The Euro sculpture in front of the European Central Bank in Frankfurt
When the financial crisis erupted two years ago, toppling banks and triggering eye-watering bailouts, European policymakers at times seemed too stunned by the scale of the situation to think about how to prevent it from happening again. Recently, though, they seem to have recovered their composure and have devised a body of legislation to anticipate future financial turmoil. Two months after U.S. President Barack Obama signed into law the most sweeping reform of America's financial sector since the 1930s, the European Union is set to follow suit by creating a trio of new financial sheriffs to monitor banks, insurance companies and trading on markets.
The European Banking Authority will be based in London; Paris will host the European Securities and Markets Authority; and the European Insurance and Occupational Pensions Authority will be in Frankfurt. On Tuesday, Sept. 7, E.U. Finance Ministers confirmed the plans for the watchdogs; the European Parliament will vote on them later this month, and the three agencies should come into force on Jan. 1 next year.
E.U. Internal Market Commissioner Michel Barnier says the agencies will give Europe "the control tower and the radar screens needed to identify risks, the tools to better control financial players and the means to act quickly, in a coordinated way, in a timely fashion." Barnier said last week that the financial crisis revealed woeful communication gaps between Europe's national regulators. "The fact is that we did not see the crisis coming," he said. "We did not have the monitoring tools to detect the risk which was accumulating across the system. And when the crisis hit, we did not have effective tools to act."
The new agencies will have the power to temporarily ban certain high-risk financial products and activities — such as naked short selling, which Germany acted against earlier this year — as well as to instruct banks and other financial actors in crisis situations, draw up standards for national regulators and settle disagreements between them.
They will be complemented by a group attached to the Frankfurt-based European Central Bank called the European Systemic Risk Board, which will monitor the risk of major threats to the economy, like problems at major banks or asset bubbles. Further initiatives are also in the works: speaking at a conference in Italy over the weekend, Barnier said the E.U. could agree in the next few weeks on a law to regulate speculative hedge funds and private-equity operators, blamed by some for financial excesses.
The wave of regulation finds Europe a far cry from the heady days just a few years ago, when banks and investors were the toast of European governments for their seeming alchemic powers of money generation. But the financial crisis has changed the perspective, says Fabian Zuleeg, chief economist at the European Policy Center, a Brussels-based think tank. "Given the deep distrust of much of the financial sector, there is no longer a debate over whether or not to introduce stronger regulation," he says.
When the watchdogs were first proposed last year, the only real resistance came from the City of London, Europe's biggest financial center, where some banks raised fears that too much red tape could prompt leading firms to move out of the E.U. altogether. But even among the City's supporters, there is a growing recognition that the crisis exposed the fault lines in the Anglo-Saxon model and left the wider economy distorted by the size and power of the banks. Angela Knight, CEO of the British Bankers' Association (BBA), says the financial sector welcomes the measures. "We need better regulatory coordination and a common rulebook," she says. "Although, of course, we do need to watch carefully to see that this does not lead to overregulation."
She is echoed by Guido Ravoet, secretary general of the European Banking Federation. "We do need more banking supervision. We recognize that we need oversight. We accept that there were gaps in the regulation," he says, pointing out that large banks — like HSBC, BNP Paribas Fortis and Deutsche Bank — had long asked for a single rulebook for cross-border operations. "The new measures might not prevent future crises, but they will predict them earlier and mitigate risks in the future," he says.
Initially, the watchdogs will not be as powerful as, say, the U.S. Securities and Exchange Commission. They are expected to be manned next year by no more than 60 people each, compared with more than 3,000 people at the U.K.'s Financial Services Authority, and will depend on help from national supervisory agencies. But it is a major step nonetheless, says Karel Lannoo of the Center for European Policy Studies in Brussels. "This is a very important, historic move. It was long overdue to have some sort of European supervision, and we now have federal bodies with powers above the national authorities," Lannoo says. "We will never abolish a financial crisis, but we can avoid the confusion we had two years ago." That may seem a modest ambition, but with Europe struggling to recover from the last crisis, a little local policing could do a world of good.