With an overwhelming majority, the European Parliament on Wednesday sent a strong message to EU Member States that the only option for effective financial supervision is one based on a thorough reform of the current system, with the establishment of European authorities capable of taking effective action to avert crises and avoid taxpayer bailouts.
By adopting amendments to the legislation but deferring the final vote on the legislative resolution, the EP has given its negotiators the backing of the full Parliament and has also left the door open for a few more weeks for an agreement to be reached at first reading with the Council after the summer break. In a separate declaration, Parliament's main political groups clearly indicated that the ball is now firmly in the Council's court to come forward with a position acceptable to all sides.
Ready to negotiate ... for a good deal
The declaration states that Parliament is willing to negotiate but is united in its view that the European authorities must be equipped with sufficient powers to prevent future crises and strengthen the single market.
This gesture is a final endeavour on the part of the EP rapporteurs to help the new Belgian Presidency to move the Member States to a more satisfactory position, the declaration adds.
Effective supervisory authorities …
Parliament voted to give a number of powers to the three European supervisory authorities (ESAs) which will be charged with controlling practices in the banking, securities and markets, and insurance sectors respectively.
The ESAs would be able to issue decisions directly to a financial institution such as a bank, where the national supervisor has not been able to change some of its practices that are considered unsound. They would also have the power to settle disputes between national supervisors and to supervise important cross-border financial institutions by acting through the national supervisors.
By their vote, MEPs also mandate the rapporteurs to push for a stability fund linked to each of the three financial sectors mentioned above so as to avoid taxpayers having to pick up the bills for future financial crises. They also state that ESAs should work to strengthen the European system of national deposit guarantee schemes. Finally the ESAs would also be able to temporarily prohibit or restrict certain types of financial activities that could undermine the proper functioning of the financial system.
... all based in one place
To ease interaction between the ESAs, Parliament is calling for them to be established in Frankfurt rather than having them spread around the EU. At the same time, it will be possible to have various representations of the ESAs in the most important financial centres of the EU.
European Systemic Risk Board (ESRB): explaining risk faster and better
The amendments adopted seek to ensure that the aim assigned by the Commission to the ESRB - that of monitoring the build-up of risk in the EU economy - is carried out better, more clearly, and can thus be acted upon faster.
MEPs also want to make risk levels more easily identifiable. They say the ESRB should develop a common set of indicators to permit uniform ratings of the riskiness of specific cross-border financial institutions and make it easier to identify the types of risks embedded in them.
To improve overall risk awareness, Parliament calls for the ESRB to establish colour-coded grades to reflect different risk levels. When the ESRB then makes warnings or recommendations on risk build-up it would use the colour-grade to indicate the level of risk. The European Parliament would have the power to summon the addressees of the ESRB's recommendations to explain the actions they have taken to take into account the ESRB's comments.
To enhance the ESRB's visibility and credibility, MEPs say it must be chaired by the ECB President. Parliament also voted to widen the ESRB board membership to include academics.
Parliament's positions on all these issues were embodied in its votes on a package of reports, all of which were approved by overwhelming majorities. The texts adopted will serve as a mandate, backed by the plenary, for the EP's negotiators to continue talks with the Council in view of reaching an agreement in the very near future, possibly just after the summer recess.
Also in a separate move MEPs backed action to avert future crisis
Tighter coordination and planning to avoid future banking crises
A special system should be set up to ensure that crises are resolved earlier and to avoid rushed, weekend bank bailouts costing the taxpayer hundreds of billions of euros, says the European Parliament in a resolution passed on Wednesday. The growing size, complexity and interconnectedness of banks means that such a system must be established at European level.
In the resolution, drafted by Portuguese MEP Elisa Ferreira (European People's Party) and adopted by a show of hands, MEPs urge the European Commission to submit by the end of the year one or more draft laws relating to the management of cross-border crises in the banking sector. In particular they call for an EU crisis-management framework, an EU financial stability fund and a resolution unit within the European Banking Authority to deal with insolvencies of cross-border systemic banks.
"Risks cannot and should not be eliminated from the market but we do require regulation which will make risks more transparent and prevent the emergence of bubbles," said Ms Ferreira in a debate on Tuesday. "It is not our job to prevent banks going bankrupt but it is our job to ensure that the way in which they are liquidated or reorganised is done in an orderly fashion, and also to limit collateral effects elsewhere in the system to ensure that it is not the taxpayer who picks up the tab".
EU crisis management framework
The crisis management framework proposed in the resolution would, in the event of a crisis, preserve financial stability, minimise the cost to taxpayers, preserve basic banking services and protect depositors. It would also encourage banking sector players to act more responsibly.
The proposed framework would provide a common minimum set of rules, foster the convergence of national resolution and insolvency laws, and ultimately establish an EU resolution and insolvency regime. It would grant more crisis management powers to supervisory authorities, including the powers to wind up a bank or impose a total or partial sale. Considerable coordination powers would be vested in the nascent European Banking Authority (EBA).
A "Risk Dashboard", based on a set of indicators to be designed by the Commission, is also proposed, with a view to rating the risk levels of individual banks and providing early warning of possible instability. Each bank would be required to have its own "resolution plan" which would detail the steps to be taken should it run into difficulties, so as to avoid rushed decisions.
Financial stability fund and resolution unit
Furthermore, the framework would include an EU financial stability fund to preserve banking stability in difficult times, and also a resolution unit within the EBA in charge of restructuring cross-border systemic banks which run into difficulties.
On Tuesday, Michel Barnier, European Commissioner in charge of financial services, welcomed the Parliament's suggestions as a "very credible toolbox" and assured MEPs that the Commission would reflect these suggestions in the consultation paper it is to launch in October as well as in the legislation to be submitted next year.
According to the EC Treaty and the Parliament's Rules of procedure, MEPs have a right to request the Commission to submit any appropriate proposal for the adoption of a new law. To this end they have to adopt a resolution which must be backed by a majority of MEPs. At the same time, they may set a date by which such a proposal should be submitted. Should the Commission decide not to follow this recommendation, it has to give its reasons.