European Central Bank says will combine tests to get financial pulse

September 30, 2009

By John O’Donnell
GOTHENBURG, Sweden, Sept 30 (Reuters) – The European Central Bank will combine future tests to check the health of the financial system, its vice president said, outlining his vision for a new watchdog to prevent further crises.

Earlier this month, the European Commission, the EU’s executive arm, unveiled its blueprint for an overhaul of the way banks and financial markets are policed, a central plank in new rules meant to prevent a repeat of the global economic crisis.

It plans to create a pan-European watchdog, staffed and run by the ECB, that would warn of early signs of crisis.

On Wednesday, ECB Vice President Lucas Papademos said the so-called risk board would use a broad range of tools to judge the health of financial markets and the economy.

Many have blamed what they see as the tunnel vision of regulators in focusing on individual banks rather than the overall system for failing to stop the worst financial crisis in a generation.

Papademos said “taking the temperature” of a patient was not enough and this would be complemented by other tests as well as the “judgment of the physician” to choose the right medicine to stop a crisis.

He said the ECB was working on developing the tools and early warning signal models to sound the alarm when the financial system approaches danger.

But he and ECB Governing Council member Axel Weber stressed they would not lose sight of the ECB’s main goal of keeping inflation steady despite the increased focus on financial stability.

“What we have learned in this crisis is that price stability and financial stability go hand in hand,” Weber said.

Their remarks at an industry conference come as Sweden’s financial markets minister, Mats Odell, and Jacques de Larosiere, author of a report that formed the basis for EU laws, pushed for the new watchdogs to be set up soon.

“Will these new institutions be up and running by the end of next year?” Odell said. “My answer is: yes we can. Member states need to be prepared to walk the extra mile to make that happen.”

De Larosiere said: “The risk board is a detector of emerging risks,” adding that single supervision of individual institutions is not enough to create a stable system.

Some, however, are suspicious of the new body. Britain is worried about the extent of powers given to the group, which will be based in Germany and most likely chaired by ECB President Jean-Claude Trichet.

There is widespread scepticism in London about fresh financial rules that many there see as a German-French bid to undermine the City of London, Europe’s largest financial centre.

Nonetheless the law puts Europe ahead of the United States, which is still bogged down in a wrangle over whether to give similar watchdog powers to the Federal Reserve.

“If we start fragmenting the package, we will destroy the image of a united Europe on these matters,” de Larosiere warned.

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