Saturday, May 30, 2009

Now Europe wants its own Risk Council too! What is needed is a Global Systemic Risk Council....

Following the two-tier approach suggested by Jacques de Larosiere, The European Commission has now come out in favour of the creation of the following bodies:

1) European Systematic Risk Council (ESRC), whose job will be to monitor and assess risks to the stability of the financial system as a whole and provide an early warning system; and

2) European System of Financial Supervisors (ESFS), whose job will be to supervise individual financial institutions (where Europe's national financial supervisors will work in co-ordination with new European supervisory authorities).

Naturally, several countries (notably the UK) are not happy about losing authority to non-national bodies. But this is to be sentimentally attached to the past: Britain could foreseeably continue to go it alone in many areas, but surely supervision is one area where it should see that national supervision makes no sense where the bodies being supervised are supra-national.

The proposal is that the President of the European Central Bank would be the Chairman of the Risk Council, which would include financial supervisors and central bank representatives from each EU country.

This is not a proposal wholly without merit, since it would bring together all the regulators, supervisors and central bank representatives.

However, is the cure suited to the disease? Is it not precisely these regulators, supervisors and central banks whose failure contributed to the current crisis? If you cry "Foul!" to that last question on the grounds that the charge is excessive, pleading that the current crisis was not caused in Europe, you might want to consider that creating such a European Council would do nothing to prevent future crises originating in other parts of the world.

Consider also that the Asian crisis, only 20 years ago, did not originate in either America or Europe.

It does not make sense to try to keep an eye on a global industry by means of national or regional Risk Councils. Clearly, what is needed is a Global Systemic Risk Council. Moreover, in order to prevent "group think", it is essential for this to be a statutory body, consisting of say seven independent experts (not necessarily retired central bankers and suchlike), appointed to a maximum of a 7-year term, with one of the seven retiring each year and being replaced by a new person appointed for 7 years. This Global Council should have the power to summon not only regulators, supervisors and central bank governors, but anyone else they think relevant, and the Council should be obliged to accept submissions by anyone (for example academics and consultants) who has anything to say on the subject. Further, the Global Council would be obliged to issue, every week (or, at most, every month), a Global Risk Indicator of global risks as well as of regional and of sectoral risks.

Such a Global Council would of course instantly make all National or Regional Risk Councils unnecessary, but leave national authorities in place. While meeting the objections, for example of the UK, a Global Council would be both cheaper and more efficient than national or regional councils. Sphere: Related Content

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