EU ‘risks lagging US on regulation’ - Warning from ECB board member

EU ‘risks lagging US on regulation’ - Warning from ECB board member
By Ralph Atkins in Frankfurt
Copyright The Financial Times Limited 2009
Published: June 19 2009 11:49 | Last updated: June 19 2009 11:49
http://www.ft.com/cms/s/0/7e9c12f0-5cb9-11de-9d42-00144feabdc0.html


Europe risks falling behind the US in policing the financial system and the current crisis could prove “a wasted opportunity” to ensure its future stability, a top European Central Bank policymaker has warned.

The toughly-worded comments by Lorenzo Bini Smaghi, an ECB executive board member, came as European Union leaders approved plans for a new regulatory framework that will include a “European systemic risk board” and a European system of financial supervisors.

Mr Bini Smaghi voiced specific concern that the systemic risk board, intended to look at general threats to the financial system, would have insufficient power over national authorities. But he also feared more generally that the EU was losing its will to undertake wholesale reform.

With global financial markets showing signs of stabilisation, “there is a risk that the sense of urgency for reform fades away and nationalistic tendencies and institutional jealousies re-emerge,” Mr Bini Smaghi told a conference on financial regulation at Bocconi University in Italy.

“The forces pushing towards maintaining the status quo are gaining strength. If these forces are not firmly counteracted, this crisis could turn out to have been a wasted opportunity. And the next crisis could move closer,” he said.

Concern was also rising about the effectiveness of the EU “in comparison to the reforms that have been put forward in the US,” Mr Bini Smaghi added.

The proposed European systemic risk board would include the 27 EU central bank governors and would be supported logistically and analytically by the ECB. Its chairman would almost certainly be Jean-Claude Trichet, ECB president. The board would have the power to make recommendations – but not to implement policies directly.

Such restrictions would overcome fears, especially in the UK, that national authorities would be surrendering influence to EU institutions. But Mr Bini Smaghi warned that recommendations could be implemented differently in different counties – without clear justification.

“Ultimately the incentive to safeguard the competitiveness of the national systems would induce the respective authorities to adopt a minimalist approach, which would be to the detriment of overall stability.”

Mr Bini Smaghi preferred giving Europe’s central bankers specific tools to ensure financial stability – on top of their control over interest rates, which would remain focused on combating inflation. He noted this was the system proposed this week in the US, where the Federal Reserve would be given powers to address the build up of risks that threatened the financial system as a whole.

Mr Bini Smaghi also noted that the current EU proposals would create a “very peculiar situation” in which those countries outside the eurozone would have risks to the financial system monitored at both at the European and national levels. But eurozone members would only have the EU level – unless the ECB decided to issue itself recommendations for the eurozone.