July 19, 2010 / 4:11 PM / 10 years ago

EU bank watchdog faces flak in its own stress test

LONDON (Reuters) - The body coordinating European Union health checks on banks is struggling with its own “stress test” of how it handles the politically-charged exercise and must hope new powers from next year make repeat checks easier.

The Committee of European Banking Supervisors (CEBS) was set up as an experimental consortium of national regulators in 2004 to make EU financial lawmaking faster, flexible and more consistently applied.

It is made up of representatives of central banks and supervisors from the 27 EU countries and is run by a secretariat based in London.

CEBS has no powers of its own and is an agency of the EU’s executive European Commission to advise Brussels on banking issues and issue non-binding guidelines on implementing the bloc’s financial rules.

It is run by a Dutch central bank official, Arnoud Vossen, and chaired by Bank of Italy Deputy Director General Giovanni Carosio.

The body has only 25 staff — 21 seconded from national regulators — which is tiny compared with the 3,500 people Britain’s Financial Services Authority employs in the same city.

No bankers were willing to speak publicly about a body that from next year will have powers to directly intervene in their company in specific situations.

“The secretariat is quite small so working groups depend on the quality of people national regulators put forward and this varies,” one banking industry official said.

A first set of guidelines on the management of operational risks on the trading floor was “incoherent,” bankers said.

CEBS has been welcomed for the way it consults with banks on guidelines which are generally of high technical standard.

But industry officials said the lack of sanctions means some guidelines such as on bank bonuses were applied inconsistently.


It has kept out of the public glare for much of its short existence but edged onto investor radar screens last year when it organised the first pan-EU stress test of banks.

It publishes the results of a second test on Friday but this time the exercise has generated extreme political heat for CEBS.

The United States intervened by calling on the EU to publish detailed results to calm investor jitters over bank exposures to euro zone sovereign debt woes.

This left CEBS caught in the headlights as the European Central Bank, EU finance ministers and the Commission battled above its head over what to test and publish.

This politicisation of a regulatory process has left markets unconvinced the exercise is stringent enough.

Investors also fear the test, based on CEBS’ largely unpublished guidelines, has not been applied to the same standard at each of the 91 banks in the exercise.

Experts say CEBS is only doing what its masters allow it to.

“Governments are not prepared to give them power so nothing will change, guidelines won’t be applied exactly in the same way,” said Graham Bishop, who has advised the EU on financial services legislation.

From January 2011 CEBS will be upgraded to a European Banking Authority and have binding powers to bring in line a national regulator that errs in applying rules and guidelines.

“The future European Banking Authority is taken seriously,” a banking official said.

But countries like Britain are leery of giving the new authority too much direct power over banks on its turf, even though London claimed a victory in keeping CEBS in the capital in its new guise.

Even as an authority, it will only have about 40 staff by the end of 2011, too little to micro manage.

“In the end, the ability to issue instructions to a bank in the event of local regulators ignoring or misapplying EU law, that is what it’s about. Without that, they won’t get anywhere,” Bishop said.

Come the third test — the exercise is expected to be repeated regularly — investors will see how much independent life the new EBA musters when the politicians get closely involved.

Editing by Stephen Nisbet

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