EUROPEAN diplomats agreed last night to set EU-wide financial watchdogs by the start of next year, formalising a historic power grab by Brussels institutions over key swathes of the UK and London economies.
The trio of new regulators, to monitor banks, insurance companies and trading on markets, will be complemented by a group attached to the European Central Bank that will keep watch for other economic risks like a property price bubble.
The controversial move –?championed by EU commissioner Michel Barnier – establishes agencies that can overrule a national regulator like the Bank of England and will fuel fears that European leaders with little love of the City will throttle its ability to compete globally.
The bodies will be able to intervene in the regulation of individual banks in London. But their resources as well as freedom to sideline national agencies will be limited. “These new authorities will have the final word in mediating a dispute between national authorities,” said Karel Lannoo of the Center for European Policy Studies, a Brussels think tank.
“They will be in charge and this is a historical change. Although lack of money will hinder their work, some, for example in markets, could become as powerful as the Securities and Exchange Commission.”
In a related move, European politicians are preparing to take on hedge funds by banning “naked” short selling in shares and government debt, as well as imposing broader curbs at times of crisis.
The Commission has drawn up plans to follow Germany’s lead by forbidding traders from short selling equities or credit default swaps on sovereign bonds without being able to access the underlying security – known as naked shorting.
In emergency periods, regulators would have the power to limit all short selling and credit default swap trading for up to three months. Market makers who provide liquidity would be exempt.
Even in calm conditions, hedge funds would have to regularly reveal their short exposure to certain shares and the sovereign debt of EU nations.
The EC will meet to approve the short-selling plans on 15 September. Discussions will then begin with individual countries, with the UK expected to object. The Alternative Investment Management Association, which represents hedge funds, welcomed a unified European approach but said: “The crisis experience has shown that imposing such bans does little to calm market panic.”