EU reaches deal on new financial supervision architecture (2)

When specific financial legislation regulates these areas of activity, or in emergency situations, they may temporarily prohibit or restrict harmful financial activities or products, and may also ask the European Commission, the EU's executive arm, to introduce legislative acts to prohibit such activities or products permanently.

Barnier said he was ready to present legislative texts in the coming days to regulate derivatives and short-selling which would build on the powers of the new authorities.

Naked short selling was blamed for worsening the financial crisis and the ongoing European debt crisis.

Besides the strengthening of micro-level supervision, a new European Systemic Risk Board (ESRB) will also be set up to detect risks to the financial system and the economy as a whole.

The ESRB will develop a common set of indicators to permit uniform ratings of the riskiness of specific cross-border financial institutions and make it easier to identify the types of risks they carry.

It will also be responsible for establishing color-coded grades to reflect different risk levels. When making warnings or recommendations on risk build-up, the ESRB is to use the color- grade to indicate the level of risk.

The ESRB will be attached to the European Central Bank and presided by ECB President Jean-Claude Trichet for the first five years.

The EU hopes the new financial supervision architecture, the first one in the world that has a super-national nature, would allow itself to better identify the risks building up in the financial system before they develop in a full-blown crisis.


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