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ESRB European Systemic Risk Board holds inaugural meeting

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The General Board of the European Systemic Risk Board (ESRB) held its inaugural meeting today at the European Central Bank (ECB) in Frankfurt am Main.

The meeting led to a number of decisions on the set-up and functioning of the Board:

  • The ESRB rules of procedure were established. They will be made available in the next days on the ESRB website and will be published in the Official Journal of the European Union in the course of February.
  • Mr Marek Belka, Governor of the Narodowy Bank Polski; Mr Mario Draghi, Governor of the Banca d’Italia; Mr Athanasios Orphanides, Governor of the Central Bank of Cyprus; Mr Axel Weber, President of the Deutsche Bundesbank; were elected members of the Steering Committee for three years.
  • Mr Stefan Ingves, Governor of the Sveriges Riksbank was elected Chair of the Advisory Technical Committee for three years.
  • Mandates for the Advisory Scientific Committee and the Advisory Technical Committee were adopted and will be published on the ESRB website.
  • The General Board decided to approve the procedures to select the members of the Advisory Scientific Committee and to publish a call for expressions of interest for membership of the Committee. The call will be posted on the ESRB website in the next days and will be published in the Official Journal of the European Union in early February. Candidates will have three weeks to apply after publication in the Official Journal.

The ESRB is an independent EU body responsible for the macro-prudential oversight of the financial system within the Union. The ESRB is located in Frankfurt am Main and its Secretariat is provided by the European Central Bank.

The Chair of the ESRB is the President of the European Central Bank, Mr Jean-Claude Trichet. The first Vice-Chair of the ESRB is Mr Mervyn King, Governor of the Bank of England. He was elected by the members of the General Council of the ECB on 16 December 2010 for five years. The second Vice-Chair of the ESRB will be the Chair of the Joint Committee of the European Supervisory Authorities.

The General Board consists of the following members with voting rights: the President and the Vice-President of the European Central Bank (ECB); the Governors of the national central banks of the EU Member States; one member of the European Commission; the Chairperson of the European Banking Authority (EBA); the Chairperson of the European Insurance and Occupational Pensions Authority (EIOPA); the Chairperson of the European Securities and Markets Authority (ESMA); the Chair and the two Vice-Chairs of the Advisory Scientific Committee (ASC); the Chair of the Advisory Technical Committee (ATC). The following members have no voting rights: one high-level representative per Member State of the competent national supervisory authorities; and the President of the Economic and Financial Committee (EFC).

The General Board plans to meet at least four times per year. The meeting schedule for 2011 as well as other information about the ESRB can be found at www.esrb.europa.eu.

The new 'super-watchdog' is designed to take an overview of Europe's financial system and highlight emerging problems for relevant authorities to act on. It has no formal enforcement powers.

 

"Will they say something about the hot issues of today? Do they want to do that or will it be too politically sensitive. If they don't, and just make some quiet recommendations, this will just become another irrelevant European institution,"

said Daniel Gros, director of the Brussels based Centre for European Policy Studies. If the ESRB is not satisfied, it has the option of going public with its fears and leaving the rest to the persuasive powers of financial markets. The watchdog brings together the continent's top central bankers, seating them on a 37-member board alongside the heads of banking, trading and insurance authorities and EU Economic and Monetary Affairs Commissioner Olli Rehn. While critics complain that without any teeth it will be too weak to force countries or authorities to adhere to its warnings, others say it may carry clout.

 

"Warnings by themselves are a sort of sanctions," said Nomura economist Laurent Bilke. "It's a little bit dangerous if we jump directly to warnings...if they come at the end of a process in which any other means of discussion have failed, then it's fine."

 

Sensitivities may also hamper its effectiveness, with politicians likely to argue a major warning could be a catalyst for a crisis.

 

"The key question is whether it can handle the problems that are relevant now, such as the sovereign debt crisis and whether bond holders can be forced to take losses without a new crisis following," Gros said.

 

ESRB warnings will be colour-coded to reflect the urgency of the threat. They will draw on information such as stress tests carried out by members such as the European Banking Authority and analysis of information already available. Other analysts said the ESRB is not doomed to irrelevancy.

 

"The power of influence of regulators can be very high," Deutsche Bank economist Gilles Moec said. "This may force decisions upon national governments that otherwise would never happen."

 

TRICHET KING

 

It has personnel that should command attention from financial markets. Europe's top two central bankers will head the new body: ECB President Jean-Claude Trichet and Bank of England Governor Mervyn King. It will be heavily dominated by the ECB in other areas, posing a potential reputational issue for the ECB which could in future be criticised for perceived regulatory failures as well as monetary policy ones. ECB policymakers will hold a majority on the board, one of the bank's division heads, Francesco Mazzaferro, leads the secretariat in charge of day-to-day running, while ECB staff will provide much of its information and analysis. There will be four meetings a year, all dovetailing with the ECB General Council meetings that include Europe's 27 central bank governors. Many issues are still to be ironed out, however. The working processes are yet to be finalised, the frequency and style of warnings remains largely unknown -- it doesn't even have a public phone number yet. The Austrian National Bank said in a statement Thursday's meeting will centre on personnel and administrative topics, but also include discussions of risks. The ESRB is likely to issue warnings about public debt as well as banks, potentially treading on the European Commission's toes. Some economists expect the ESRB is likely to have a low bar for warnings, reflecting the understandable nervousness about missing a crisis. However, with its bloated structure and political sensitivities it also looks set to be steady rather than a dynamic mover.

 

"I wouldn't expect them to write fiery missives every day," said RBS economist Richard Barwell. "It is likely to be a gradual approach going through the traffic light system from green to amber to red.

 

"With Trichet and King you have a lot of clout... The big question is how willing will they be to intervene and will the authorities follow their advice."

 

One key issue to avoid is increasing market nervousness in times of tension and to be taken seriously when the good times roll.

 

"Their impact in times of financial crisis or risk aversion may be dramatic on financial markets, whereas in the good times they may not be listened to," Nomura's Bilke said.

Following are comments by European Central Bank President Jean-Claude Trichet and Bank of England Governor Mervyn King after the inaugural meeting of the European Systemic Risk Board.

TRICHET

 

Asked if systemic risks have changed:

 

"We are living in a demanding period."

 

On authority of the ESRB:

 

"Where appropriate ... we can embark on public recommendations and warning."

 

"It will be a comply or explain concept that will be applied."

 

"Authority is not to be taken for granted, you have to gain it of course and I think it is the strong determination of all those who participate in the board to demonstrate and gain authority."

 

"It has been constructed to be a board with, I trust, a lot of authority, moral authority coming from the experience and the wisdom and the authority of all institutions concerned."

 

KING On ESRB:

 

"The purpose of today was to put in place the building blocks."

 

"There is no point jumping the gun. It is vital that the ESRB work with senior people all across Europe."

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