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Cablegate: Eu Financial Regulatory Reform: Chief Regulator Has

VZCZCXRO4050
PP RUEHIK
DE RUEHFT #3013/01 3241255
ZNR UUUUU ZZH
P 201255Z NOV 09
FM AMCONSUL FRANKFURT
TO RUEHC/SECSTATE WASHDC PRIORITY 2465
RUEHRL/AMEMBASSY BERLIN 1192
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCNFRG/FRG COLLECTIVE

UNCLAS SECTION 01 OF 02 FRANKFURT 003013

SENSITIVE

STATE FOR EEB (NELSON, HASTINGS), EEB/IFD/OMA (WHITTINGTON), EUR/CE
(HODGES, SCHROEDER)
TREASURY FOR ICN (KOHLER), IMB (MURDEN, BAKER) AND OASIA

SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON GM

SUBJECT: EU FINANCIAL REGULATORY REFORM: CHIEF REGULATOR HAS
CONCERNS ABOUT THE LOSS OF NATIONAL AUTHORITY

REF: A)BRUSSELS 0290
B)BRUSSELS 1393

FRANKFURT 00003013 001.2 OF 002


1. (SBU) Summary: A recent conversation between Consulate
Representatives and Joachim Sanio, the President of the German
Federal Financial Supervisory Authority (BaFin), revealed concerns
over strong French influence in the new EU financial regulatory
agencies currently being created. Sanio commented on the short
window of opportunity for EU regulatory reform, which explained the
pace and legal means by which the EU Commission acted. Sanio also
believes that the EU Commission will gain power over financial
regulation at the expense of national regulators. END SUMMARY.


Background: Overview of EU Financial Regulatory Reforms
--------------------------------------------- ----------
2. (U) In February 2009, a high-level group chaired by the former
Banque de France Governor Jacques de Larosihre drafted a series of
proposals to strengthen the EU financial regulatory system in
response to a request from EU Commission President Barroso. The de
Larosiere Report became the foundation of a series of reforms
undertaken by the EU. By May, a "Communication" was adopted, with
draft legislation proposed on September 23, and further defining
legislation written by October 26. The EU Council and Parliament
currently are considering these proposals.



3. (U) Under the new legislation, a European Systemic Risk Board
(ESRB) will be established to detect risks in the financial system
as a whole. In addition, a European System of Financial Supervisors
(ESFS) composed of national supervisors will encourage cross-border
practices in financial supervision.

4. (U) The ESFS will consist of three new "European Supervisory
Authorities" that will replace the existing "Level 3 committees."
Like the current Level 3 committees, they will cover the following
areas: 1)banking ("the European Banking Authority" (EBA) replacing
CEBS), 2)securities ("the European Securities and Markets Authority"
(ESMA) replacing CESR); and 3)insurance and occupational pensions
("the European Insurance and Occupational Pensions Authority"
(EIOPA) replacing CEIOPS). The objective of these "Authorities" is
to: 1)coordinate the work of national supervisors; 2)arbitrate in
the case of cross-border disagreements; 3)harmonize national
regulatory rules; and 4)directly supervise certain pan-European
institutions which are regulated at the EU level, such as Credit
Rating Agencies.

Remarkable Speed Results in "A Legal Coup d'etat"
--------------------------------------------- ----
5. (SBU) The financial crisis, according to Sanio, has opened a
unique window of opportunity for the EU financial reforms. Sanio
believes that the speed has been driven by French interests, which
were at the heart of the original proposal. There is also a uniquely
pro-European constellation in favor of reforms in the EU Commission
and the British government. (Sanio believes this window will close
in May 2010, the latest date that Gordon Brown has to call a new
election.)

6. (SBU) The remarkable pace with which the EU Commission has pushed
through the reforms, amounts in Sanio's opinion to a legal "coup
d'etat." In order to put the new regime in place as soon as
possible, Sanio posited, the Commission drafted it as "regulations"
instead of as "directives," since regulations have a more general
scope and do not require each nation to pass implementing
legislation. Sanio considers this move "a form of procedural abuse"
which circumvents national legislatures. He also thinks that
without this "unprecedented legislative maneuver" the EU would not
have been able to accomplish the reforms prior to the UK election
and a "unique opportunity" for the Commission would have been lost.

Sanio Questions the Legal Authority of the New Agencies
--------------------------------------------- ----------
7. (SBU) For Sanio, the new EU regulatory architecture raises a
number of legal points. Sanio pointed out that in the Meroni Case
(1958), the European Court of Justice (ECJ) set out a number of
rules and conditions that have to be met before an EU institution
can delegate its powers to bodies not mentioned in EU Treaties. The
Court ruled that a treaty body can only delegate clearly defined,
i.e. non-discretionary powers, and must remain able to review the

FRANKFURT 00003013 002.2 OF 002


exercise of these powers.

8. (SBU) Based on the Meroni ruling, Sanio believes that the new
"European Supervisory Authorities" (ESAs) can only be
sub-organizations ("secondary institutions") of the Commission with
powers delegated to them by the Commission. "It's very clearly a
power game," said Sanio. "What the Commission de facto does is to
reel in for itself the entire financial supervision. It will fully
dominate European financial supervision, since all decisions will in
the end have to be approved by the Commission."


Power Lost by the National Authorities
--------------------------------------
9. (SBU) Sanio believes that as the EU Commission gains power over
financial regulation and supervision, the national regulators will
lose it. The EU Commission "will have its foot in the door," and
regardless of the amount of power maintained by national
institutions, the EU Commission will always "remain a player at the
table."

10. (SBU) Sanio also views the EU Commission's offer to pay for the
new regulatory bodies with skepticism. Several Eastern European
members have welcomed this offer, particularly Poland and Lithuania,
according to Sanio, who currently find it difficult to pay their
share. Sanio and his organization, BaFin, by contrast would like to
increase the direct payment by States to these agencies, because
under EU law, that would strengthen the power of the national
regulators. "We even somewhat in jest proposed at one point to pay
the Polish share if they would give us their 27 votes in return."
However, Sanio thinks that Germany will not be able to sustain its
position.


Winners and Losers of EU Regulatory Reform
------------------------------------------
11. (SBU) Key beneficiaries of the reforms, Sanio said, will be the
French, who have been the core advocates and the motor driving the
reforms. The specific interest of the French, apart from
strengthening their overall influence over EU regulation through the
Commission, is to establish the European Securities and Markets
Authority (ESMA) in Paris. This would significantly strengthen
Paris as a financial center at the expense of London and Frankfurt.
While Frankfurt hosts the European Central Bank (ECB) and will
likely continue to house the newly-formed EIOPA (currently CEIOPS),
Sanio believes that hosting the supervisory agency for capital
markets and securities will give Paris more influence. "The ECB
might be more powerful and more prestigious, but in terms of
economic value and political influence on financial market
developments, ESMA clearly is the better prize." said Sanio.

12. (SBU) The British, by contrast, are the ones that have the most
to lose, according to Sanio. While for Germany financial
supervision is an "abstract issue," for the UK, strong European
financial supervision with operative powers over securities in
French hands, poses an "incalculable risk" and a serious economic
threat. Currently, the financial center London, Sanio stated, is
"underregulated." With its manufacturing sector being "practically
dead," Britain is economically dependent on maintaining the
competitive advantage of its financial sector through "light touch
regulation."


13. (SBU) Comment: Sanio's comments regarding the French influence
on the new EU Financial Regulatory architecture appear consistent
with general sentiment in Germany. The October 30 announcement by
France that it would like Michel Barnier, French Minister for
Agriculture and Fisheries, to become the "Internal Market and
Services Commissioner" (replacing McCreevy from Ireland) has
reinforced this German view. In that position, Barnier would
oversee EU banking legislation and be able to influence the shape of
the new EU regulatory instruments.


14. (U) This cable has been coordinated with Consulate Duesseldorf
and Embassy Berlin.


ALFORD

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