The role of the European Banking Authority must be beefed up beyond current plans to ensure that regulation of Europe's banks does not fragment into two competing systems, one of the architects of the reforms told a public hearing on Friday.
Jacques de Larosiere, former head of the Bank of France and IMF, said the European Central Bank's role in a European Banking Union to supervise euro zone lenders risked creating a "duopoly" that would split the bloc's single market next year.
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The ECB and the European Banking Authority (EBA), which will continue to supervise banks in non banking union countries, would be a "de facto duopoly... the too big to cooperate symptom", he told the hearing in Brussels, part of a review process that is aimed at tweaking the reforms.
The EBA, with its remit to forge a single book of banking rules for all EU countries, must be made more independent to preserve the single market, he added.
The financial crisis prompted the EU to strengthen supervision by setting up in 2011 the London based EBA, and sister authorities for securities in Paris and insurers in Frankfurt, based on a blueprint from de Larosiere.
Friday's hearing is part of a review of the two-year old set up and how it should be changed to reflect the ECB becoming the banking supervisor in 17 of the bloc's 27 countries.
De Larosiere said the bloc must also avoid the ECB and EBA pursuing different stress tests for banks.
"We don't want two classes of tests in Europe where one could be seen as weaker than the other," he said.
The EBA had a bumpy start, coming under extreme pressure from national supervisors to water down parts of its first "unsuccessful" stress test, de Larosiere said.
WHERE'S THE SAILOR?
EU financial services chief Michel Barnier told the hearing the review should consider how to avoid national interests dominating the activities of EBA and its sister authorities.
Barnier suggested they should be given more powers to protect consumers, directly supervise parts of the market such as settlement houses and market benchmarks, and asked if all three should be based in the same place.
Britain has fought to keep the EBA in London and won safeguards to stop the ECB imposing the rules it wants on all the bloc. Barnier said a banking union reinforced the need for the EBA as there were big financial centers like London outside it.
De Larosiere's blueprint included the new European Systemic Risk Board (ESRB) at the ECB in Frankfurt to spot system wide risks early to head off market bubbles.
He said that body needed shaking up. ESRB reports were too general and without specific recommendations when there are sources of systemic risk from central bank liquidity to low interest rates.
"If we want to avoid mistakes of the recent past, we should be prepared to act. The ESRB is a very large body, difficult to stir and get into action," de Larosiere said.
"If the present institutional setting is too cumbersome it should be changed. Europe needs a sailor at the top of the mast who looks at possible systemic dangers."
(Editing by Patrick Graham)