CRISIS IMPACT: ECB gains, UK wanes in financial regulation

(repeats story first transmitted on June 9)

* Little support for Britain in fighting EU reforms

* EU regulatory committees to be enhanced

* New regime may favour superbanks, hurt second-tier players

* Post-crisis EU model may influence regulation globally

By Huw Jones

LONDON, June 9 (Reuters) - Radical reform of financial supervision in Europe shows how power is shifting in the wake of the credit crunch, with the European Central Bank's star rising and Britain set to lose clout.

Nine months after the collapse of Lehman Brothers, it is becoming clear how much the Anglo-American "light touch model" has been discredited as the world rethinks its financial rules.

In late May, the European Union announced plans to create a "systemic risk council" to monitor stresses in the financial system and call for action when it felt that was needed. The ECB, a pan-European institution in which Britain does not have a seat on the governing council, would play a core role.

"The ECB has had a good war. If there is one clear winner in Europe from all this, it's them," said Graham Bishop, a former banker who advises the 27-nation bloc on financial regulation.

In public meetings and closed-door negotiations, European policymakers no longer defer readily on financial regulation issues to Britain, the EU's top banking centre.

The near-meltdown of the British banking system, which forced it to nationalise lenders, has made it a lot harder for Britain to lecture pro-regulation states such as France and Germany.

With the EU asserting itself as a major forum for financial rulemaking, Britain will find it tougher to water down draft laws that will affect it as an EU member. (for a factbox on EU plans for regulatory reform, click [ID:nLR980643])

"The UK government is not going to be in a position to argue the toss at EU finance ministers' meetings," Bishop said.

HEDGE FUNDS

The EU's proposal to crack down on hedge funds is one of its most high-profile regulatory initiatives. Hedge fund managers would be required to register and be subject to close scrutiny if they wanted to operate in the bloc.

That has drawn howls of protest from some fund managers and alarmed Britain, a big centre for the hedge fund industry. But Britain faces an uphill battle in trying to dilute the proposal.

More important in the long term may be the EU's plans to establish new regulatory authorities with binding powers over member states, a move which Britain also opposes.

So far only two financial minnows in the EU, Slovakia and Slovenia, have come out on Britain's side.

"The Europeanisation of the regulatory regime is no doubt going to cause a shift in the balance of power away from the incumbents -- London, Luxembourg and Dublin -- as one stares down the barrel of a more dirigiste, more socialist approach in regulation," said Bob Penn of Allen & Overy, a law firm.

Some think Britain's setback won't be permanent, because no regulatory model has covered itself in glory during the credit crunch.

"The UK has the most tainted model, but it will also be the quickest to reinvent itself. Is there long-term harm? I am not so sure," said Barbara Ridpath, chief executive of the International Centre for Financial Regulation.

But Ridpath added that Britain's influence in regulatory affairs would nevertheless be harmed if it did not ditch its "we know better" attitude and engage seriously with the EU.

"While all these decisions are being made in Brussels, there is nobody in the UK actively engaging," she said.

That points to another problem for Britain: its domestic politics may hurt its chances of having a major say in the EU's post-crisis regulatory regime. The economic slump has left the Labour government weak and directionless, with the Conservatives looking almost certain to win the next general election, due by June 2010.

The Conservatives' declared intention to pull out of the European Parliament's main centre-right bloc is widely seen as potentially damaging Britain's influence in the assembly, which has a joint say with EU governments on financial laws.

EU COMMITTEES

In addition to the ECB, other EU regulatory bodies are likely to emerge enhanced from the crisis, especially EU committees which group national securities, insurance and banking supervisors.

"They have taken over the role that supervisors like Britain's Financial Services Authority used to play in intermediating between EU law and practical implementation," Penn said.

A broader change expected to result from the crisis is that the financial industry will have less power in shaping the rules governing it; EU policymakers will care less about narrow cost-benefit analyses of draft rules and more about the system's overall stability.

Some parts of the industry may fare well, however. A club of European "superbanks" including Spain's Santander (SAN.MC) and Britain's HSBC (HSBA.L), and a posse of small, nimble players, may thrive under a tighter regulatory regime even as the mass of second-tier banks is squeezed.

"Clearly six to ten European banks have emerged from this crisis comparatively well, and are well-placed for growth," said Andy Baldwin of consultancy Ernst & Young.

Ultimately, the EU's post-crisis approach to financial regulation may help to shape rule-making in banking, insurance, mutual funds and the securities industry around the world -- just as European product safety rules in sectors such as chemicals have had a growing influence on global production.

The result may be greater financial stability, but at the potential cost of higher fees for investors and less innovative and lucrative financial products.

"Ultimately, small investors will pay for extra regulation," Penn said. (Editing by Andrew Torchia and Janet McBride)