EU leaders agree to sharper scrutiny of financial sector

Leaders of the European Union (EU) agreed to their most sweeping overhaul of financial regulation, sharpening scrutiny of banks and risks after spending more than half a trillion dollars propping up lenders in the credit crisis.

The leaders of the 27 countries meeting in Brussels backed the creation of agencies to unify oversight of banks, insurers, investment firms, credit-rating companies and hazards in the broader economy. UK Prime Minister Gordon Brown won a compromise to scale back some of the authorities’ power to override national decisions involving public money.

The accord gives the EU its most centralised power over financial firms after national supervision failed to contain the crisis sparked in the US housing market. The region’s governments and central banks are on the hook for more than ¤3.7 trillion ($5.2 trillion) of guarantees and funding.

“For the first time, you will have a place where the most powerful central bankers and regulators sit down together to discuss common issues,” David Green, former head of international affairs at the UK Financial Services Authority and a former Bank of England official, said in a Bloomberg Television interview.

New agencies for banking, insurance and securities will have authority to ensure EU market laws are implemented the same in every country. At the UK’s insistence, the EU draft scales back the power of those bodies, so they can’t override national objections and order changes to capital or other measures that could put government funds at risk.

Supervisory practices
“Getting identical supervisory practices is something that London has been pressing for, for a long time, and that’s probably the most important thing here,” said Green, who is now an adviser to the UK Financial Reporting Council.

The EU overhaul also creates a European Systemic Risk Board of central bankers and financial regulators, to compare notes and monitor hazards that cut across borders and industries.

While its recommendations won’t be legally binding, the body is designed to spot problems such as the build-up of exposure to US subprime mortgages — the issue that sparked the turmoil in which banks have absorbed almost $1.5 trillion of losses and writedowns.

In another compromise pushed by the UK, the draft calls for the board’s chairman to be elected by the General Council of the European Central Bank, instead of always handing it to the ECB president as proposed by the EU’s executive arm.