EU financial watchdog to rely on moral authority

[September 23, 2009]  BRUSSELS (AP) -- The European Union's new economic watchdog plans to use "moral pressure" instead of regulatory authority to crack down on countries posing major risks to Europe's economy, the European Commission said Wednesday.

The EU's executive body laid out a new financial oversight structure Wednesday that it wants EU governments to back to prevent a repeat of last year's banking crisis. Still, it is shying away from creating forceful new regulators who could unilaterally overrule member states.

The commission says it wants risks in the financial system to be identified and resolved at an earlier stage; EU countries to cooperate better in emergency situations and clearer rules set out for solving disputes between financial supervisors in different countries.

Despite Europe's shared market of 500 million people, financial oversight is fragmented and divided between 27 member states who do not always apply the same EU rules in the same way.

That became very clear last year when governments scrambled to rescue banks and shore up a financial system under threat of collapse.

Ireland's move to guarantee all bank deposits alarmed British banks who feared that savers would move funds there. France and Germany, meanwhile, complained loudly about Luxembourg's lax investor protection rules that led to many losing money after investing in funds linked to the massive U.S. financial fraud run by Bernard Madoff.

The European Commission says it wants to plug those weaknesses in the EU's supervisory framework.

The new European Systemic Risk Board is also supposed to watch out for wider risks to the economy, such as the financial situation of banks, potential asset bubbles and how well markets are functioning.

That will issue recommendations and warnings to national governments and supervisors which must take action or explain why they haven't done so.

The European Commission says the new risk board will flag warnings that have been ignored to all EU governments, which will increase "the moral pressure on the recipient to act or explain." Warnings won't always be made public to avoid spooking financial markets.

The European Central Bank, which governs monetary policy in the 16 nations that use the euro, will help run the risk board and its president will likely lead the watchdog -- although EU officials have said that senior jobs are open to non-euro nations.

The new financial supervisory framework will create three new authorities to watch over banking, financial markets and both insurance and pensions.

They will have more power than the supervisory committees they are replacing because they will be able to resolve disputes between national supervisors and suggest new technical standards. The European Securities and Markets Authority will also supervise credit rating agencies.

That means EU agencies will have more power to counter national supervisors -- something Britain has fiercely resisted.

But the EU executive insists that the new system won't veto national supervisors and will only step in where necessary -- such as on EU-wide technical standards and sorting out disputes.

The new authorities will not be allowed to make decisions that would force a government to spend money -- such as telling it to bail out a bank.

"Our aim is to protect European taxpayers from a repeat of the dark days of autumn 2008, when governments had to pour billions of euros into the banks," said EU Commission President Jose Manuel Barroso.

He said Europe's system "can also inspire a global one and we will argue for that in Pittsburgh" when the G-20 rich and developing nations meet to discuss global financial reform on Thursday and Friday.

[Associated Press; By AOIFE WHITE]

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