Analysts applaud passage of ESRB, fret over practical concerns

Commentators welcomed European Parliament's approval on Wednesday of a new supervisory structure for the continent, but flagged worries that the new bodies would face an uphill struggle from the outset.

European lawmakers' assent was the final stage in the process, and the European Systemic Risk Board (ESRB) and three European Supervisory Authorities (ESA) - a banking supervisor based in London, a securities authority in Paris, and an insurance regulator in Frankfurt - will be formally operational by January.

"The overall lesson from the crisis was that the European banking sector remains very fragmented, with many lending across borders, but operating under national guarantees. Some element of cross-European regulation is therefore needed," James Nixon, the chief European economist at Société Générale, a French bank, told CentralBanking.com. "It's nice that the ESRB and the ESAs will be able to dig down into specific markets and products to see where problems are coming from."

Marc Ostwald, an analyst at Monument Securities, a London brokerage, told CentralBanking.com that the body would provide "vital reassurance that systemic risk was being watched," with its structure and set-up lending it a little more regional authority than an institution like the Bank for International Settlements.

Policymakers and politicians also welcomed the vote. Jean-Claude Trichet, the president of the European Central Bank, said in a German television interview that Europe was taking "a very important step forward." He added: "The ESRB will have the particular responsibility to concentrate on the systemic risks, the risks that are really dealing with cross-border, with cross-national problems that are not dealing with individual supervision, individual supervision authorities." Trichet will be the first head of the ESRB until the end of his term next October, and his successor at the ECB will take over the role until 2016.

Giovanni Carosio, the chairman of the Committee of European Banking Supervisors, said his organisation was well on its way to morphing into the new London-based banking authority. "One of [our] priorities will be developing technical standards that, once adopted, will directly apply to banks and bank supervisors in Europe. This innovation in prudential rulemaking will contribute to the establishment of a common [European Union] rule book," he said. "The timing could not be better, given the recently agreed upon package of Basel III reforms that we will implement in Europe."

Kay Swinburne, a member of the European Parliament for the United Kingdom, said the reform package provided a crucial check-and-balance on the power of the financial services industry. "Instead of handing over the keys to the City of London, this deal places it in a kind of European Neighbourhood Watch programme. Peer oversight will provide us all with loudhailer warnings when there are macro systemic or particular risks," she said.

Political tensions
However, the framework was likely to throw up political challenges.

"If there is a disaster or huge financial risks are building up, it still remains the responsibility of the national authorities to take action," Nixon said, noting that it was still not clear where the authority of the ESRB would end and that of national regulators would take over. The legislation states that the ESRB will be able to draw up rules, monitor how national supervisors enforce them and settle disagreements between national authorities where necessary.

Ostwald said the ESRB could also become a scapegoat. "The real power that it has is to make recommendations. But it will undoubtedly end up shouldering a lot of blame - people will say it's a lot like the European Commission," he said. Eurosceptic parts of the media would attempt to capitalise on this, twisting its words and judgments to suit domestic political agendas, Ostwald said.

Policy challenge
The ESRB's policy mandate would throw up its own host of challenges, Richard Barwell, an economist at Royal Bank of Scotland, told CentralBanking.com. Barwell, who previously worked macroprudential policy at the Bank of England, said uncertainty over the development of rules would persist. "Much of the grunt work still remains to be done, and its key that the ESRB is well resourced. Economists and policymakers were equipped to switch to inflation targeting, because there was a wealth of academic writing on it," he said, adding that macroprudential policy was still in its nascent stages.

Strasbourg green-lighted the proposals on Wednesday nearly a year after they were first put forth by the European Commission. Negotiations between the European Council, Parliament and Commission have been fraught at times. Lawmakers wanted the head of the ECB to run the ESRB, but national authorities preferred a system under which ESRB members elect the chair.