Plans to reform EU financial supervision criticised

Proposals for overhauling Europe's patchy system of financial supervision have paid too little attention to how cross-border bank bailouts should be funded, an influential report said on Tuesday.

The report, written by a high-level committee for the Belgian government, said the recommendations in the de Larosiere report paid "insufficient attention" to the issue of burden-sharing between member states in the case of cross-border bank rescues.

It said it would be "highly desirable" to develop a European framework, in particular "a properly calibrated and pre-funded European Deposit Insurance Scheme", which would provide an "important degree" of risk diversification and a "level-playing field" between large and small countries.

The committee was headed by Alexandre Lamfalussy, a European economist and central banker who has already played a significant role in trying to develop more coordinated supervisory structures for banks and other financial institutions in Europe.

In February, a group headed by French banker Jacques de Larosiere produced proposals for reforming the system of financial supervision, which drew heavily on Mr Lamfalussy's ideas.

The Belgian committee did throw its weight behind some of the other recommendations in the de Larosiere report, however. It urged the country's ministers "to use their influence in the European decision-making process" and ensure new structures created by the EU remained "as close as possible" to the design proposed in the de Larosiere report.

In particular, it said the EU should follow proposals for a "European Systemic Risk Council", designed to warn of threats to the region's financial system, and a new "European System of Financial Supervisors" (ESFS), which would better harmonise and coordinate oversight by national supervisors.

However, there is already heated debate about what national powers, if any, should be ceded to the new ESFS.

The Lamfalussy high-level committee also suggested that Belgium itself needed a new "Systemic Risk Committee" in charge of crisis prevention. This, it said, should have six members and be chaired by the governor of the National Bank of Belgium but remain operationally independent of the NBB.

"The absence of macro-prudential policy is the main shortcoming of the present Belgian framework," the report said, adding that the country's financial watchdog, the CBFA, also needed reform.

Belgian banks were amongst those badly hit by the financial crisis, notably Fortis, whose difficulties had political repercussions.

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