Europe’s Regulatory Iron Fist

Big news out of Europe today.

The European Parliament has endorsed the "EU financial supervision reform package".

Basically, this is a series of principles aimed at creating a cohesive regulatory body to oversee banks across the EU.

Up until now, EU banking rules have been worked on by a number of less formal groups known as the Level 3 Committees (for anyone interested, these are the Committee of European Banking Supervisors, Committee of European Insurance and Occupational Pensions Supervisors, and Committee of European Securities Regulators). These "3L3" Committees have carried out studies and made recommendations on reforming the EU banking system in the wake of the financial crisis.

But today's decision from the EU Parliament will give these organizations more teeth. By January 2011, the committees will convert into "European Authorities" with wide-reaching powers to supervise and regulate EU banks.

One of the stated aims of this reform is to create a "single European rule book applicable to all financial institutions". Meaning all EU banks are going to have to start reporting things the same way, and adhering to strict standards on business practices and risk management.

It will be interesting to see what comes of this. In the U.S., strengthening of accounting rules brought to light a lot of shortcomings in the balance sheets of banks and corporations. Playing a role in triggering financial and market difficulties in 2007.

Could stricter rules for EU banks also reveal some groups "swimming naked"? We'll find out starting in the new year.

By. Dave Forest of Notela Resources