The European Union concurred June 9 to form two financial regulatory commissions called the European Systemic Risk Board and the European System of Financial Supervisors. The European Union has not decided how much power these regulatory bodies will have, and determining the amount of power will likely be challenged by eurozone members in Central Europe and the United Kingdom. The European Union finance ministers’ meeting concluded on June 9, with a tentative agreement to pursue a major overhaul of the financial regulatory system. The finance ministers essentially agreed on the creation of a European Systemic Risk Board (ESRB) to provide systemic (macroprudential) oversight and a European System of Financial Supervisors (ESFS), to enhance institution level (microprudential) regulatory capacity. However, finance ministers did not agree on what powers should be vested within these institutions, delaying that decision until the next meeting of EU leaders on June 18-19. The challenge to an EU-wide financial regulatory system is twofold. First, member states with significant banking and financial sectors (such as the United Kingdom) are understandably nervous about tinkering with an important part of their economy and potentially causing the entire industry to uproot and move to non-EU regulated markets, such as Switzerland. Second, non-eurozone member states (like the United Kingdom and Central European countries) are concerned that greater EU oversight would give the European Central Bank (ECB), which oversees the eurozone economy but not the European Union as a whole, inordinate power over their financial systems, power that they would be unable to control. The approval given to the financial regulatory scheme on June 9 was therefore vague, and finance ministers agreed to create new macro and microprudential regulatory institutions, but in the process illuminated important fissures between EU member states on the powers of those intuitions. For the United Kingdom, and several other member states, the resistance to wider EU regulation boils down to three issues. First, there is concern that an EU-wide regulatory body could make bank bailout decisions that would necessitate tax payers in a member state to cover for the rescue. This would effectively mean that the European Union was imposing binding decisions that undermined a principle of national sovereignty on how a government spends money and taxes its populace. The United Kingdom was not alone in its objection on this point, which is why the finance ministers relented and inserted a clause that guaranteed that any future decisions on EU regulatory framework should make sure to “not impinge in any way on member states’ fiscal responsibilities.” The second contentious point is the proposal that the chairmanship of the systemic regulator, the ESRB, would be held by the ECB. The United Kingdom and other non-eurozone EU member states who do not accept the authority of the ECB have a serious problem with this proposal. This is understandable since non-eurozone states have their own central banks and are not under the purview of the ECB. The United Kingdom’s Paul Myners, financial services secretary to the Treasury, pointed out “the president of the ECB is chosen only by those countries within the eurozone, raising the question of whether he or she can effectively or credibly represent the whole of the EU.” Central European economies are particularly nervous with this proposal because it would mean that their predominately foreign-owned banking sector would now be foreign regulated. From the perspective of Warsaw, Prague, Budapest and other capitals in the EU’s new member states in Central Europe, this could create a conflict of interest where the ECB is regulating the eurozone’s banking institutions operating in non-eurozone economies. The guarantees that the ECB is an independent institution will not be sufficient to allay the suspicions of Central Europe that their Western European counterparts would not use the regulatory authority of the ECB to rule in their favor. Third, the United Kingdom is concerned that increased financial oversight, particularly at the institutional level, would drive hedge funds out of London to non-EU locals such as Switzerland, Singapore and Hong Kong. For this reason, the rules and shape of financial regulatory bodies will continue to be debated throughout 2009 by EU member states. EU member states could (if there was agreement aside from the United Kingdom) force London to accept regulation because unanimity would not be required and the EU’s qualified majority voting would be used to approve the new rules. However, considering that United Kingdom is not alone on a number of contentious points and it is unlikely that it would remain the isolated skeptic. Political change in the United Kingdom could further stall the process of adopting new financial regulation rules for the European Union. British Prime Minister Gordon Brown and his Labor Party are unlikely to survive the next election and even completing his term, which concludes in mid-2010, is in jeopardy. Labor’s successor will probably be the Conservative Party, the euro-skeptic and staunch supporter of London’s financial sector. This therefore puts an onus on the European Union to negotiate rules that the United Kingdom will be comfortable with while the more palatable (from the EU’s perspective) government is still in power.EU: Overhauling the Financial Regulatory System
June 10, 2009 | 1916 GMT
Leon Neal/AFP/Getty Images
Paul Myners, the Financial Services Secretary for Britain’s Treasury, in central London on May 15
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