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EU financial system still weighed down by risk

The risk burden still threatens Europe’s financial stability, and the crisis aftermath will last many years, the two vice chairs of the EU’s new financial risk watchdog warned the Economic and Monetary Affairs Committee on 2 May.

Mervyn King and Andrea Enria repeatedly called for the EP’s support when pushing through difficult reforms, particularly in better times when the financial sector would lobby fiercely against regulation.

Mervyn King, the first Vice Chair of the European Systemic Risk Board (ESRB) and Governor of the Bank of England, assured MEPs that the ESRB would not “shy away from making all the warnings and recommendations it considered necessary”.  Andrea Enria, also an ESRB Vice Chair and head of the European Banking Authority, said that one of the ESRB’s most pressing tasks would be to tackle the “shadow” banking sector, whose activities escape the rules applying to normal banks.

Political support vital
Asked whether he had the human and financial resources he needed, King insisted that generating the necessary political will would prove the biggest challenge. “The right judgements will be dependent on the existence of will and determination. At times, the ESRB is going to have to take very unpopular decisions and face an immense lobby.  We count on the EP to support us in those days” he said.

Stress tests – before and after
MEPs quizzed King on banking “stress tests”, the next crucial round of which is just a month away. King stressed that national authorities must put plans in place to tackle problems revealed by stress tests, without waiting for results to show which banks failed them. He also warned that even a bank that passes the tests should not automatically consider itself “safe”. 

Enria said that remedial action should be taken within six months of the stress tests, after which the European Banking Authority “would use all instruments available to make sure such action is taken”, should national authorities decline to co-operate.

On the banks’ share of national economies, King said that it was crucial that banking systems should never become as big as they did in economies such as Ireland and Iceland. “This is the biggest problem yet to be solved”, he said.

The limits to supervision
Asked about the limits to controlling risk build-up, King admitted that there was a limit to what supervisors could achieve. “We must realise that the structure of banking matters as much as its supervision”, he said, adding that as long as the wrong incentives remained, problems would remain. Further legislation was therefore necessary, he added, again warning that this legislation, too, could be undermined if the financial industry lobby dominates the shaping of the rules.






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