French lessons for the FSA

8 December 2009 | By John Murray

True, fellow Frenchman Nicolas Zarkozy used the occasion to declare that unfettered City practices must end and added that he wanted to see the victory of the European model which had nothing to do with the excess of capitalism.

It was a bit in your face as far as Alistair Darling and the City were concerned but that’s the way things are going anyway.

For a start we’ve a chairman of the Financial Services Authority who has raised question marks about the size of the City and on Sunday ever vocal Vince Cable told the BBC that the banking sector might be getting too big for the UK economy (perhaps he was thinking of the Icelandic model?) .

Meanwhile, behind the scenes the bureaucrats of Brussels have been busy executing a U-turn from the position of just a few years ago. Back then the perceived wisdom was that the UK had the most innovative mortgage market in Europe and that there was the potential for a UK-style £500bn non-conforming mortgage market across the European Community.

How things have changed. Take for example the meeting on November 10 of the European Parliament Committee on the Issues of the Economic Crisis.

It was called to explore the causes and consequences of the financial crisis which, according to invited expert Paul Jorion, was down to the securitisation process which he considered deeply flawed and one that could not be remedied by improved supervision. Jorion, for the record, is an anthropologist and economist and the author of Vers la crise du capitalisme américain? For those of us who have yet to brush up on our French this can be translated as Towards the American Capitalism Crisis?

To be fair, another expert, Verena Ross of the FSA, didn’t damn securitisation quite in the same way as Jorion, though it was on her agenda too.

CRIS will continue its hearings and plans to produce an interim report in six months time and a final report in October next year but as indicator of what that might contain Jőrgen Holmquist, EC director general of internal market and services, said that the European Parliament, the Council and the Commission realised that supervision and regulation needed be more rather than less.

That is as maybe. In the meantime, the House of Lords EU Committee has written to Lord Myners, the financial services secretary, expressing its concerns with EC proposals for the reform of financial supervision in the EU.

Under the current proposals the European Supervisory Authorities will have the power to directly apply a decision to an individual institution if the national supervisory authority has failed to implement it.

Thus  if  the ESA reaches decisions  by qualified majority voting this could lead to decisions being applied to UK financial institutions with the FSA being powerless to veto them. As the good lords point out, that goes against the principle that day-to-day supervision should be the responsibility of the national supervisor.

The lords are also worried about the creation of a European Systematic Risk Board and in particular that it could put pressure on individual member states to conform to its own fiscal and economic policies, rather than their own.

The other worry is that with 61 members on its board it won’t be able to make effective decisions in a crisis, though perhaps naively, the lords expect that the UK, as the largest financial centre in the EU, will have permanent representation on the steering committee. No doubt the French will have something to say about that.