7th Dec 2022

Expert group likely to suggest new EU bank watchdog

A report out on Wednesday (25 February) will likely call for the setting up of a new European agency to regulate financial institutions within the EU.

It "will call for deep institutional change" predicts Karel Lannoo, chief executive officer with the Centre for European Policy Studies, a Brussels based think-tank. The chair of the CEPS board, Onno Ruding, sits on the group tasked with issuing the report.

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  • How best to keep an eye on financial institutions will form the basis of the group's report (Photo: European Commission)

Mr Lannoo, who specialises in the field of financial regulation, said the report would call for a "single agency modelled on the European Monetary Institute of 1992 ... to lay the basis for the creation of a new European system of financial supervisors."

The European Monetary Institute was the forerunner to the European Central Bank and encouraged co-operation between member-state central banks ahead of the creation of the ECB.

The group drafting the report is headed by former International Monetary Fund chairman Jacques de Larosiere. It was mandated last October by commission President Jose Manuel Barroso to devise ideas for a new financial regulatory framework for Europe.

While a number of ECB board members have suggested over the last month that they would be happy to take on a regulatory role in addition to their existing inflation-fighting tasks, the report is likely to suggest that the new agency be separate from the ECB.

A commission spokesperson said on Monday that the group was still working on the final draft. "They are working late nights on this," the official said. It is "extremely complicated."

Struggle ahead

However, Mr Lannoo feels that the chances of EU leaders agreeing on a European solution are slim, pointing to comments made by EU leaders from the major economies at a mini-summit held in Berlin on Sunday that was supposed to cobble together a common front of the European G8 members heading into the April G20 meeting on the global economic crisis in London.

"If you look at the content of what they were saying, no one referred at any point to the Larosiere group or European structural reform. It's all the IMF and global solutions. No one said specifically we need a European answer."

"Certainly the Larosiere report will meet with a very hard fight," he continued.

Speaking in the European parliament earlier this month however, Czech finance minister Miroslav Kalousek stressed that the EU should not wait for a global solution.

Comments made by Czech Prime Minister Mirek Topolanek, in Berlin in his country's capacity as current holder of the six-month rotating EU presidency, to AFP reporters during his flight home also suggest that despite the unified front at Sunday's meeting, large divisions still exist between different member states.

The EU is home to 57 per cent of global banking assets, the highest stake held by any one region. Likewise, the largest 45 cross-border financial institutions in the EU hold over 70 per cent of deposits in the 27-country bloc.

Current regulation of the financial sector within the EU is carried out at national level by local authorities. Some co-ordination between these authorities is carried out by colleges of supervisors made up of national regulatory officials.

However, decisions made by these colleges are non-binding and current regulation of the sector is extremely heterogeneous, varying from state to state.

"Subsidiarity says you should only act at the European level if it cannot be done better at the national level. In this case you can achieve much better supervision at the European level," says Mr Lannoo.

Expert group members include Lehman, Citibank big-wigs

Critics of the EU do not need to look as far as the impending squabble at council level regarding the group's report.

Instead they point to the Larosiere group as a simple continuation of a financial regime of greedy bankers and inefficient regulators that led to the financial crisis in the first place.

The group is made up of eight members, including the chairman. Of these, Rainer Masera is a former managing director and chairman of Lehman Brother's financial institutions group in Italy. Onmo Ruding is a former vice-chairman of Citibank and Sir Callum McCarthy is the former chairman of the Financial Services Authority in the UK.

The group's concentration of banking bigwigs - in many quarters viewed as the very individuals responsible for the mess - will likely upset some of the sectors hardest hit by the crisis.

At the same time however, others will argue that it would be hard to come up with a similar group with the necessary financial experience that did not include bankers.

The report will likely form an important part of the commission contribution to the European council meeting on 19-20 March.

Depending on its reception there, some components may yet make it to the G20 table on 2 April.

ECB says more rate hikes to come

European Central Bank president Christine Lagarde said more rate hikes will come, but also admitted a recession will not lower inflation — leaving some economist question the logic of the policy.

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