THE EUROPEAN Commission will announce plans for a radical overhaul of Europe’s financial supervisory system today that gives Brussels legally binding powers over national supervisors for the first time.

The proposal draws heavily on the recent De Larosiere report on financial supervision but proposes to fast track some of its recommendations and beef up a planned new pan-European supervisor for cross-border institutions.

The core of the commission’s proposal would see a new European Systemic Risk Council (ESRC) formed to identify risks to financial stability in Europe and issue warnings and recommendations to EU states. The draft proposal, which has been seen by The Irish Times, suggests the president of the ECB should chair the ESRC, but, to address the concerns of non-euro-zone members, it says a vice-chairman should be elected from a non-euro-zone member state.

All 27 governors of the central banks in Europe would attend meetings of the ESRC along with representatives from national supervisory authorities and the commission. Finance ministers will not be invited to the body because this could blur its role in providing independent analysis of risk, says the proposal.

The body would meet quarterly, although during times of crisis it could meet more regularly. Significantly, it would not have legally binding powers to direct member states to take a particular course of action. But it would be expected to exert major influence on member states when it issues a warning or recommendation. Warnings would be followed up through an “act or explain” mechanism to increase pier pressure on states with problems. The ESRC would decide when a warning should be made publicly or privately.

Because it is a non-euro-zone member, Britain is nervous about the possibility that the president of the ECB will automatically be proposed as ESRC chairman. But London is even more anxious about a second proposal from the commission, which envisages creating a new European System of Financial Supervisors to monitor the pan-European banking, insurance and pensions industries.

This system is intended to ensure national regulators make the best possible decisions for cross-border institutions rather than act nationally in the best interests of their own locally-based financial institutions.

The commission’s proposal in this area goes slightly further than those in the De Larosiere report – the independent report drawn up by former Bank of France governor Jacques de Larosiere. While it had envisaged this system would work on the basis of a decentralised network, the commission is proposing a new steering committee to oversee the work of three new supervisory authorities covering banking, insurance and pensions. The European supervisory system would also have legally binding powers to intervene and force a national regulator to make a particular decision.

It would also be given responsibility for authorising and supervising certain pan-European entities such as credit ratings agencies and a newly proposed EU central counterparty clearing house for certain financial products. The commission also wants the new system in place by 2011 rather than allow it to be introduced in two phases by 2013, which De Larosiere recommends.

One of the reasons for the faster timetable is a fear that the best chance of getting agreement to the far-reaching proposals from all 27 EU member states is to push them through during the current deep financial crisis.

But the proposals will face strong opposition from Britain, which is particularly concerned about giving EU regulators the legal power to overrule national regulators. It also has doubts about placing credit ratings agencies and other financial institutions under pan-European regulation when national treasuries would still be forced to bail them out in a crisis.

EU finance ministers will discuss the proposals in early June and EU leaders will debate them at an EU summit on June 18th-19th.