A report to the European Commission has recommended that two new pan-EU bodies be set up to monitor risks and co-ordinate supervision of financial institutions in Europe. The report, compiled by a group headed by former Bank of France Governor Jacques de Larosiere, said financial regulation was too weak in the EU.
It said a European System of Financial Supervisors should be set up to co-ordinate standards between national regulators . It also recommended a new European Systemic Risk Council, or ESRC, to be chaired by the European Central Bank, which would include representatives of banking, insurance and securities supervisors.
The ESRC would pool and analyse all information relevant for financial stability, it suggested.
The group headed by de Larosiere was asked by the European Commission to suggest how to reform a regulatory system which has been tested by the credit crunch.
The report also sets out principles which should govern financial executives' pay, saying that regulators should demand changes if pay policies encourage too much risk-taking.
It calls for a 'fundamental review' of the business model of credit ratings agencies, and their supervision by a European Securities Authority. It also says hedge funds should provide more information about their activities. The report also calls for a harmonised EU scheme for guaranteeing bank deposits.
The European Commission will use the de Larosiere report to propose changes to supervision for EU leaders to discuss at a summit in March, and could be part of a wider supervisory debate at the G20 summit in London in April.
EU guidelines on banks' bad assets
The European Commission has also issued guidelines to members on how to treat banks' toxic assets. These include investment products which were backed by sub-prime mortgages or loans which may not be re-paid.
The commission said there should be a common European approach to make sure banks' losses are disclosed and banks can use their capital to resume lending to the economy.
The guidelines outline various ways of dealing with the issue, including setting up a 'bad bank' to house such assets or introducing an insurance scheme.
Internal market commissioner Charlie McCreevy said that if countries did not face up to the issue, there was a risk of prolonging the crisis with 'zombie banks'.
The commission sets out a number of principles for dealing with banks' bad assets. It says there should be full disclosure of impairments by banks before any government intervention and a co-ordinated approach to how assets are valued.
The commission also calls for a sharing out of the costs involved in dealing with these assets between shareholders, creditors and the State, as well as adequate payment for the State.
