Q&A

Q.WHAT IS BEING SET UP?

A.Three agencies will be established to keep tabs on banks, markets and insurers next January.
The new European Banking Authority will be based in London, Paris will be home to the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority will be in Frankfurt.
The EU will also establish a European Systemic Risk Board, an agency of the European Central Bank in Frankfurt that will keep watch for threats to the economy such as property price bubbles or soaring country debts.

Q.HOW MUCH POWER WILL THE NEW REGULATORS HAVE?

A.To begin with, the power of the new financial sheriffs will be restricted.
In limited circumstances, they will be allowed to overrule a national regulator such as Germany’s Bafin or Britain’s Financial Services Authority.

They would, for example, have the final say in a tug-of-war between countries, such as that between Belgium and the Netherlands over the future of banking and insurance group Fortis, which was split up during the crisis.

But countries will be allowed to veto any order if it would force them to spend money, a power which members of the European Parliament had attempted to overturn out of concern that it would give states a get-out, allowing them to undermine the new authorities.

The bodies are, however, likely to gather more powers as Brussels rolls out its reform of financial services. The European executive has, for example, proposed giving the markets authority the power to impose short-selling bans.

Q.HOW MUCH POLITICAL SUPPORT IS THERE FOR THE NEW REGULATORS?

A. Setting up the new authorities has been one of the most contested elements of the EU’s financial reform. Coordination among national regulators was largely disbanded as capitals scrambled to protect their banks and savers during the crisis. Nonetheless Germany and Britain, two of the EU’s most important economic centres, were reluctant to surrender power to the agencies.

The threat of a political veto to their rulings will likely discourage the new agencies from intervening in the regulation of banks in London or Frankfurt. The stability board is in an even weaker position as it does not have legally binding power. Instead it will rely on the power to “name and shame” to discourage behaviour that could lead to another economic crash. One source familiar with the group recently said, however, that it would be reluctant to publicly voice concerns over threats for fear that it could rattle investors.

For example, a warning to a country whose borrowing is dangerously high will mostly take place behind closed doors.

Q.IS THIS THE BEGINNING OF A EUROPEAN-STYLE SECURITIES AND EXCHANGE COMMISSION?

A.Experts in European policy have called the setting up of the new authorities a historic development, but their power and influence is likely to fall some way short of the US Securities and Exchange Commission. The European bodies will have a legal mandate as well as the discretion to overrule a country regulator if they bend the rules that the new agencies are responsible for setting. But with a limited budget and headcount, many fear the new regulators may struggle to make their voice heard.