REPORT on the proposal for a Council regulation entrusting the European Central Bank with specific tasks concerning the functioning of the European Systemic Risk Board

21.5.2010 - (05551/2010 – C7‑0014/2010 – 2009/0141(CNS)) - *

Committee on Economic and Monetary Affairs
Rapporteur: Ramon Tremosa i Balcells

DRAFT EUROPEAN PARLIAMENT LEGISLATIVE RESOLUTION

on the proposal for a Council regulation entrusting the European Central Bank with specific tasks concerning the functioning of the European Systemic Risk Board

(05551/2010 – C7‑0014/2010 – 2009/0141(CNS))

(Special legislative procedure - Consultation)

The European Parliament,

–   having regard to the Commission proposal to the Council (COM(2009)0500),

–   having regard to the Commission Communication to Parliament and the Council entitled 'Consequences of the entry into force of the Treaty of Lisbon for ongoing interinstitutional decision-making procedures' (COM(2009)0665),

–   having regard to the proposal for a Council Regulation (05551/2010),

–   having regard to Article 127(6) of the Treaty on the Functioning of the European Union, pursuant to which the Council consulted Parliament (C7‑0014/2010),

–   having regard to Rule 55 of its Rules of Procedure,

–   having regard to the report of the Committee on Economic and Monetary Affairs (A7-0167/2010),

1.  Approves the proposal for a Council Regulation as amended;

2.  Calls on the Commission to alter its proposal accordingly, pursuant to Article 293(2) of the Treaty on the Functioning of the European Union;

3.  Calls on the Council to notify Parliament if it intends to depart from the text approved by Parliament;

4.  Asks the Council to consult Parliament again if it intends to amend the proposal substantially;

5.  Instructs its President to forward its position to the Council, the Commission and the national parliaments.

Amendment  1 Proposal for a regulation Recital 1 a (new)
Text proposed by the Council	Amendment
	(1a) Long before the financial crisis, the European Parliament called regularly for the reinforcement of the true level playing field for all actors at the Union level while pointing out significant failures in the Union's supervision of ever more integrated financial markets (in its resolutions of 13 April 2000 on the Commission communication on implementing the framework for financial markets: Action Plan1, of 25 November 2002 on prudential supervision rules in the European Union2, of 11 July 2007 on financial services policy (2005-2010) – White Paper3, of 23 September 2008 with recommendations to the Commission on hedge funds and private equity4, of 9 October 2008 with recommendations to the Commission on Lamfalussy follow-up: future structure of supervision5, of 22 April 2009 on the amended proposal for a directive of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II)6 and of 23 April 2009 on the proposal for a regulation of the European parliament and of the Council on Credit Rating Agencies7).
	___________ 1 OJ C 40, 7.2.2001, p. 453. 2 OJ C 25 E, 29.1.2004, p. 394. 3 OJ C 175 E, 10.7.2008, p. xx. 4 OJ C 8 E, 14.1.2010, p. 26. 5 OJ C 9 E, 15.1.2010, p. 48. 6 Texts adopted, P6_TA(2009)0251. 7 Texts adopted, P6_TA(2009)0279.
Amendment  2 Proposal for a regulation Recital 8 a
Text proposed by the Council	Amendment
(8a) The measures for the collection of information set out in this Regulation are necessary for the performance of the tasks of the ESRB and should be without prejudice to the legal framework of the European Statistical System (ESS) and the European System of Central Banks (ESCB) in the field of statistics. This Regulation should therefore be without prejudice to Regulation EC no 223/2009 of the European Parliament and of the Council of 11 March 2009 on European statistics and to Council Regulation EC No 2533/98 of 23 November 1998 concerning the collection of statistical information by the European Central Bank.	(8a) The ECB should be entrusted with the task of providing statistical support to the ESRB. The collection and processing of information as set out in this Regulation and as necessary for the performance of the tasks of the ESRB should therefore benefit under Article 5 of the Statute of the European System of Central Banks (ESCB) and of the ECB and under Council Regulation (EC) No 2533/98 of 23 November 1998 concerning the collection of statistical information by the European Central Bank1. Accordingly, confidential statistical information collected by the ECB or the ESCB should be shared with the ESRB.
	______ 1 OJ L 318, 27.11.1998, p. 8.
Amendment  3 Proposal for a regulation Article 1 – paragraph 1 a (new)
Text proposed by the Council	Amendment
	1a. The Chair of the ESRB shall be the President of the ECB. His or her term of office shall be the same as his or her term of office as President of the ECB.
Amendment  4 Proposal for a regulation Article 1 – paragraph 1 b (new)
Text proposed by the Council	Amendment
	1b. The first Vice-Chair shall be elected by the members of the General Council of the ECB for the same term as that of his or her membership of the General Council, with regard to the need for a balanced representation of Member States, and those within and outside the euro area. He or she may be re-elected.
Amendment  5 Proposal for a regulation Article 1 – paragraph 1 c (new)
Text proposed by the Council	Amendment
	1c. The second Vice-Chair shall be the Chair of the Joint Committee of European Supervisory Authorities (Joint Committee) established by Article 40 of Regulation (EU) No .../2010 [ESMA], of Regulation (EU) No …/2010 [EIOPA] and of Regulation (EU) No …/2010 [EBA] (the "Joint Committee").
Amendment  6 Proposal for a regulation Article 1 – paragraph 1 d (new)
Text proposed by the Council	Amendment
	1d. Before taking office, the Chair and the first Vice-Chair shall present to the European Parliament, during a public hearing, how they intend to discharge their duties under this Regulation. The second Vice-Chair shall be heard by the European Parliament in his or her role as Chair of the Joint Committee.
Amendment  7 Proposal for a regulation Article 1 – paragraph 1 e (new)
Text proposed by the Council	Amendment
	1e. The Chair shall preside at the meetings of the General Board and the Steering Committee.
Amendment  8 Proposal for a regulation Article 1 – paragraph 1 f (new)
Text proposed by the Council	Amendment
	1f. The Vice-Chairs, in order of precedence, shall preside at the General Board and the Steering Committee when the Chair cannot participate in a meeting.
Amendment  9 Proposal for a regulation Article 1 – paragraph 1 g (new)
Text proposed by the Council	Amendment
	1g. If the Vice-Chairs are unable to discharge their duties, new Vice-Chairs shall be elected in accordance with paragraphs 1b and 1c.
Amendment  10 Proposal for a regulation Article 1 – paragraph 1 h (new)
Text proposed by the Council	Amendment
	1h. The Chair shall represent the ESRB externally.
Amendment  11 Proposal for a regulation Article 1 – paragraph 1 i (new)
Text proposed by the Council	Amendment
	1i. The Chair shall be invited to an annual hearing in the European Parliament marking the publication of the annual report of the ESRB, which shall take place in a different context from the monetary dialogue between the European Parliament and the President of the ECB.
Amendment  12 Proposal for a regulation Article 2 – introductory part
Text proposed by the Council	Amendment
The European Central Bank shall ensure a Secretariat, and thereby provide analytical, statistical, logistical and administrative support to the ESRB. The mission of the Secretariat as defined in Article 4(4) of Regulation XXXX, shall include in particular:	The ECB shall ensure a Secretariat, and thereby provide analytical, statistical, logistical and administrative support to the ESRB. It shall also draw technical advice from the European Supervisory Authorities, national central banks and national supervisors. It shall also be responsible for all staff matters. The tasks of the Secretariat referred to in Article 4(4) of Regulation (EU) No .../2010 [ESRB] shall include in particular:
Amendment  13 Proposal for a regulation Article 2 – point e
Text proposed by the Council	Amendment
(e) the support to the work of the General Board, the Steering Committee and the Advisory Technical Committee.	(e) the support to the work of the General Board, the Steering Committee and the Advisory Scientific Committee.
Amendment  14 Proposal for a regulation Article 2 – point e a (new)
Text proposed by the Council	Amendment
	(ea) the supply of information to the European Supervisory Authorities when required.
Amendment  15 Proposal for a regulation Article 3 – paragraph 1
Text proposed by the Council	Amendment
1. The ECB shall ensure sufficient, human and financial resources for the fulfilment of its task of ensuring the Secretariat.	1. The ECB shall ensure sufficient, human and financial resources for the fulfilment of the tasks of the Secretariat, ensuring high-quality staff broadly reflecting the broad scope of the ESRB and the composition of the General Board. The ECB shall ensure a fair financing of the Secretariat from its own resources.
Amendment  16 Proposal for a regulation Article 3 – paragraph 2
Text proposed by the Council	Amendment
(2) The Head of the Secretariat shall be appointed by the ECB, in consultation with the General Board of the ESRB.	(2) The Head of the Secretariat shall be appointed by the ECB, on a proposal by the General Board of the ESRB.
Amendment  17 Proposal for a regulation Article 3 – paragraph 2 a (new)
Text proposed by the Council	Amendment
	2a. All members of the Secretariat shall be required not to disclose information covered by professional secrecy, even after their duties have ceased, in accordance with Article 8 of Regulation (EU) No …/2010 [ESRB] to ensure the aim of Article 6 of this Regulation.
Amendment  18 Proposal for a regulation Article 4 – paragraph 2
Text proposed by the Council	Amendment
2. The Head of the Secretariat or its representative shall attend the meetings of the General Board, the Steering Committee and the Advisory Technical Committee of the ESRB.	2. The Head of the Secretariat or its representative shall attend the meetings of the General Board, the Steering Committee and the Advisory Scientific Committee of the ESRB.
Amendment  19 Proposal for a regulation Article 5 – paragraph 2 a (new)
Text proposed by the Council	Amendment
	2a. The Secretariat may request information, in individual, summary or collective form, relating to financial institutions or markets relevant for the tasks of the ESRB from the European Supervisory Authorities and, in the cases specified in Article 15 of Regulation (EU) No …/2010 [ESRB], the national supervisory authorities, the national central banks, other authorities of the Member States or, on the basis of a reasoned request, directly from the financial institutions.
Amendment  20 Proposal for a regulation Article 5 – paragraph 2 b (new)
Text proposed by the Council	Amendment
	2b. Information under paragraph 2 may include data relating to the European Economic Area, the Union or the euro area, or national aggregated and individual data. National data shall be collected only on a reasoned request. Before a request for data is made, the Secretariat shall first take account of the existing statistics produced, disseminated and developed by both the European Statistical System and the ESCB and then consult the relevant European Supervisory Authority, in order to ensure that the request is proportionate.
Amendment  21 Proposal for a regulation Article 7
Text proposed by the Council	Amendment
The Council shall examine this Regulation three years after the date set out in Article 8, on the basis of a report from the Commission and shall determine whether the present Regulation needs to be reviewed after having received an opinion from the ECB and from the European Supervisory Authorities.	The European Parliament and the Council shall, by ...*, examine this Regulation on the basis of a report from the Commission and shall determine whether the objectives and organisation of the ESRB need to be reviewed after having received an opinion from the ECB.
	The report shall assess, in particular, whether:
	(a) it is appropriate to simplify and reinforce the architecture of the European System of Financial Supervision (ESFS) in order to increase the coherence between the macro and the micro levels as well as between the European Supervisory Authorities;
	(b) it is appropriate to increase the regulatory powers of the European Supervisory Authorities;
	(c) the evolution of the ESFS is consistent with that of the global developments in this area;
	(d) there is sufficient diversity and excellence within the ESFS;
	(e) accountability and transparency in relation to publication requirements are adequate.
	______ * Three years after the entry into force of this Regulation.
Justification

EXPLANATORY STATEMENT

The European Union (EU) is establishing a framework for safeguarding financial stability. An integrated EU financial market, dominated by large pan European groups in most EU countries, cannot work properly if the supervision remains fragmented at the national level. The EU needs a new financial architecture with an integrated micro prudential supervision, including a transfer of competence to the EU. In addition, European macro surveillance could have detected that unsustainable credit growth, real state bubbles and large current accounts deficits would have created some risks for macroeconomic and financial stability. Europe needs urgently to develop expertise in macro prudential supervision to detect systemic risks, in other words, to identify financial stability risk at the European level, where necessary issue warnings and ensure the follow up.

Even if further financial crisis are unavoidable, the social and economic effects should be less harmful in the future, as it happened with the current crisis in comparison to the real effects of the Great Depression. Europe needs a legislative and institutional framework to resolve the insolvency of systemic important financial institutions. A new macro-prudential supervisor, the European Systemic Risk Board (ESRB), and a new micro-prudential supervision, the European System of Financial supervisions (ESFS), will be created. And its efficiency is carried by the ECB's prestige since the new ESRB will not be able to impose measures or sanctions on member states or financial institutions, and its warnings will not binding. Their effectiveness depends on the high reputation of the European Central Bank (ECB) and the recognized expertise of its staff. The role of the ECB will be essential in the European macro-supervision.

In the last years a monetary policy of very low interest rates has nourished bubbles in physical and financial assets, which in bursting have provoked the crisis that we are now suffering. The ultimate aim of the supervisory architecture is to avoid such dramatic situations in the future, ensure financial stability and protect the consumers. Prevention or mitigation of systemic risks, distress or failure of a significant part of the financial sector, will reduce the effects on the real economy and European citizens of further crisis.

In the two last decades the European monetary policy has been effective regarding the inflation's control. The clear visualization of the goal "stability of prices" (a clear objective of 2% of annual inflation, for example) was also associated with a clear and powerful instrument of the monetary policy, the interest rate. In this sense, the free trade expansion and the generalization of global production networks all over the world during the past twenty years, with its deflationary pressure, has been contributing also to price moderation in developed countries.

As a matter of fact, it could be argued that the interest rates have been artificially low for years in comparison to the market interest rates that would have gauged freely the offer of credits and the demand of investment. This fact could have been one of the main causes of the current crisis: they would have distorted the expectations of the economic agents, until the point of inviting them to an excessive indebtedness to fund consumption and investment also excessive. But in any case there is a quite large consensus about the efficiency of the monetary policy as already mentioned.

However, the economic globalization, especially intense regarding the capital movements, has deeply modified the financial markets. Central banks kept their traditional goal, the control of the inflation, and for such purpose they used the interest rate. But the freedom of capital movements has reinforced extraordinarily the link between the monetary and the financial sector. This new situation increasingly forced central banks to incorporate a new goal into their agenda: the stabilization of financial markets.

The simultaneously achievement of both goals (stability of prices and stability of financial markets) is impossible only with one instrument, the interest rate, no matter how powerful this tool can be. The interest rate has been efficient to control inflation, but it has not been useful to avoid the credit expansion and the real state bubbles in several countries.

There is a need for a new instrument and there is a large consensus has been developed during the last two years that this tool should be: EU-wide regulation and supervision of the banking and financial systems. Even though the financial regulation existed for many years, this has been inappropriate and insufficient in the new globalised world. As a matter of fact, supervisions and regulation is the only great competence that the national central banks reserved to themselves nation-wide after the creation of the Euro. Thus, today the need and the convenience to improve the regulation with a European dimension are ascertained.

The president of the European Central Bank, in a lecture in Singapore in 2005[1], was asked on the bubbles generation in the prices of physical or financial assets. He answered that a bubble can be detected when, for example, a type of credit or the price of some assets starts to deviate significantly from its historical trend, and he expressed himself in favour of using the rise of interest rate to break the creation of the bubble. The consequent cost is translated into an incentive of insurances that stops worse scenarios. This measure seems reasonable but given the experience from the recent financial crisis it seems less suitable: the financial system can adapt to the variation of interest rates changing, for instance, the conditions of the contracts of credit (for the mortgage credits their period of amortisation can be extended).

In these circumstances, the modification of the interest rate has little effect in deflating the bubbles: if interest rates are not raised significantly, in which case the economy as a whole would be damaged, still artificially low interest rates would continue nourishing the bubbles that would subsist. It is in this sense that a better supervision is necessary. The system of dynamic provisions of the Bank of Spain, for example, did not avoid the generation of one huge bubble in real estate in Spain: the amount of the accumulated debt from the real estate promoters with the Spanish banking is equivalent to a 30% of the 2009 Spanish GDP (325.000 million €).

The necessary improvements in the financial regulation and supervision are in the basis of the debate of all the new financial architecture that the European institutions are constructing and of which this report is a minor part. The control of the degree of leverage would seem a suitable measure for the too big to fail institutions: a smaller level of leverage incentivises them to consider if they want to preserve their size, or to divide into smaller entities adjusted to the traditional activities of the commercial banking.

The degree of leverage, therefore, forces to reduce the degree of leverage to the credit entities: either to reduce the credit that will be destined to the housing sector or to increase their capital base to enable to assume the excess of losses with burst the bubble. National supervisors did not manage to stop the accumulation of risks in several national systems.

In the different proposals made on how to regulate the financial markets, there are two common elements: on the one hand, it would be necessary to reduce the high degree of leverage, that is, to reduce the ratio total assets / capital; and on the other hand, it would be necessary to increase the capital requirements of the financial entities. This is essential in order to have a suitable capital basis, to face the possible losses that might be generated in the future financial crises. We should bear in mind that the main function of the financial system is to channel saving towards investment. In this process it is impossible to stop the financial entities from assuming risks: and even if now the risks are subjected to a better supervision, the possibility of new speculative bubbles will not disappear.

In the concrete case of banking, as long as the businesses of commercial and investment loans are mixed, the big banks will be led to risk their capital in the purchase and sale of financial assets, instead of backing up the real economy converting the deposits picked up into credits to families and companies. As a matter of fact, banks do not have any duty to act in any another way.

For this reason the new regulation needs flexibility to be able to reduce leverage if alarming signs are detected. Some orange or red light, for example, should have appeared in the first years of period 1996-2006, when in Spain the credit expansion lead to a very high increase: during ten years credit grew in a rhythm of the 20% annual. In this case it would have been necessary to act against the financial entities (big or small) who exposed themselves more to the mortgage loan limiting their leverage limit.

On the other hand, the monitoring of the financial sector at a European level is the key issue for the effectiveness of good regulatory policies, taking into account the failure of the national minded analysis of several crisis indicators. As the President of the ECB stated in November 2008 in the 5th ECB Central Banking Conference: “(…) there were warning signs, even back in 2006, that global markets were “priced for perfection” and that even a small change in conditions could severely disrupt financial markets. (…) We knew that a storm was brewing but, admittedly, we did not know exactly where. Neither did we know what would trigger it, or when it would come.[2]”

In that sense, the ideas that the Larosière report launched, a lot of them included in the supervisory package today in discussion, will enable a competent policy for regulation and supervision of financial markets. The core of its success will be the interconnection between the micro and macro supervision, and the fluid information between the two levels. In this way, the Secretariat of the ESRB will have a major role in ensuring the efficient and fast exchange of data between the different actors involved, always strictly guaranteeing the confidentiality needed. As conceived from the beginning, the Micro-Supervisory Authorities and the ESRB are a unit and shall work closely together. With the new architecture the EU should be able to hear the thunders before the storm, and react in the due time.

• [1]  "Asset price bubbles and monetary policy"
  Speech by Jean-Claude Trichet, President of the ECB, Mas lecture, 8 June 2005, Singapore.
  http://www.ecb.int/press/key/date/2005/html/sp050608.en.html
• [2]  "Undervalued risk and uncertainty: Some thoughts on the market turmoil"
  Speech by Jean-Claude Trichet, President of the ECB at the Fifth ECB Central Banking Conference, Frankfurt am Main, 13 November 2008
  http://www.ecb.int/press/key/date/2008/html/sp081113_1.en.html

PROCEDURE

Title	Specific tasks for the European Central Bank concerning the functioning of the European Systemic Risk Board
References	05551/2010 – C7-0014/2010 – COM(2009)0500 – 2009/0141(CNS)
Date of consulting Parliament	2.2.2010
Committee responsible        Date announced in plenary	ECON 8.2.2010
Rapporteur(s)        Date appointed	Ramon Tremosa i Balcells 20.10.2009
Discussed in committee	23.11.2009		23.2.2010		23.3.2010		27.4.2010
Date adopted	10.5.2010
Result of final vote	+: –: 0:	33 3 0
Members present for the final vote	Burkhard Balz, Sharon Bowles, Udo Bullmann, Pascal Canfin, Nikolaos Chountis, George Sabin Cutaş, Leonardo Domenici, Derk Jan Eppink, Diogo Feio, Vicky Ford, José Manuel García-Margallo y Marfil, Jean-Paul Gauzès, Sven Giegold, Sylvie Goulard, Othmar Karas, Astrid Lulling, Arlene McCarthy, Ivari Padar, Antolín Sánchez Presedo, Olle Schmidt, Edward Scicluna, Peter Simon, Peter Skinner, Theodor Dumitru Stolojan, Ramon Tremosa i Balcells
Substitute(s) present for the final vote	Pervenche Berès, Carl Haglund, Syed Kamall, Philippe Lamberts, Catherine Stihler, Pablo Zalba Bidegain
Substitute(s) under Rule 187(2) present for the final vote	Andrea Cozzolino, Michel Dantin, Frank Engel, Christa Klaß, Elisabeth Morin-Chartier
Date tabled	21.5.2010