Central Bank losers: the inside story of how the ECB and the Bundesbank are being pushed aside as financial regulators.

• Author: Engelen, Klaus C.

By pushing through his single regulator concept for financial market supervision, German finance minister Hans Eichel has dealt a blow to the ambitions of the Bundesbank, the European Central Bank and the European System of Central Banks. What's more, after Europe's largest economy and financial market rejected the concept of central-bank oversight, the weight in European financial supervision is moving Eichel's way, towards decentralized financial regulators that are responsible to elected governments and lawmakers. This shift has far-reaching consequences not only for European financial institutions and their customers, but also for many participants in world financial markets.

The failure of the once-mighty Bundesbank to become the country's leading bank supervisor has, of course, especially important implications for the single European market for financial services. In reforming Germany's financial system more along the British single-regulator model, Eichel is setting a standard for continental Europe: He is blocking ECB plans to play a leading role in financial supervision in the European Union.

The Berlin government hasn't lost much time. Only days after German legislators agreed to slim down the Bundesbank to the new realities of a European System of Central Banks where the ECB is in charge of setting monetary policy and controlling the euro, the government of Gerhard Schroeder joined other EU partners in a drive to secure the primacy of national European financial regulators over the ECB's ambitions. At an informal meeting in April of finance and economic ministers, Eichel and his British counterpart, Gordon Brown, asked the ECB finance and economic ministers to help secure the financial services objectives agreed by the European Council; promote cooperation between national regulators and supervisors of financial institutions; deliver the provision of technical input into EU legislative processes in order to speed it up; and spot and respond to financial stability problems. Specifically, Eichel and Brown asked that ECOFIN establish five new oversight panels: two that would regulate banks, two that would regulate insurance companies, and one, the European Forum for Financial Market Stability, that would serve as an umbrella financial-sector supervisory body.

In essence, the Brown-Eichel plan aims at improving coordination among financial supervisors in a European market for financial services that, since the introduction of the euro, is integrating at high speed. As Eichel makes clear: "There is no intention to establish a full-fledged pan-European supervisor because oversight over banking, securities markets and insurance should remain at the national level." What Brown and Eichel are proposing is to follow the new coordination framework suggested by a Committee of Wise Men on the regulation of European securities markets set up in July 2000 under the chair of Alexandre Lamfalussy, the former Belgian central banker.

Following the recommendations of the Lamfalussy Report, two new Brussels committees were established: the European Securities Committee (ESC), with both regulatory and advisory functions, and the advisory Committee of European Securities Regulators (CESR). The ESC is composed of representatives of ministries of finance of member states and is chaired by the European Commission. The CESR, which operates as a body independent from the Commission, brings together the heads of the national public authorities competent in the field of securities regulation and supervision.

Should European Union finance ministers come to the conclusion by September to follow the Brown-Eichel proposal of a Lamfalussy-style committee structure for banking and insurance markets, this would be a blow to the already existing Banking Supervision Committee (BSC) of the ECB, chaired by Edgar Meister, a German central banker. In the 15-member countries of the European Union, banking supervision is now widely dispersed among national...