Financial Supervision - briefing
27 May 2009by eub2 -- last modified 28 May 2009
The European Commission has adopted a Communication on Financial Supervision in Europe. The Communication proposes a set of ambitious reforms to the current architecture of financial services committees, with the creation of a new European Systemic Risk Council (ESRC) and European System of Financial Supervisors (ESFS), composed of new European Supervisory Authorities. Legislation to embody these proposals will follow in the autumn. The Commission also invites all interested parties to submit their reactions on the Communication before 15 July.
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MACRO-PRUDENTIAL SUPERVISION
Is the new European Systemic Risk Council (ESRC) not just an example of the EU creating more institutions and bureaucracy?
There has been a worldwide understanding in the wake of the financial crisis that systemic risk has not been adequately monitored. Under the present arrangements, both at global and EU level, place too much emphasis is being put on the supervision of individual firms, and too little on risk to the financial system as a whole. Against this background, the US has announced a systemic risk monitoring body, within the Federal Reserve, and the G20 has announced the creation of the Financial Stability Board. The ESRC will play a key role as part of this global network to monitor systemic risk more effectively, in order to detect potential crises earlier and to mitigate their impact. It will therefore fill an important gap in financial supervision in the EU.
Surely the latest crisis has shown that systemic risks are global, so why not leave monitoring of systemic risks to the newly-created Financial Stability Board?
The existence of an internal market in the EU and EEA (1), and the increasing integration of EU financial markets, requires an EU-level institution to supervise and monitor risks to the internal market. The new body will of course closely liaise with the new Financial Stability Board, contributing to a stronger global framework for risk monitoring and more stable financial markets.
Why is it proposed to give central banks a prominent role within the European Systemic Risk Council (ESRC) (especially when London, outside eurozone, is the biggest EU financial centre)?
Central banks have always played a central role in the macro-prudential supervision and the ECB is at the heart of the EU monetary system and has wide ranging expertise in the macro-prudential field. It is therefore appropriate for the ESCB to have a prominent role in the ESRC. To ensure appropriate geographical coverage and a well-balanced composition, the Commission has proposed that the ESRC would also include the central bank governors of the 27 Member States, among other members.
Will the ESCB governors not be subject to conflicts of interest in the ESRC, given their competence for monetary policy?
Traditionally, most central banks have been entrusted with both monetary policy and ensuring financial stability. Historically, both competences have been carried out by a same body without conflicts. Any potential conflict of interest between these two objectives is outweighed by the advantage of having the expertise of a central bank available for macro-financial prudential supervision. Moreover, the ESRC will be a body distinct from the ECB. The ESRC will also have mechanisms for consulting all relevant stakeholders. Therefore, it is not considered likely that conflicts of interest will be an issue for the ESRC in its work. Moreover the activities of the ESRC will be accountable to the Parliament and of the Council.
The ESRC will have over 60 institutions represented in it. Is this not too cumbersome to be effective?
A broad representation of institutions within the ESRC is necessary to ensure a global macro-prudential perspective in the ESRC's risk assessments. The ESRC must include all those who have relevant information and expertise to contribute. These include the governors of national central banks, the new European Supervisory Authorities, and national supervisors. However, a small steering committee – consisting of the ESRC chairperson and vice-chairperson, two additional central bank members of the ESRC (one from a euro area Member State and one from a non euro area Member State), the chairpersons of the new European Supervisory Authorities and the Commission member - should be established to prepare and ensure efficient ESRC operations.
Why can't the ESRC address its warnings and recommendations to any institution , but only to the ECOFIN council or the European Supervisory Authorities?
In order to maximize the effectiveness of the ESRC's activity, simple and fast procedures are needed. The fact that all warnings and recommendations are channelled to the final recipients through either the ECOFIN Council or the European Supervisory Authorities will significantly simplify ESRC operations, avoiding the need to establish a burdensome and complex network of institutional relationships and a variety of different statutes and legal forms.
What concrete effect will ESRC recommendations have, if the addressee can simply decline to follow up by providing a justification for not complying?
The quality of the ESRC work will provide a significant moral incentive to follow up ESRC recommendations, or give convincing reasons to do otherwise The overall aim should be to ensure the smooth functioning of the key elements that make up the financial system. The ESRC therefore cannot oblige individual Member States or Authorities to act in a particular way, but it will provide, credible warnings and guidance as to the way to address potential risks.
Will the ESRC lead to a greater administrative burden for financial institutions and to risks to the confidentiality of information provided?
No. All data needed by the ESRC will be provided to it by the Authorities in the ESFS using information which they already possess, without creating extra burdens for financial institutions. Appropriate measures will be taken to protect confidentiality of information provided.
MICRO-PRUDENTIAL SUPERVISION
What status would the new Authorities have institutionally?
The existing financial services committees (the so-called "Lamfalussy level three committees") would be transformed into three European Authorities: a European Banking Authority, a European Insurance and Occupational Pensions Authority and a European Securities Authority. These Authorities would be independent Community bodies set up by the European legislature, but they would not be EU institutions (the creation of new institutions requires a change to the Treaty). There will also be a steering committee to co-ordinate the work of the three Authorities and to replace the Joint Committee on Financial Conglomerates.
Why not allow the new system of colleges of supervisors to bed down before making further reforms to the supervision of financial undertakings?
Colleges of supervisors and the new European Supervisory Authorities are complementary parts of a comprehensive supervisory reform. Colleges of supervisors are at the critical to effective supervision of cross-border financial groups in Europe, and are being introduced for all such groups. The European Supervisory Authorities will complement supervisory colleges by ensuring that supervisory standards in the EU are of the highest quality for all institutions by, for example, helping to develop a single rulebook for financial services regulation. They will also provide a mechanism for ensuring supervisory colleges are consistent for each cross border group, and will be able to arbitrate when there is a lack of agreement between home and host supervisors within colleges. .
How is it possible to move supervision competences to EU level when the tax bill for saving failed financial institutions will remain with member States?
The financial responsibility of Member States in cases of financial crises is one of the reasons why supervision competences must remain at the national level, since the decision to intervene must be taken at the same level where the financial burden will lie. The new European Supervisory Authorities will have a role of arbitration, co-ordination and promoting harmonisation of rules, but not direct supervision, and so will not impinge on the fiscal responsibilities of Member States.
Why are you proposing that some specific pan-European institutions be supervised at the EU level?
It is logical that the level of supervision should follow the level of activity of institutions. Most financial institutions in Europe are domestic and will continue to be supervised by national supervisors. Cross-border institutions will be supervised by colleges of supervisors, with European Authorities having the power to arbitrate if necessary. Pan-European institutions, such as Credit Rating Agencies, which are regulated by directly-applicable EU law, are most efficiently also supervised at European level, as national supervisors would only have a partial view of their activity and reaching a common view across all EU supervisors would require an unnecessary degree of co-ordination among supervisors..
How will the new authorities be able to contribute to the creation of a "single European Rulebook" for financial services?
The new Authorities will not adopt rules themselves as such. However, they will play an important role in bringing about a common rulebook. They will be able to develop technical standards, which will be binding unless the Commission opposes them, and they will draw up interpretative guidelines to assist the national authorities in taking individual decisions. In addition, their arbitration decisions in individual cases of disagreement in colleges of supervisors will have a value of precedent (although ultimately, the Court of Justice will set the precedent in cases of appeals against the Authorities' arbitrations). One of the problems observed in the build up to the crisis was the inconsistent application of supervisory rules. A common set of rules lead to heterogeneous supervisory actions. The new authorities will play an important role to avoid similar problems in the future.
How will the new authorities be able to arbitrate between national supervisors which cannot agree, and on what subjects?
In the case of diverging opinions between national supervisory authorities, for example, in colleges of supervisors, the European Supervisory Authorities should facilitate a dialogue and assist the supervisors in reaching a joint agreement. If, after a phase of conciliation, the latter have not been able to reach an agreement, the European Supervisory Authorities should, through a decision, settle the matter. However, this would clearly be a last resort option as in most cases the respective national authorities should be able to come to an agreement in the preceding conciliation procedure. The framework for the exercise of this competence will be specified detail in the relevant sectoral legislation.
Is this the first step of a planned "Europeanisation" of all financial supervision in the EU?
No. Ninety-nine percent of financial institutions in the EU are national, and national supervision is appropriate for them. Even regarding the forty or so large cross-border banks (which account for a majority of the assets of banks in Europe), at this stage, the issue of national fiscal responsibilities means that supervision of individual firms must remain national. However, it is appropriate for financial stability and the internal market that rule-making and co-ordination of supervision is appropriately done at EU-level.
Why is the single European supervisor model not adopted (i.e., full centralisation of supervision at the EU level)?
A single supervisor would amount to a complete overhaul of the present arrangements and it is doubtful whether such an approach would be effective. Supervision has to be carried-out in close contact, on the ground, with the supervised entities. At this stage it is not realistic that over ten thousand financial institutions could be supervised at the EU level. For major cross-border institutions, moving supervisory responsibilities to the EU level would mean resolving all the issues related to burden sharing, which at this stage is not realistic. Furthermore, there is no evidence to support the idea that a single supervisor would do a better job than effective colleges of supervisors, working closely with European Authorities.
Would the three new EU authorities be de facto EU supervisors with authority over Member State supervisors?
Each European Supervisory Authority would have a board structure composed of the chairpersons from the national authorities. So Member State supervisors would be directly involved in setting the policies of the European Supervisory Authorities. Within the system, the European Supervisory Authorities would be responsible for defining the general supervisory policy to be followed on the ground by national supervisors, for fostering cooperation and consistency and for taking a selected number of decisions binding on firms which it is not appropriate to take at the national level. It is a system of partnership with clear responsibilities at the EU and national level.
What will be the role of the ESFS Authorities regarding crisis management?
The new European Supervisory Authorities will co-ordinate with national supervisors in crisis situations by facilitating co-operation and exchange of information between competent authorities, mediating where appropriate, and helping to define and implement the right decisions. However, flanking measures on burden sharing and early intervention in crisis situations will be essential to ensure the impacts of crises are minimised. This is why the Commission will in June 2009 adopt a paper on early intervention in crisis situations.
Won't binding rules undermine Member States' ability to protect financial stability?
There are substantial differences in the powers granted to national supervisors in different Member States, both in respect of what they can do by way of supervision and in respect of enforcement actions (including sanctions). The proposed system is aimed at ensuring that the rules which have been agreed upon at the EU level are consistently implemented and applied. It should be noted that in most Member States, crisis management and resolution are not supervisory tasks, and EU legislation does not harmonise restructuring measures. To reinforce Member States ability to protect financial stability the Commission is working on initiatives related to bank stabilisation and resolution framework in the EU.
Why three Authorities and not one, reflecting cross-sector integration in financial services?
Different Member States have chosen different models for national supervisory authorities, with one, two or three supervisors. However, the new European Supervisory Authorities will not be carrying out the same tasks as national supervisors, and experience regarding different supervisory structures in the member States cannot be applied directly to them. In addition, evidence which can be gathered from national experiences does not lead to the conclusion that one system is superior to the others. It is therefore prudent to maintain the sectoral model used for the existing European financial services committees, with three Authorities and an overarching steering committee, and review the experience three years after the entry into force of the European System of Financial Supervisors to evaluate if any structural changes are needed.
Where will the new Authorities be located?
The new Authorities will be created on the basis of the existing European financial services committees, the Committee of European Banking Supervisors (CEBS), the Committee of European Insurance and Occupational Pensions Committee (CEIOPS) and the Committee of European Securities Regulators (CESR), also often known as the "Lamfalussy level 3 Committees". Therefore, their locations should be the same as the locations of these committees (i.e. London, Frankfurt and Paris respectively).
How will you make sure these changes have teeth without taking powers away from national authorities?
The European System of Financial Supervisors will be based on the principles of partnership, flexibility and subsidiarity. The focal point for day-to-day supervision would remain at the national level, with national supervisors remaining responsible for the supervision of individual entities, for example with respect to capital adequacy. For cross-border institutions, the colleges of supervisors which are being set up will be the lynchpin of the supervisory system. Moreover, Member State supervisors would be directly involved in setting the policies of the European Supervisory Authorities. The system will aim to enhance trust between national supervisors by ensuring, for example, that host supervisors have an appropriate say in setting policies relating to financial stability and consumer protection, thereby allowing cross-border risks to be addressed more effectively.
Will the authorities be allowed to undertake on site inspections of firms?
The focal point for day-to-day supervision will remain at the national level, so it will be the national supervisory authorities which will be responsible for on-site inspections. However, in order to build a common European supervisory culture and consistent supervisory practices, the new European Supervisory Authorities may participate in meetings of colleges of supervisors as observers.
(1) The European Economic Area consists of the 27 Member States of the EU plus Norway, Iceland and Liechtenstein. Created in 1994 through an Agreement, it allows Norway, Iceland and Liechtenstein to participate in the EU's Internal Market.
Source: European Commission
