Reform of Epvisory Architecture

UNCLAS SECTION 01 OF 03 BRUSSELS 001705 SENSITIVE SIPDIS NOT FOR INTERNET DISTRIBUTION E.O. 12958: N/A TAGS: EFIN ECON ETRDEIQ SUBJECT: Reform of Epvisory Architecture BRUSSELS 00001705 001.2 OF 003 1.(uropean Commission (EC) asions; ¶4. tween national supervisorsks will include promotinQioning of Colleges of Q able to directly address individual firms only for breaches of EU law. General supervision will stay with national supervisors; ¶3. Only the Council will have the power to declare a banking emergency, after consulting the Commission and the ESRB. (The EC's original proposal had given that power to itself.) Declaring a banking emergency would empower the ESAs to take binding decisions to coordinate national supervisory responses, and to require national supervisors to jointly take specific actions (e.g. short-selling restrictions, suspension of trading) to remedy an emergency situation. ¶6. (SBU) The Council decision creates a voting system that will limit the ESAs powers over national supervisors, thereby addressing concerns notably by the UK) that decisions by the ESAs do not have fiscal implication for Member States. It creates two procedures for a Member State to challenge a decision by an ESA if it believes that the decision impinges on its fiscal responsibility: ¶1. In case of decisions taken to settle disagreement between national supervisors: A Member State has one month to notify the ESA that it is challenging the ESA's decision, thereby immediately suspending its enforceability. After notification, the ESA will have one month to amend or maintain its decision. If the ESA maintains its decision, the Council has two months to vote to uphold it, acting by qualified majority voting (QMV). If the Council allows the two month deadline to lapse without taking action, the ESA's decision is terminated. ¶2. In case of decisions taken in emergency situations: A Member State has three days to notify the ESA that it is challenging the ESA's decision, suspending its enforceability. This triggers a request to the Council to overrule the ESA. The Council has ten days to decide by simple majority whether to overrule the ESA's decision. If the Council allows the ten day deadline to lapse without taking action, the ESA's decision is terminated. ¶7. (SBU) Though it enhances the current supervisory structure, the BRUSSELS 00001705 002.2 OF 003 Council's position is less ambitious than the original EC's proposal. The EC feels nonetheless that some important new principles have been enshrined with this compromise: ¶1. No single Member State has a veto; ¶2. The ESAs will be empowered to develop technical standards, as an instrument of harmonization. (Although, the EC will have to endorse these standards to make them binding.); ¶3. The ESAs will have the power to arbitrate between national supervisors, even though the Council will have the power to overrule the ESAs; ¶4. ESAs can go directly to firms - even if just for non-compliance with EU law and to request information. ¶8. (SBU) The main decision-making body of the ESAs will be their Board of Supervisors. It will decide by simple majority of its members, and will be composed of: ¶1. The Chairperson (non-voting); ¶2. The Head of each national supervisor; ¶3. One representative of the EC (non-voting); ¶4. One representative of the ESRB (non-voting); ¶5. One representative of each of the other two ESAs (non-voting). European Systemic Risk Board -------------- ¶9. (SBU) The agreement on the ESFS follows the October 20 ECOFIN decision to create the European Systemic Risk Board (ESRB). Unlike the agreement to set up the ESAs, Member States made only minor amendments to the original EC proposal, mainly to its organizational structure (such as raising the number of General Board members in the Steering Committee from three to five). ¶10. (SBU)The main function of the ESRB will be to monitor and collect information relevant to potential threats and risks to financial stability arising from macro-economic developments and the EU financial system. Its tasks will be the following: ¶1. Identify and prioritize systemic risks; ¶2. Issue warnings where such systemic risks are deemed to be significant; ¶3. Issue recommendations for remedial action in response to the risks identified including, where appropriate, for legislative initiatives; ¶4. Monitor the follow-up to warnings and recommendations; ¶5. Coordinate with international institutions, as well as the relevant bodies in third countries on matters related to macro-prudential oversight; ¶11. (SBU) Warnings or recommendations may be either of a general or specific nature and shall be addressed to the whole EU, to one or more Member States, to one or more of the European Supervisory Authorities, or to one or more national supervisory authorities. At the discretion of the ESRB, warnings and recommendations may or may not be made public. At the same time, warnings and recommendations will be transmitted to the Council and, if appropriate, to the ESAs. Its recommendations will not have legal force, but the addressees will have to communicate the actions undertaken in response to them to the Council and the ESRB and provide adequate justification in case of inaction ("comply or explain"). ¶12. (SBU) The ESRB's recommendations will not cover: monetary policy, fiscal policy, or specific financial institutions. However, the ESRD will be able to issue recommendations covering a specific Member State. The ESRB will report at least every six months to the Council and the European Parliament (EP). ¶13. (SBU) Under the agreement, the ESRB will be composed of a General Board, a Steering Committee, a Secretariat and an Advisory Technical Committee. ¶1. The General Board is the main decision-making body. It will be composed by voting and non-voting members. ¶2. The voting members will be: a. Chair (expected to be the President of the European Central Bank - ECB); b. Vice-Chair (expected to be the Governor of a non-Euro area Central Bank); c. The 26 other Central Bank governors; d. A representative of the EC; BRUSSELS 00001705 003.2 OF 003 e. The Chairpersons of each of the ESAs. ¶3. Non-voting members will be: a. The President of the Economic and Financial Committee (EFC); and b. One representative of each of the competent national supervisory authorities (on a rotating basis, depending on the issues to be discussed, unless a common representative has been agreed upon). ¶14. (SBU) The General Board will hold regular meetings at least four times a year. Extraordinary meetings may also be convened. Voting will be by simple majority. ¶1. The Steering Committee will be responsible for preparing the meetings of the General Board and monitoring the progress of the ESRB's ongoing work, meeting at least quarterly. It will be composed of: a. The Chair and Vice-Chair of the ESRB; b. Five other members of the General Board (three from a Euro area Member State and two from a non-Euro area Member State); c. A Member of the EC; d. The Chairpersons of each of the ESAs; and e. The President of the EFC. ¶2. The Secretariat shall provide analytical, statistical, administrative and logistical support. The ECB has been given the task to staff the Secretariat, which will be located at the ECB. ¶3. The Advisory Technical Committee will be responsible for providing advice and assistance on technical issues. It will be composed of: a. A representative of each national central bank; b. A representative of the ECB; c. One representative of each of the competent national supervisory authorities; d. One representative of each of the ESAs; e. Two representatives of the EC; and f. One representative of the EFC. Outlook: European Parliament may seek to strengthen power of ESAs: -------------- -------------- ¶15. (SBU) The EP has only begun examining the EC's proposals, and no opinion has yet been made public. However, following the Council agreement on the ESFS, the four main political parties issued a joint statement in which they openly disagreed with the Council's decision, and pledging to fight what they perceive as a watering down of the supervisory structure. ECB President Trichet also expressed dissatisfaction that the Council's decision did not give more binding powers to the ESAs. Regarding the ESRB, there appears to be consensus in the EP that the limited amendments made by the Council to the original EC's proposal are acceptable. Both proposals now must be negotiated with the EP. Final approval is expected in June/July 2010, with the new Authorities starting work in 2011. KENNARD