A landmark deal that will create four new watchdogs to police the European financial system was finally signed off late on 2 September, a year after the package of proposals was put on the table. The four - to be based in London, Paris and Frankfurt - should open their doors on 1 January next year. The deal was made possible after MEPs gave way on having all four watchdogs located in Frankfurt, and member states backed down on appointing the president of the European Central Bank to the chairmanship of the soon-to-be created European Systemic Risk Board (ESRB), the early warning body tasked with preventing future crises. “We have reached a crucial milestone,” EU Internal Market Commissioner Michel Barnier said late on 2 September. “We will have the control tower and the radar screens needed to identify risks.”

However, a review clause after three years could overturn some of the delicate compromises, with MEPs keen to see the Commission report back, in 2014, on how the separation of the agencies is working - the Liberals in particular are keen to see one single EU supervisor put in place - as well as whether it would be more prudent to locate all three in the German financial centre, where the ESRB and the new insurance authority will be headquartered.

HOW IT WORKS

Under the risk board - which will be responsible for monitoring asset price bubbles and other dangers in the system as a whole - will sit three sector-specific European Supervisory Authorities with binding powers to address decisions to national regulators, and even in some cases individual banks or other actors. The ESAs will be responsible for policing banks, stock markets and insurance companies, and will be primarily tasked with ensuring EU law - and detailed technical standards - is applied in the same way across the 27 member states. They will have more clout to enforce their decisions if there has been a flagrant breach of EU rules, if a future emergency (such as another financial crisis) is declared or if there is a disagreement between national regulators over a point of law.

The three agencies will also gain the power to temporarily ban certain risky financial products and practices - the first to be handed the extra control will be the Paris-based European Securities and Markets Authority (ESMA), which will be able to suspend naked short-selling pending a new directive on the practice, to be released on 15 September. MEPs also managed to insert a clause handing responsibility for investor and consumer protection to the ESAs, as well as a role for the European Banking Authority in mandating a network of bank resolution funds and deposit guarantee schemes - already the subject of Commission communications to be set up across the bloc.

However, member states have retained the right to appeal decisions handed down by the authorities if they seriously impinge on national budgets, although according to senior officials this would have to mean the London-based European Banking Authority ordering a bank bailout in the billions of euro for it to be waved through.

BACKGROUND

Although an overhaul of financial supervision has been in the pipeline for over three years, the proposals, as agreed on 2 September, were first put forward in skeletal form by former IMF Managing Director Jacques de Larosière in February last year, and fleshed out by then-Internal Market Commissioner Charlie McCreevy in a series of five legislative texts last September: a regulation setting up the ECB-led ESRB (COM(2009)499), a proposal for a Council decision giving special powers to the ECB (COM(2009)500) and three further regulations setting up the ESAs (COM(2009)501-3). That was followed by an omnibus directive (COM(2009)576) amending several existing rules in the sector, including the Capital Requirements (2006/48/EC and 2006/49/EC), Market Abuse (2003/6/EC) and the Markets in Financial Instruments (MiFID, 2004/39/EC) Directives, along with seven others. In December 2009, the Council laid down several red lines - including the safeguard clause - a position that clashed with Parliament’s 10 May compromise agreed between the rapporteurs - Sylvie Goulard (ALDE, France) for the ESRB, Peter Skinner (S&D, UK) for the European Insurance and Occupational Pensions Authority, Jose-Maria Garcia Margall Y Marfil (EPP, Spain) for the European Banking Authority, Sven Giegold (Greens-EFA, Germany) for ESMA, Ramon Tremosa I Balcells (ALDE, Spain) for the ECB’s role in the ESRB, and Antolin Sanchez Presedo (S&D, Spain) and Burhard Balz (EPP, Germany) for the omnibus amending directives. However, several three-way talks later and with movement from both sides, an accord was made possible on 2 September.