ECB member says EU risks falling behind in regulation

EUROPE RISKS falling behind the US in policing the financial system and the current crisis could prove “a wasted opportunity”to ensure its future stability, a European Central Bank policymaker has warned.

The toughly worded comments by Lorenzo Bini Smaghi, an ECB executive board member, came as European Union leaders approved plans for a regulatory framework that will include a “European systemic risk board” and a European system of financial supervisors.

Mr Bini Smaghi voiced concern that the board, intended to look at general threats to the financial system, would have insufficient power over national authorities. He also feared that the EU was unwilling to make wholesale reforms.

With global financial markets showing signs of stabilisation, “there is a risk the sense of urgency for reform fades away and nationalistic tendencies and institutional jealousies re-emerge”, Mr Bini Smaghi told a conference on financial regulation at Bocconi University in Italy.

“The forces pushing towards maintaining the status quo are gaining strength. If these forces are not firmly counteracted, this crisis could turn out to have been a wasted opportunity – and the next crisis could move closer.”

Concern was also rising about the effectiveness of the EU “in comparison to the reforms that have been put forward in the US”, Mr Bini Smaghi added.

The proposed European systemic risk board would include the 27 EU central bank governors and would be supported logistically and analytically by the ECB. Its chairman would almost certainly be ECB president Jean-Claude Trichet. The board would have the power to make recommendations – but not to implement policies directly.

Such restrictions would overcome fears, especially in Britain, that national authorities would be surrendering influence to EU institutions. However Mr Bini Smaghi warned that recommendations could be implemented differently in different countries without clear justification.

“Ultimately, the incentive to safeguard the competitiveness of the national systems would induce the respective authorities to adopt a minimalist approach.”

Mr Bini Smaghi preferred giving Europe’s central bankers tools to ensure financial stability – on top of their control over interest rates. – (Copyright The Financial Times Limited 2009)