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P 130919Z FEB 09
FM USEU BRUSSELS
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INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCNMEU/EU INTEREST COLLECTIVE

UNCLAS SECTION 01 OF 02 BRUSSELS 000208 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR U/S MCCORMICK, DAS ERIC MEYER 
AND DAS MARK SOBEL 
NSC FOR TED POSNER AND KRISTINA KVIEN 
STATE FOR E, EEB, EUR/ERA 
PLESE PASS TO USTR 
 
NOT FOR INTERNET DISTRIBUTIO 
 
E.O. 12958:  N/A 
TAGS: EFIN ECON ETRD EIND EINV EUN
SUBJECT: EU Financial Sector Reorm: De Larosihre Report, Barroso 
Plan, an Financial Services Action Plan II 
 
¶1. (SBU) ummary. The de Larosihre group's report on EU Fnancial 
Services supervision is due to be relesed on February 25.  Given 
strong disagreemens within the EU on host versus home supervisory 
powers, the recommendations are likely to be modest.  The report's 
conclusions will form part of a broader financial services strategy 
that Barroso plans to present at the G-20 Leaders' meeting.  The 
strategy is also meant to provide the basis for an EC White Paper on 
financial services and a Financial Services Action Plan to be 
launched in 2H 2009. 
 
De Larosihre Report 
------------------- 
 
¶2. (SBU) In November 2008, European Commission President Barroso 
tasked former EBRD President and Banque de France Governor Jacques 
de Larosihre to lead a group to review EU financial supervision and 
make recommendations for its reform.  The group is due to present 
its report on February 25.  The report will focus on four areas: 
 
      1) The cause of the current crisis; 
2) Overview of current financial supervisory system in the EU; 
      3) Proposed reforms of EU supervision; and, 
4) Linking Europe's solution to the global financial system. 
 
The report will also touch on several areas of regulation where the 
Commission is currently pushing reforms, such as Solvency II, 
Capital Requirement, and Credit Rating Agencies.  However, it will 
not make detailed recommendations. 
 
Supervisory proposals likely to be modest 
----------------------------------------- 
 
¶3. (SBU) Both the group led by de Larosihre and Member States are 
deeply divided over how EU supervision should be reformed.  Some 
Member States (e.g. France) favor moving to a strong Group 
Supervision regime, whereby a Lead Supervisor (or Home Supervisor) 
would have the final say in supervisory decisions, most notably in 
the allocation of capital amongst subsidiaries.  Other Member 
States, particularly the smaller ones, want to retain strong Host 
Supervisor powers.  Recent events, such as Fortis and Iceland, have 
led many supervisors to fear that Home Supervisors will leave 
subsidiaries insufficiently capitalized in the event of a crisis. 
 
¶4. (SBU) De Larosihre hopes to find a compromise that retains some 
of the benefits of Group Supervision, while assuaging the concerns 
of host supervisors about losing control.  Recent indications are 
that the report will likely emphasize the use of Colleges of 
Supervisors, while not giving final say to Home Supervisors, and 
recommend giving the ECB some role in supervision. 
 
Consistency between EU and global rules and defining international 
architecture 
--------------------------------------------- ------- 
 
¶5. (SBU) De Larosihre has emphasized the importance of consistency 
between EU and global rules.  This requires an international process 
to write global rules and put in place the right global architecture 
to tackle the three levels of activity that international 
institutions need to fulfill: 
      a. Macro oversight 
      b. Standard setting 
      c. Enforcement of measures by nations 
 
De Larosihre Report to Barroso plan 
----------------------------------- 
 
¶6. (SBU) After the release of the De Larosihre Report on February 
25, its general conclusions will be pulled into a broader strategy 
paper on financial services that will be prepared by Commission 
staff.  This strategy paper will be discussed by EU Finance 
Ministers on March 10 and discussed - and presumably endorsed - by 
EU Leaders at the  March 19-20 European Council.  Barroso then hopes 
to present the principles emerging from de Larosiere Report and the 
financial services strategy paper to G-20 Leaders as the EU 
consensus for reform of global financial regulation and supervision. 
 [This set of principles is being informally termed the "Barroso 
Plan".] 
 
Barroso Plan to Financial Sector Action Plan II in H2 2009 
 
BRUSSELS 00000208  002 OF 002 
 
 
--------------------------------------------- ------- 
 
¶7. (SBU) The Commission financial services strategy paper and 
Barroso plan are meant to be the basis of a White Paper to be 
presented to EU Leaders in June.  The White Paper will lay out a 
broad set of reforms going well beyond supervision, to include hedge 
funds, private equity funds, transparency, corporate governance, and 
market infrastructure.  If EU Leaders accept the proposals of the 
White Paper, Commission staff plan to draft a detailed set of 
proposed reforms for announcement in the second half of 2009.  This 
set of reforms is being informally called the second Financial 
Sector Action Plan - which is indicative of the broad scope and 
extent of the EC's plans for reform.  Unlike the first Financial 
Services Action Plan launched in 1999, FSAP II will focus less on 
market integration and more on the strengthening of prudential 
rules.  Sweden - as the next EU President - is reportedly planning 
to focus heavily on this issue. 
 
Comment: Barroso pushing for financial services reform to help his 
reelection 
--------------------------------------------- ---------- 
 
¶8. (SBU) Much of the effort to reform financial services is 
reportedly being driven by Barroso.  Barroso has come under strong 
pressure from Member State Leaders for not being sufficiently 
responsive to the financial crisis.  The European Parliament has 
also heavily criticized Barroso for not pushing McCreevy to regulate 
the financial services industry more heavily.  As he is maneuvering 
for reelection after the European Parliament elections in June, 
Barroso fears being criticized for not responding to the financial 
crisis and sees financial services reform as one of the few areas 
where he can demonstrate leadership. 
 
MURRAY