This week the European Parliament and Council negotiators have agreed a package of plans to boost the regulatory community’s control of the financial markets, in line with some of the changes going on in the US. One of these has been to plan for the establishment of the European Systemic Risk Board (ESRB) by January next year. But, given its remit to more closely monitor risk across markets in a similar vein to the Office of Financial Research across the pond, will this endeavour involve the establishment of a European-based reference data utility?
The package of reforms passed this week grants new powers to the ESRB and the incoming EU supervisory authorities (ESAs) with a view to enabling these pan-European level bodies to supervise cross border financial institutions in a more joined up manner. They will also be given the authority to police the national regulators themselves by checking they are meeting their obligations required under EU legislation and thus provide a cohesive European financial supervisory framework (thus rectifying the lack of harmonisation when it comes to implementing European directives – see MiFID for a prime example).
A large part of this endeavour will be focused on monitoring systemic risk across the European markets and this is where the ESRB comes into play. European Internal Market Commissioner Michel Barnier reckons the new agencies will act as the “control tower and the radar screens needed to identify risks, the tools to better control financial players and the means to act quickly, in a coordinated way, in a timely fashion”, provided the deal is ratified by the European Parliament next week.
But if it is approved on 7 September, what then? The ESRB has been charged with developing a common set of indicators to permit uniform ratings of the riskiness of specific cross border financial institutions and making it easier to identify the types of risks they carry. It will also be responsible for establishing colour coded grades to reflect different risk levels to be used when making warnings or recommendations about tackling systemic risk. However, in order to be able to function in this manner, surely there is some requirement for uniform data on which to base this analysis?
Although the European Parliament has not yet publically discussed it, a data utility in the vein of the Office of Financial Research may be on the cards. Given that the European political community is keen to keep in line with developments in the US and individuals at the European Central Bank (ECB) have championed the idea, then surely it is time for a serious discussion at a European level on the subject?
Of course, it is very early days yet for the Office of Financial Research in the US (its new head is yet to be appointed for a start) and its success is far from guaranteed. But the practicalities of how to monitor systemic risk across an industry that has a plethora of different and often proprietary entity identifiers is an important point for discussion. Whether the regulatory community opts for a US style utility approach, or a more commercially driven endeavour, the discussion needs to happen publically and soon, if the politicians have a hope of ensuring these new bodies can function effectively when they are established in January.