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Britain digs in heels over supervision reform

PRAGUE - Britain clashed with its European Union partners on Saturday over an ambitious reform of financial supervision that would erode its sovereignty in regulating the bloc’s biggest financial centre.

The UK is fiercely protective of its City of London financial sector which is a major tax contributor, but France and Germany want stronger supervision of large financial institutions operating across EU borders to prevent a future banking crisis that could damage the 27-nation bloc.

“We agreed we have to reinforce the European supervisory structure but there will still be a very demanding discussion on the final model to be adopted,” said Miroslav Kalousek, finance minister for the Czech EU presidency.

Britain was largely isolated because of its two fundamental reservations over reform while the bulk of member states said they wanted to push ahead based on a plan from former Bank of France governor Jacques De Larosiere.

There is no sign of Britain being outvoted for now.

“We need to find a common front, a common solution, because we cannot leave Britain outside the system. London plays too important a role in the financial arena to be left to one side,” French Finance Minister, Christine Lagarde told reporters.

Two tier

De Larosiere has proposed a two-level approach that would curb national sovereignty by creating a new pan-EU council chaired by the European Central Bank to monitor system-wide risk and plug a big gap in the current framework.

The pan-EU risk council could formally ask the bloc’s finance ministers to take action against a member state whose response to a risk warning from the council is inadequate.

“We are fully in support of the macro prudential body but we don’t believe that it should necessarily always be chaired by the president of the ECB,” a British official said.

ECB President, Jean-Claude Trichet, sought to mollify Britain by saying the new body should include all members of the European System of Central Banks from the 27 EU central banks, not just those in the euro zone.

“We are a single market with rules at the level of 27 states. The general council of the ECB is precisely designed for the 27,” Trichet told reporters.

Nevertheless, the risk council’s recommendations, although not binding, must be taken very seriously such as by putting pressure on countries to explain why they have not complied, Trichet said.

De Larosiere’s second supervisory level is made up of national securities, insurance and banking supervisors for day-to-day micro prudential supervision.

It would have a mediation process for disputes between states with a binding outcome, a step Britain is against.

A British official said there was a need to maintain a direct line between supervisory responsibility and fiscal obligation.

Other countries such as Slovakia and Portugal also noted how the planned reform failed to address the fundamental issue of burden-sharing or which country bails out a failed cross-border bank.

“If you expect the taxpayers of a country to pick up a bill for an institution then they must ultimately be able to hold to account their own elected representatives,” the official said.

Britain, which supported the broad concept of a risk council also wants its Financial Services Authority to have a role.

EU Internal Market Commissioner, Charlie McCreevy, said legislative proposals should include a binding mechanism otherwise there would be no real advance.

“We are not looking for a perfect solution but we are looking for a better solution,” McCreevy said.

EU ministers asked their officials to come up with a report on details of the two planned new bodies for EU leaders in June.

Ambitious deadline

The bloc’s leaders gave the reform an urgent status, setting an end of 2009 deadline for taking political decisions to overhaul the current system.

The EU has a patchwork of national supervisory systems that lags a single capital market where 40 to 50 cross-border banks such as Deutsche Bank, BNP Paribas, Santander and HSBC dominate.

The European Commission will present outline proposals to turn De Larosiere into EU law at a summit of the bloc’s leaders in June, with more detailed legislative proposals in the autumn.

De Larosiere suggested that his framework could be introduced in two stages over three years but the Commission wants it introduced in one phase at the end of 2010.

German Finance Minister, Peer Steinbrueck, said this deadline was very ambitious.

The EU has been debating supervisory reform for a decade and its track history is poor due to vested national interests.

Last month, the EU adopted a law to reform the insurance sector but at the cost of ditching the core element of a pan-EU approach to setting capital requirements that would have given overriding power to a company’s home regulator.

This was a step too far for nearly half of member states.