EU’s new ESRB watchdog starts work with steering committee

The European Systemic Risk Board, Europe's proposed solution to avoid a repeat of the financial crisis, elected central bankers from Poland, Italy, Cyprus and Germany to head its steering committee for three years at its first meeting on Thursday.
The new 'super-watchdog' is designed to take an overview of Europe's financial system and highlight emerging problems for relevant authorities to act on. It has no formal enforcement powers and its Secretariat is provided by the European Central Bank.
The rules of procedure were established at the meeting in Frankfurt and will be on the ESRB website and in the Official Journal of the European Union in February.
Marek Belka, Governor of the Narodowy Bank Polski; Mario Draghi, Governor of the Banca d’Italia; Athanasios Orphanides, Governor of the Central Bank of Cyprus; and, Axel Weber, President of the Deutsche Bundesbank, were elected members of the steering committee for three years. Stefan Ingves, Governor of the Sveriges Riksbank was elected Chair of the Advisory Technical Committee for three years.
ECB President Jean-Claude Trichet chairs the ESRB with Mervyn King, Governor of the Bank of England as his first vice-chair. The 37-member general board also includes the heads of banking, trading and insurance authorities and EU Economic and Monetary Affairs Commissioner Olli Rehn and will meet at least four times a year.
ECB policymakers will hold a majority on the board – one of the bank's division heads, Francesco Mazzaferro, leads the secretariat in charge of day-to-day running, while ECB staff will provide much of its information and analysis.
While critics complain that without any teeth it will be too weak to force countries or authorities to adhere to its warnings, others say it may carry clout.
"Warnings by themselves are a sort of sanctions," said Nomura economist Laurent Bilke. "It's a little bit dangerous if we jump directly to warnings… if they come at the end of a process in which any other means of discussion have failed, then it's fine."
Sensitivities may also hamper its effectiveness, with politicians likely to argue a major warning could be a catalyst for a crisis.
"The key question is whether it can handle the problems that are relevant now, such as the sovereign debt crisis and whether bond holders can be forced to take losses without a new crisis following," said Daniel Gros, director of the Brussels based Centre for European Policy Studies.
"Will they say something … or will it be too politically sensitive. If they don't, and just make some quiet recommendations, this will just become another irrelevant European institution," Gros added.
ESRB warnings will be colour-coded to reflect the urgency of the threat. They will draw on information such as stress tests carried out by members such as the European Banking Authority and analysis of information already available.
Other analysts said the ESRB is not doomed to irrelevancy.
"The power of influence of regulators can be very high," Deutsche Bank economist Gilles Moec said. "This may force decisions upon national governments that otherwise would never happen.”
Some economists expect the ESRB is likely to have a low bar for warnings, reflecting the understandable nervousness about missing a crisis. However, with its bloated structure and political sensitivities it also looks set to be steady rather than a dynamic mover.
"I wouldn't expect them to write fiery missives every day," said RBS economist Richard Barwell. "It is likely to be a gradual approach going through the traffic light system from green to amber to red.
"With Trichet and King you have a lot of clout… The big question is how willing will they be to intervene and will the authorities follow their advice."
One key issue to avoid is increasing market nervousness in times of tension and to be taken seriously when the good times roll.
"Their impact in times of financial crisis or risk aversion may be dramatic on financial markets, whereas in the good times they may not be listened to," Nomura's Bilke said.