial Stability Board.
Separately, there would also be a steering group among three new pan-EU authorities whose job would be to ensure EU rules are applied consistently across the 27-nation bloc.
It would have powers to overrule a member state deemed not complying with common technical standards.
The three new authorities would oversee insurance, banking and securities markets.
The Commission's plans will go to a summit of EU leaders in June for endorsement, and the executive will come forward with draft laws later in the year. The European Parliament and EU states will have the final word on the reforms.