Business

EU: central banks to pick new watchdog head

By Aoife White
Associated Press
Published: June 19, 2009

BRUSSELS (AP) — The European Union's 27 central banks will choose the head of the region's new economy watchdog, member states said Friday — avoiding a row with Britain, which had opposed letting the European Central Bank chief take the key role in monitoring threats to EU economies.

In a statement, EU leaders also warned governments to stay alert to new moves to shore up the financial sector because banks are still coping with a "challenging" trading climate where credit flows are constrained.

But they said economic stimulus measures by governments and central banks are working by cushioning the worst effects of the downturn and helping to safeguard jobs. They said these paved the way toward "a sustainable economic recovery" and that no new stimulus is needed right now.

The leaders approved an overhaul to the EU's financial oversight that aims to prevent a repeat of the crisis that has dragged their economies into the worst downturn since the Second World War.

French President Nicolas Sarkozy said the EU had made "spectacular progress" in tightening regulation." He said this was essential or Europe could be "accused of falling behind the Americans and not meeting" commitments made at an April summit between the G-20 group of the world's leading economies.

The EU will now set up a European Systemic Risk Board to give early warning of threats to financial stability, such as the wave of securitized — or repackaged — debt that has helped punch huge holes in banks' balance sheets.

EU nations scrapped a plan for this to be automatically led by the European Central Bank's president, saying its leader should be elected by the governors of all the EU's 27 central banks.

This soothes British fears that the euro-zone's central bank would take charge of warning — and ordering — national governments outside the euro to take action over economic problems. Britain is one of the 11 EU countries that doesn't use the euro.

Leaders also backed plans for three new financial oversight agencies to watch over banks, insurers and financial markets, saying they should have "binding" powers to overrule national regulators when they can't agree on supervising the 40 or so major crossborder banks that operate across several nations.

But leaders failed to agree how countries would bail out such a bank, bowing once again to Britain by saying the EU agencies should not force countries to rescue banks with taxpayers' money.

The EU's executive commission will have to iron out this apparent contradiction when it proposes a law to set up the agencies later this year.

This could make the EU agencies only able to warn different national regulators about banks that lend heavily without holding capital to cover possible losses — but unable to force them to act.

That's a situation British regulators were faced in recent years when they sounded alarms about low capital reserves at local branches of Icelandic banks — but could not demand action from Iceland's banking authority.

Better oversight is urgent as banks write down huge losses from bad loans. The European Central Bank says banks in the 16 nations that use the euro could lose $649 billion as a result of the financial crisis by the end of 2010.