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Safeguarding financial stability - 27/05/2009

Burning euro notes © Reporters

Commission outlines plans for closer financial supervision at European level

The worst banking crisis in decades has shown how investment risks can destabilise the broader financial system and even send whole economies into a tailspin. At separate summits earlier this year, EU leaders and the Group of 20 top economies pledged to strengthen supervision of the financial system to head off excessive risks.

"Better supervision of cross-border financial markets is crucial for ethical and economic reasons," says commission president José Manuel Barroso."The commission is making proposals today to help restore confidence, guard against future crises and protect growth and jobs."

Currently, the European banking system is largely supervised at the national level. The commission’s plan calls for the creation of an EU-wide body to identify and tackle system-wide risks.

The European Systemic Risk Council would be chaired by the president of the European Central Bank and include financial supervisors and central bank representatives from each country. Its job would be to provide an early warning of risks that threaten market stability and recommend corrective action.

The commission is also proposing to set up a European System of Financial Supervisors to ensure consistent oversight of financial institutions that operate in two or more EU countries. Under the system, European authorities on banking, insurance and securities would oversee and coordinate the work of supervisors working at the national level.

The two-pronged package , a key part of the EU response to the economic crisis, is designed to make financial markets safer for investors and restore confidence in the system. The proposals will also help consolidate the European market for financial services.

After the European banking system nearly collapsed in October 2008, president Barroso set up a group of banking experts, chaired by former International Monetary Fund chief Jacques de Larosière, to find ways to improve financial supervision. The proposals are based on the group’s recommendations. EU leaders are expected to consider the proposals at their meeting in June.

More on reforming the financial system

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