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September 24, 2009

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Home » Business » Economy

EU to opt for 'moral pressure'

THE European Union's new economic watchdog plans to use "moral pressure" instead of regulatory authority to crack down on countries posing major risks to Europe's economy, the European Commission said yesterday.

The EU's executive body laid out a new financial oversight structure that it wants governments to back to prevent a repeat of the banking crisis. Still, it is shying away from creating forceful new regulators who could unilaterally overrule member states.

The commission says it wants risks in the financial system to be identified and resolved at an earlier stage; EU countries to cooperate better in emergency situations and clearer rules set out for solving disputes between financial supervisors in different countries.

Despite Europe's shared market of 500 million people, financial oversight is fragmented and divided between 27 member states who do not always apply the same EU rules in the same way.

That became very clear last year when governments scrambled to rescue banks and shore up a financial system under threat of collapse.

Ireland's move to guarantee all bank deposits alarmed British banks who feared that savers would move funds there. France and Germany, meanwhile, complained loudly about Luxembourg's lax investor protection rules that led to many losing money after investing in funds linked to the massive United States financial fraud run by Bernard Madoff.

The EC says it wants to plug those weaknesses in the EU's supervisory framework. The new European Systemic Risk Board is also supposed to watch out for wider risks to the economy, such as the financial situation of banks, potential asset bubbles and how well markets are functioning.

It will issue recommendations and warnings to national governments and supervisors which must take action or explain why they haven't.

The EC says the risk board will flag warnings that have been ignored to all EU governments, which will increase "the moral pressure on the recipient to act or explain." Warnings won't always be made public to avoid spooking the financial markets.

The new financial supervisory framework will create three authorities to watch over banking, financial markets and both insurance and pensions.


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