VZCZCXRO4050
PP RUEHIK
DE RUEHFT #3013/01 3241255
ZNR UUUUU ZZH
P 201255Z NOV 09
FM AMCONSUL FRANKFURT
TO RUEHC/SECSTATE WASHDC PRIORITY 2465
RUEHRL/AMEMBASSY BERLIN 1192
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCNFRG/FRG COLLECTIVE

UNCLAS SECTION 01 OF 02 FRANKFURT 003013 
 
SENSITIVE 
 
STATE FOR EEB (NELSON, HASTINGS), EEB/IFD/OMA (WHITTINGTON), EUR/CE 
(HODGES, SCHROEDER) 
TREASURY FOR ICN (KOHLER), IMB (MURDEN, BAKER) AND OASIA 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON GM
 
SUBJECT:  EU FINANCIAL REGULATORY REFORM: CHIEF REGULATOR HAS 
CONCERNS ABOUT THE LOSS OF NATIONAL AUTHORITY 
 
REF: A)BRUSSELS 0290 
     B)BRUSSELS 1393 
 
FRANKFURT 00003013  001.2 OF 002 
 
 
¶1.  (SBU) Summary: A recent conversation between Consulate 
Representatives and Joachim Sanio, the President of the German 
Federal Financial Supervisory Authority (BaFin), revealed concerns 
over strong French influence in the new EU financial regulatory 
agencies currently being created.  Sanio commented on the short 
window of opportunity for EU regulatory reform, which explained the 
pace and legal means by which the EU Commission acted.  Sanio also 
believes that the EU Commission will gain power over financial 
regulation at the expense of national regulators. END SUMMARY. 
 
 
Background: Overview of EU Financial Regulatory Reforms 
--------------------------------------------- ---------- 
¶2. (U) In February 2009, a high-level group chaired by the former 
Banque de France Governor Jacques de Larosihre drafted a series of 
proposals to strengthen the EU financial regulatory system in 
response to a request from EU Commission President Barroso.  The de 
Larosiere Report became the foundation of a series of reforms 
undertaken by the EU.  By May, a "Communication" was adopted, with 
draft legislation proposed on September 23, and further defining 
legislation written by October 26.  The EU Council and Parliament 
currently are considering these proposals. 
 
¶3. (U) Under the new legislation, a European Systemic Risk Board 
(ESRB) will be established to detect risks in the financial system 
as a whole.  In addition, a European System of Financial Supervisors 
(ESFS) composed of national supervisors will encourage cross-border 
practices in financial supervision. 
 
¶4. (U) The ESFS will consist of three new "European Supervisory 
Authorities" that will replace the existing "Level 3 committees." 
Like the current Level 3 committees, they will cover the following 
areas: 1)banking ("the European Banking Authority" (EBA) replacing 
CEBS), 2)securities ("the European Securities and Markets Authority" 
(ESMA) replacing CESR); and 3)insurance and occupational pensions 
("the European Insurance and Occupational Pensions Authority" 
(EIOPA) replacing CEIOPS). The objective of these "Authorities" is 
to: 1)coordinate the work of national supervisors; 2)arbitrate in 
the case of cross-border disagreements; 3)harmonize national 
regulatory rules; and 4)directly supervise certain pan-European 
institutions which are regulated at the EU level, such as Credit 
Rating Agencies. 
 
 
 
Remarkable Speed Results in "A Legal Coup d'etat" 
--------------------------------------------- ---- 
¶5. (SBU) The financial crisis, according to Sanio, has opened a 
unique window of opportunity for the EU financial reforms.  Sanio 
believes that the speed has been driven by French interests, which 
were at the heart of the original proposal. There is also a uniquely 
pro-European constellation in favor of reforms in the EU Commission 
and the British government. (Sanio believes this window will close 
in May 2010, the latest date that Gordon Brown has to call a new 
election.) 
 
¶6. (SBU) The remarkable pace with which the EU Commission has pushed 
through the reforms, amounts in Sanio's opinion to a legal "coup 
d'etat."  In order to put the new regime in place as soon as 
possible, Sanio posited, the Commission drafted it as "regulations" 
instead of as "directives," since regulations have a more general 
scope and do not require each nation to pass implementing 
legislation.  Sanio considers this move "a form of procedural abuse" 
which circumvents national legislatures.  He also thinks that 
without this "unprecedented legislative maneuver" the EU would not 
have been able to accomplish the reforms prior to the UK election 
and a "unique opportunity" for the Commission would have been lost. 
 
 
 
Sanio Questions the Legal Authority of the New Agencies 
--------------------------------------------- ---------- 
¶7. (SBU) For Sanio, the new EU regulatory architecture raises a 
number of legal points.  Sanio pointed out that in the Meroni Case 
(1958), the European Court of Justice (ECJ) set out a number of 
rules and conditions that have to be met before an EU institution 
can delegate its powers to bodies not mentioned in EU Treaties.  The 
Court ruled that a treaty body can only delegate clearly defined, 
i.e. non-discretionary powers, and must remain able to review the 
 
FRANKFURT 00003013  002.2 OF 002 
 
 
exercise of these powers. 
 
¶8. (SBU) Based on the Meroni ruling, Sanio believes that the new 
"European Supervisory Authorities" (ESAs) can only be 
sub-organizations ("secondary institutions") of the Commission with 
powers delegated to them by the Commission. "It's very clearly a 
power game," said Sanio.  "What the Commission de facto does is to 
reel in for itself the entire financial supervision.  It will fully 
dominate European financial supervision, since all decisions will in 
the end have to be approved by the Commission." 
 
 
Power Lost by the National Authorities 
-------------------------------------- 
¶9. (SBU) Sanio believes that as the EU Commission gains power over 
financial regulation and supervision, the national regulators will 
lose it.  The EU Commission "will have its foot in the door," and 
regardless of the amount of power maintained by national 
institutions, the EU Commission will always "remain a player at the 
table." 
 
¶10. (SBU) Sanio also views the EU Commission's offer to pay for the 
new regulatory bodies with skepticism.  Several Eastern European 
members have welcomed this offer, particularly Poland and Lithuania, 
according to Sanio, who currently find it difficult to pay their 
share.  Sanio and his organization, BaFin, by contrast would like to 
increase the direct payment by States to these agencies, because 
under EU law, that would strengthen the power of the national 
regulators.  "We even somewhat in jest proposed at one point to pay 
the Polish share if they would give us their 27 votes in return." 
However, Sanio thinks that Germany will not be able to sustain its 
position. 
 
 
Winners and Losers of EU Regulatory Reform 
------------------------------------------ 
¶11. (SBU) Key beneficiaries of the reforms, Sanio said, will be the 
French, who have been the core advocates and the motor driving the 
reforms.  The specific interest of the French, apart from 
strengthening their overall influence over EU regulation through the 
Commission, is to establish the European Securities and Markets 
Authority (ESMA) in Paris.  This would significantly strengthen 
Paris as a financial center at the expense of London and Frankfurt. 
While Frankfurt hosts the European Central Bank (ECB) and will 
likely continue to house the newly-formed EIOPA (currently CEIOPS), 
Sanio believes that hosting the supervisory agency for capital 
markets and securities will give Paris more influence. "The ECB 
might be more powerful and more prestigious, but in terms of 
economic value and political influence on financial market 
developments, ESMA clearly is the better prize." said Sanio. 
 
¶12. (SBU) The British, by contrast, are the ones that have the most 
to lose, according to Sanio.  While for Germany financial 
supervision is an "abstract issue," for the UK, strong European 
financial supervision with operative powers over securities in 
French hands, poses an "incalculable risk" and a serious economic 
threat.  Currently, the financial center London, Sanio stated, is 
"underregulated."  With its manufacturing sector being "practically 
dead," Britain is economically dependent on maintaining the 
competitive advantage of its financial sector through "light touch 
regulation." 
 
 
¶13. (SBU) Comment: Sanio's comments regarding the French influence 
on the new EU Financial Regulatory architecture appear consistent 
with general sentiment in Germany.  The October 30 announcement by 
France that it would like Michel Barnier, French Minister for 
Agriculture and Fisheries, to become the "Internal Market and 
Services Commissioner" (replacing McCreevy from Ireland) has 
reinforced this German view.  In that position, Barnier would 
oversee EU banking legislation and be able to influence the shape of 
the new EU regulatory instruments. 
 
 
¶14. (U) This cable has been coordinated with Consulate Duesseldorf 
and Embassy Berlin. 
 
 
ALFORD