Hight Level Group on Financial Supervision in the EU Report
Internal risk management
122) In many cases, risk monitoring and management practices within financial institutions
have dramatically failed in the crisis.
123) In the future, the risk management function must be fully independent within the firms
and it should carry out effective and not arbitrarily constrained stress testing exercises.
Firms should organise themselves internally so that incentives are not too much tilted
towards risk taking – neglecting risk control. To contribute to this, the Senior Risk
Officer in an institution should hold a very high rank in the hierarchy (at senior
management level with direct access to the board). Changes to remuneration structures
will also be needed: effective checks and balances are indeed unlikely to work if those
who are supposed to control risk remain under-paid compared to those whose job it is to
124) But all this must not be construed as exonerating issuers and investors from their duties.
For issuers, transparency and clarity in the description of assets put on the market is of
the essence as this report has often stressed; but investors and in particular asset
managers must not rely (as has too often been the case) on credit rating agencies
assessments; they must exercise informed judgement; penalties should be enforced by
supervisors when this is not applied. Supervisory control of firms' risk management
should be considerably reinforced through rigorous and frequent inspection regimes.
Recommendation 12: With respect to internal risk management, the Group recommends
- the risk management function within financial institutions must be made independent
and responsible for effective, independent stress testing;
- senior risk officers should hold a very high rank in the company hierarchy, and
- internal risk assessment and proper due diligence must not be neglected by over-
reliance on external ratings.
Supervisors are called upon to frequently inspect financial institutions' internal risk
VI. CRISIS MANAGEMENT AND RESOLUTION
125) As a general observation, it has been clearly demonstrated that the stakes in a banking
crisis are high for Governments and society at large because such a situation has the
potential to jeopardise financial stability and the real economy. The crisis has also
shown that crisis prevention, crisis management and crisis resolution tools should all be
handled in a consistent regulatory framework.
126) Of course, crisis prevention should be the first preoccupation of national and EU
authorities (see chapter on supervision). Supervisors should act as early as possible in
order to address the vulnerabilities identified in a given institution, and use all means
available to them to this effect (e.g. calling on contributions from shareholders, fostering
the acquisition of the institution concerned by a stronger one). In this respect, the role of
central banks which are by essence well placed to observe the first signs of vulnerability
of a bank is of crucial importance. Therefore in countries where supervision is not in the
hands of the central bank, a close collaboration must be ensured between supervisors
and central banks. But crises will always occur and recent experiences in managing
crises have shown that many improvements to the present system are called for.
a) Dealing with the moral hazard issue
127) “Constructive ambiguity” regarding decisions whether or not public sector support will
be made available can be useful to contain moral hazard. However, the cure for moral
hazard is not to be ambiguous on the issue of public sector involvement as such in crisis
management. Two aspects need to be distinguished and require different treatment. On
the one hand, a clear and consistent framework for crisis management is required with
full transparency and certainty that the authorities have developed concrete crisis
management plans to be used in cases where absence of such public sector support is
likely to create uncertainty and threaten financial stability. On the other hand,
constructive ambiguity and uncertainty is appropriate in the application of these
arrangements in future individual cases of distressed banks .
b) Framework for dealing with distressed banks
128) In the management of a crisis, priority should always be given to private-sector
solutions (e.g. restructuring). When these solutions appear insufficient, then public
authorities have to play a more prominent role and the injection of public money
becomes often inevitable.
129) As far as domestic national banks are concerned, crisis management should be kept at
the national level. National supervisors know the banks well, the political authorities
have at their disposal a consistent legal framework and taxpayers' concerns can be dealt
with in the democratic framework of an elected government. For cross-border
institutions at EU level, because of different supervisory, crisis management and
resolution tools as well as different company and insolvency laws, the situation is much
more complex to handle. There are inconsistencies between national legislation
preventing an orderly and efficient handling of an institution in difficulty.
130) For example, company law provisions in some countries prevent in times of crisis the
transfer of assets from one legal entity to another within the same group. This makes it
impossible to transfer assets where they are needed, even though this may be crucial to
safeguard the viability of the group as a whole. Another problem is that some countries
place, in their national laws, emphasis on the protection of the institution while other
countries attach a greater priority to the protection of creditors. In the crisis resolution
phase, other problems appear: for example, the ranks of creditors are different from one
Member State to the other.
6 This approach is recommended by Charles Goodhart and Dirk Schoenmaker, “Fiscal Burden Sharing in Cross Border
Banking Crises”, in International Journal of Central Banking, to be published early 2009. 33
131) The lack of consistent crisis management and resolution tools across the Single Market
places Europe at a disadvantage vis-à-vis the US and these issues should be addressed
by the adoption at EU level of adequate measures.
c) Deposit Guarantee Schemes (DGS)
132) The crisis has demonstrated that the current organisation of DGSs in the Member States
was a major weakness in the EU banking regulatory framework . The Commission
recent proposal is an important step to improve the current regime, as it will improve the
protection of depositors.
133) A critical element of this proposal is the requirement that all Member States apply the
same amount of DGS protection for each depositor. The EU cannot indeed continue to
rely on the principle of a minimum coverage level, which can be topped-up at national
level. This principle presents two major flaws: first, in a situation where a national
banking sector is perceived as becoming fragile, there is the risk that deposits would be
moved to the countries with the most protective regime (thus weakening banks in the
first country even further); second, it would mean that in the same Member State the
customers of a local bank and those using the services of a third country branch could
enjoy different coverage levels. As the crisis has shown, this cannot be reconciled with
the notion of a well-functioning Single Market.
134) Another important element to be taken into account is the way in which the DGSs are
funded. In this respect, the Group is of the view that preference should be given to
schemes which are pre-funded by the financial sector. Such schemes are better to foster
confidence and help avoiding pro-cyclical effects resulting from banks having to pay
into the schemes at a time where they are already in difficulty.
135) Normally, pre-funded DGSs should take care in the future of losses incurred by
depositors. Nonetheless, it is probable that for very large and cross border institutions,
pre-funded mechanisms might not be sufficient to cover these guarantees. In order to
preserve trust in the system, it should be made clear that in those cases pre-funded
schemes would have to be topped-up by the State.
7 The Commission's recent proposal is an important step to improve the current DGS-regime, as it strengthens harmonisation
and improves the protection of depositors. However, the directive still leaves a large degree of discretion to member states,
particularly in relation to funding arrangements, administrative responsibility and the role of DGS in the overall crisis
management framework. Leaving these issues unresolved at EU-level implies that significant weaknesses remain in the DGS-
framework, including inter alia:
− Unsustainable funding – the current lack of sophisticated and risk sensitive funding arrangements involves a significant
risk that governments will have to carry the financial burden indented for the banks, or worse, that the DGS fails on their
commitments (both of which illustrated by the Icelandic case). In particular, in relation to the any of the 43 European
LFCIs identified earlier in the chapter, no current scheme can be expected to have the capacity to make reimbursements
without involving public funds.
− Limited use in crisis management – Even if DGS’ had that capacity, the pay box nature of most schemes makes it
unlikely that they ever will be utilised for LFCIs, because of the large externalities associated with letting such
− Negative effects on financial stability – reliance on ex-post funding and lack of risk sensitive premiums weakens market
discipline (moral hazard), distort the efficient allocation of deposits, as well as it may be a source of pro-cyclicality.
Obstacle to efficient crisis management – due to incompatible schemes (trigger points, early intervention powers etc.) and
diverging incentives among member. 34
136) The idea of a pooled EU fund, composed of the national deposit guarantee funds, has
been discussed by the Group, but has not been supported. The setting-up and
management of such a fund would raise numerous political and practical problems.
Furthermore, one fails to see the added-value that such a fund would have in comparison
to national funds operating under well-harmonised rules (notably for coverage levels
and the triggering of the scheme).
EU harmonization should not go as far either as laying down rules on the possible use of
DGSs in the management of a crisis. It should not prohibit additional roles beyond the
base task for a DGS to act ex post, in the crisis resolution phase, as a pay box by
reimbursing the guaranteed amount to depositors in a defaulted bank. Most member
countries limit their national DGS to this pay box function. Some countries, however,
extend the activities by giving their DGS also a rescue function. The Group did not see
any need for EU harmonization in this respect.
137) There is a specific case (of the Icelandic type) when a supervisory authority allows some
of its banks to mushroom large branches in other EU countries, whilst the home
Member State is not able to honour the deposit guarantee schemes which are inadequate
for such exposures. The guarantee responsibilities then de facto fall into the jurisdiction
of the host country. This is not acceptable and should at least be addressed, for example,
in the following way: the host Member State should have the right to inquire whether
the funds available in the DGS of the home Member State are indeed sufficient to
protect fully the depositors in the host Member State. Should the host Member State not
have sufficient guarantees that this is indeed the case, the only way to address this kind
of problem is to give sufficient powers to the host supervisory authorities to take
measures that would at the very beginning curtail the expansive trends observed.
138) The Group has not entered into the specifics of the protection of policy-holders and
investors. It nevertheless considers that the above general principles, and in particular
the equal protection of all customers in the Single Market, should also be implemented
in the insurance and investment sectors.
d) Burden sharing
139) The issue of burden sharing in cases of crisis resolution is extremely complicated for
two reasons. First, cases where financial support from both public sector and private
sector is needed to reach an acceptable solution are more complex than rescues where
either private or public money is involved. Second, agreement on burden sharing on an
ex post basis, at the moment of the rescue operation, is more difficult to reach than when
one can rely on predetermined, ex ante arrangements.
140) As noted above, the current lack of pan-EU mechanism to resolve a crisis affecting a
cross-border group implies that there is no choice but to resolve this crisis at national
entity-level or to agree on improvised, ad hoc cross-border solutions. The lack of a
financing mechanism to support the resolution of a cross-border group further
complicates the situation.
141) On the basis of the experiences learnt from the crisis, the Group believes that the
Member States should become able to manage a crisis in a more adequate way than is
feasible today. There would be merit, in order to achieve this, in developing more
detailed criteria on burden sharing than the principles established in the current
Memorandum of Understanding (MoU), which limits the sharing of a fiscal burden to
two main principles: the economic impact of the crisis on the Member States concerned
(equity principle) and the allocation of home/host supervisory powers (accountability
142) Burden sharing arrangements could, in addition, include one of the following criteria, or
a combination thereof:
- the deposits of the institution;
- the assets (either in terms of accounting values, market values or risk-weighted
values) of the institution;
- the revenue flows of the institution;
- the share of payment system flows of the institution;
- the division of supervisory responsibility; the party responsible for supervisory
work, analysis and decision being also responsible for an appropriately larger share
of the costs.
143) These criteria would preferably be implemented by amending the 2008 MoU. Where
needed, additional criteria could be agreed.
Recommendation 13: The Group calls for a coherent and workable regulatory framework
for crisis management in the EU:
- without pre-judging the intervention in future individual cases of distressed financial
institutions, a transparent and clear framework for managing crises should be
- all relevant authorities in the EU should be equipped with appropriate and equivalent
crisis prevention and crisis intervention tools;
- legal obstacles which stand in the way of using these tools in a cross-border context
should be removed, with adequate measures to be adopted at EU level.
Deposit Guarantee Schemes (DGS) in the EU should be harmonised
and preferably be pre-funded by the private sector (in exceptional cases topped up by the
State) and provide high, equal protection to all bank customers throughout the EU.
The principle of high, equal protection of all customers should also be implemented in the
insurance and investment sectors.
The Group recognises that the present arrangements for safeguarding the interests of
depositors in host countries have not proved robust in all cases, and recommends that the
existing powers of host countries in respect of branches be reviewed to deal with the
problems which have occurred in this context. 36
Recommendation 15: In view of the absence of an EU-level mechanisms for financing
cross-border crisis resolution efforts, Member States should agree on more detailed criteria
for burden sharing than those contained in the existing Memorandum of Understanding
(MoU) and amend the MoU accordingly. 37
CHAPTER III: EU SUPERVISORY REPAIR
144) The previous chapter proposed changes to the European regulation of financial services.
This chapter examines the policies and practices of supervision of financial services
within the EU and proposes both short and longer term changes. Regulation and
supervision are interdependent: competent supervision cannot make good failures in
financial regulatory policy; but without competent and well designed supervision good
regulatory policies will be ineffective. High standards in both are therefore required.
Macro and Micro prudential supervision
145) The experience of the past few years has brought to the fore the important distinction
between micro-prudential and macro-prudential supervision. Both are clearly
intertwined, in substance as well as in operational terms. Both are necessary and will be
covered in this chapter.
146) Micro-prudential supervision has traditionally been the centre of the attention of
supervisors around the world. The main objective of micro-prudential supervision is to
supervise and limit the distress of individual financial institutions, thus protecting the
customers of the institution in question. The fact that the financial system as a whole
may be exposed to common risks is not always fully taken into account. However, by
preventing the failure of individual financial institutions, micro-prudential supervision
attempts to prevent (or at least mitigate) the risk of contagion and the subsequent
negative externalities in terms of confidence in the overall financial system.
147) The objective of macro-prudential supervision is to limit the distress of the financial
system as a whole in order to protect the overall economy from significant losses in real
output. While risks to the financial system can in principle arise from the failure of one
financial institution alone if it is large enough in relation to the country concerned
and/or with multiple branches/subsidiaries in other countries, the much more important
global systemic risk arises from a common exposure of many financial institutions to the
same risk factors. Macro-prudential analysis therefore must pay particular attention to
common or correlated shocks and to shocks to those parts of the financial system that
trigger contagious knock-on or feedback effects.
148) Macro-prudential supervision cannot be meaningful unless it can somehow impact on
supervision at the micro-level; whilst micro-prudential supervision cannot effectively
safeguard financial stability without adequately taking account of macro-level
The objective of supervision
149) The prime objective of supervision is to ensure that the rules applicable to the financial
sector are adequately implemented, in order to preserve financial stability and thereby to
ensure confidence in the financial system as a whole and sufficient protection for the
customers of financial services. One function of supervisors is to detect problems at an
early stage to prevent crises from occurring. However, it is inevitable that there will be
failures from time to time, and the arrangements for supervision have to be seen with
this in mind. But once a crisis has broken out, supervisors have a critical role to play
(together with central banks and finance ministries) to manage the crisis as effectively as
possible to limit the damage to the wider economy and society as a whole.
150) Supervision must ensure that all supervised entities are subject to a high minimum set of
core standards. When carrying-out their duties, supervisors should not favour a
particular institution, or type of institution, to the detriment of others. Competition
distortions and regulatory arbitrage stemming from different supervisory practices must
be avoided, because they have the potential of undermining financial stability – inter
alia by encouraging a shift of financial activity to countries with lax supervision. The
supervisory system has to be perceived as fair and balanced. Furthermore, a level
playing field is vital for the credibility of supervisory arrangements, their acceptance by
market operators big and small and for generating optimal cooperation between
supervisors and financial institutions. This is of particular importance in the context of
the Single Market, built as it is, inter alia, on the principles of undistorted competition,
freedom of establishment and the free flow of capital. Confidence will be gained in the
European Union from common approaches by all Member States.
151) The supervisory objective of maintaining financial stability must take into account an
important constraint which is to allow the financial industry to perform its allocative
economic function with the greatest possible efficiency, and thereby contribute to
sustainable economic growth. Supervision should aim to encourage the smooth
functioning of markets and the development of a competitive industry. Poor supervisory
organisation or unduly intrusive supervisory rules and practices will translate into costs
for the financial sector and, in turn, for customers, taxpayers and the wider economy.
Therefore supervision should be carried-out as effectively as possible and at the lowest
possible cost. This, again, is crucial if the Single Market is to deliver all its benefits to
customers and companies.
II. LESSONS FROM THE CRISIS: WHAT WENT WRONG?
152) Chapter 1 examined in detail the causes of the crisis. These were many; often with a
global dimension. Although the way in which the financial sector has been supervised
in the EU has not been one of the primary causes behind the crisis, there have been real
and important supervisory failures, from both a macro and micro-prudential standpoint.
The following significant problems have come to light:
a) Lack of adequate macro-prudential supervision
153) The present EU supervisory arrangements place too much emphasis on the supervision
of individual firms, and too little on the macro-prudential side. The fact that this failing
is duplicated elsewhere in the world makes it a greater, not a lesser, issue. The Group
believes that to be effective macro-prudential supervision must encompass all sectors of
finance and not be confined to banks, as well as the wider macro-economic context.
This oversight also should take account of global issues. Macro-prudential supervision
requires, in addition to the judgements made by individual Member States, a judgement
to be taken at EU level. The Group believes that this requires that an Institution at EU
8 be explicitly and
level be entrusted with this task. It recommends that the ECB/ESCB
formally charged with this responsibility in the European Union.
b) Ineffective Early Warning mechanisms
154) Insofar as macro-prudential risks were identified (and there was no shortage of
comments about worrying developments in both macroeconomic imbalances and the
lowering price of risk, for example) there was no mechanism to ensure that this
assessment of risk was translated into action. The Group believes, if the responsibility it
proposes to be given to the ECB/ESCB is to work, that there must be an effective and
enforceable mechanism to check that the risks identified by the macro-prudential
analysis have resulted in specific action by the new European Authorities (see below)
and national supervisors. The Group therefore recommends a formal process to give
teeth to this.
c) Problems of competences
155) There have been a significant number of instances of different types of failure in the
supervision, by national supervisors, of particular institutions, i.e. in their oversight
duties supervisors failed to perform to an adequate standard their responsibilities. One of
these instances – the supervision of Northern Rock by the UK Financial Services
Authority – has been examined in detail, but other, less well documented examples
abound (e.g. IKB, Fortis). The Group believes there is advantage in analysing and
publishing the circumstances of those failures, so that lessons can be learnt and future
supervisory behaviour improved. Although the Group does not believe that any system
can avoid errors of judgment occurring, it considers that the supervisory experience of
the crisis points to the need for well staffed, experienced and well trained supervisors in
all Member States, and the Group accordingly makes recommendations designed to
d) Failures to challenge supervisory practices on a cross-border basis
156) The present processes and practices for challenging the decisions of a national
supervisor have proven to be inadequate; for example the embryonic peer review
arrangements being developed within the level 3 committees proved ineffective. At
present (and until any practical arrangements for supervision on an EU basis are both
agreed in principle and translated into practice), extensive reliance is and will be placed
on the judgements and decisions of the home supervisor. This is particularly important
when a financial institution spreads its activities into countries other than its home base
by branching from its home country. This can, as occurred with the Icelandic banks,
create significant risks in countries other than that of the home regulator, yet the ability
of the host countries affected to challenge the decisions of the home regulator do not
sufficiently recognise these risks.
157) The Group believes that an effective means of challenging the decisions of the home
regulator is needed, and therefore makes recommendations designed both to achieve a
step change in the speed and effectiveness of the present arrangements for peer review
8 ESCB is the European System of Central Banks. It includes all the national central banks of the EU. 40
(which are at a very early stage of development), and to give force to a considered
decision (if arrived at), that a home regulator has not met the necessary supervisory
standards. The Group considers that a binding mediation mechanism is required to deal
with such cross-border supervisory problems. Without such an effective and binding
mechanism, pressure will build up and some Member States might in the future try to
limit the branching activities of any firm supervised by a supervisor which has been
judged to have failed to meet the standards. Such fragmentation would represent a major
step backwards for the Single Market.
158) Equally, the Group believes that an effective mechanism is needed to allow home
supervisors to challenge decisions made by host supervisors.
e) Lack of frankness and cooperation between supervisors
159) As the crisis developed, in too many instances supervisors in Member States were not
prepared to discuss with appropriate frankness and at an early stage the vulnerabilities of
financial institutions which they supervised. Information flow among supervisors was
far from being optimal, especially in the build-up phase of the crisis. This has led to an
erosion of mutual confidence among supervisors. Although the Group recognises the
issues of commercial confidentiality and legal constraints involved in candid
discussions, it believes that much more frank exchange of information is called for and
makes recommendations to achieve this.
f) Lack of consistent supervisory powers across Member States
160) 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 the enforcement actions (including sanctions) open to them when a firm is
in breach of its duties. The Group recommends an urgent review of these differences in
powers and subsequent action to bring all supervisors up to a high level minimum
standard. This will involve substantial increase in the powers of a number of Member
g) Lack of resources in the level 3 committees
161) The resources available to the level 3 committees severely limited the work which they
could undertake, and their speed of reaction. This, combined with the heavy workload
required of them in implementing the Financial Services Action Plan, meant that they
were unable to perform very much either by way of peer review or by way of
identifying sector wide risk issues. The Group therefore believes that the resources
available to the three committees should be significantly increased, and makes
recommendations to that end.
h) No means for supervisors to take common decisions
162) There are a number of reasons why the level 3 committees have been unable to
contribute to the effective management of the crisis, notably their inability to take urgent
decisions. For example, they were not able to agree and implement common decisions in
relation to money-market funds or short-selling. The basic reason for this problem is
that the level 3 committees do not have the legal powers to take decisions. As a
consequence, they understandably have failed to develop either the attitude or the
procedures needed to respond rapidly to the emerging crisis. If their legal powers are
expanded, changes in both will be required.
163) The above diagnosis is of course easy to establish with hindsight. It is not the Group's
intention to blame the supervisory community in the EU for a crisis which is the result
of the interaction of a number of complex and global factors – many of which (i.e.
global imbalances, excess liquidity, too low interest rates…) were beyond the remit of
micro-prudential supervisors. We should also recognize that some regulation applied by
supervisors played a negative role in fuelling the crisis. In the previous chapter on
regulation, we noted that some "public" regulation may well have aggravated things,
generated perverse effects and contributed to the excesses of securitisation. In addition,
in some instances, the absence of clarity of some rules (e.g. pillar 2 of Basel) led
supervisors to be passive, rather than pro-active.
164) It remains however the case that the evidence clearly shows that the crisis prevention
function of supervisors in the EU has not been performed well, and is not fit for
165) This chapter will not enter into the details of recent trends that have resulted in an
increasingly integrated European financial market (see annex 3) nor into the description
of the present supervisory arrangements (see annex 4).
166) What is proposed here is basically a new structure to make European supervision more
effective and so improve financial stability in all the member countries of the EU. There
are two elements to this: strengthening the quality of both national supervision and
European supervision. The evidence given to the" Group by the level 3 committees was
clear that, under their existing mandate as advisory committees to the Commission and
with their present working methods, their ability to develop their work further will be
III. WHAT TO DO: BUILDING A EUROPEAN SYSTEM OF
SUPERVISION AND CRISIS MANAGEMENT
a) The role of the ECB
167) A number of people, including representatives of the ECB, have suggested that the ECB
could play a major role in a new European supervisory system in two respects: a role in
macro-prudential supervision and a role in micro-prudential supervision.
9 This general statement does not reflect the fact that some banks in the EU fared better than others. Was this related to
differences in national supervision? It could be that some banks' supervisors had a more "prudent" approach than others (see
for example the Spanish approach to off-balance sheet transactions which was the most rigorous and also their requirement
for dynamic provisioning which provided cushions to the banks when the crisis erupted). It could be also that some financial
institutions had developed, by tradition, better internal controls and risk management which led, for example, to a more
cautious behaviour to securitisation than had been the case in others (the US investment bank model was less used by EU
banks). Those European banks which held to the universal banking model have been to some extent better protected although
a number of them, in their investment capacities, were caught by buying toxic securities.
All this shows that the context in which the crisis developed is complex and that there is no single explanation. 42
168) In the area of macro-prudential supervision, the suggested responsibilities could cover
financial stability analysis; the development of early warning systems to signal the
emergence of risks and vulnerabilities in the financial system; macro-stress testing
exercises to verify the degree of resilience of the financial sector to specific shocks and
propagation mechanisms with cross-border and cross-sector dimensions; as well as the
definition of reporting and disclosure requirements relevant from a macro-prudential
169) In the area of micro-prudential supervision, the views have been put forward to the
Group that the ECB could become responsible for the direct supervision of cross-border
banks in the EU or only in the euro zone. This could cover all cross-border banks or
only the systemically important ones. In such a scenario, the competences, currently
assigned to national supervisory authorities, would be transferred to the ECB which
would, inter alia, licence the institutions concerned, enforce capital requirements, carry-
out on-site inspections.
170) Alternatively, the ECB could be granted a leading oversight and coordination function
in the micro-supervision of cross-border banks in the EU. Whilst the colleges composed
of national supervisors would continue to directly supervise cross-border banks, the
ECB could play a binding mediation role to resolve conflicts between national
supervisors, define supervisory practices and arrangements to promote supervisory
convergence and become responsible for regulation related to issues such as pro-
cyclicality, leverage, risk concentration or liquidity mismatch.
171) These ideas have been carefully appraised by the Group. While the Group supports an
extended role for the ECB in macro-prudential oversight (as discussed below), it does
not support any role for the ECB for micro-prudential supervision. The main reasons for
- the ECB is primarily responsible for monetary stability. Adding micro-supervisory
duties could impinge on its fundamental mandate;
- in case of a crisis, the supervisor will be heavily involved with the providers of
financial support (typically Ministries of Finance) given the likelihood that tax
payers money may be called upon. This could result in political pressure and
interference, thereby jeopardising the ECB's independence;
- giving a micro-prudential role to the ECB would be extremely complex because in
the case of a crisis the ECB would have to deal with a multiplicity of Member States
Treasuries and supervisors;
- conferring micro-prudential duties to the ECB would be particularly difficult given
the fact that a number of ECB/ESCB members have no competence in terms of
- conferring responsibilities to the ECB/Eurosystem which is not responsible for the
monetary policy of a number of European countries, would not resolve the issue of
the need for a comprehensive, integrated system of supervision;
- finally, the ECB is not entitled by the Treaty to deal with insurance companies. In a
financial sector where transactions in banking and insurance activities can have very
comparable economic effects, a system of micro-prudential supervision which was
excluded from considering insurance activities would run severe risks of fragmented
172) For all these reasons, the Group takes the view that the ECB should not become
responsible for the micro-supervision of financial institutions. However, the Group
considers that the ECB should be tasked with the role in ensuring adequate macro-
prudential supervision in the EU.
b) Macro-prudential supervision: the case for reform
173) A key lesson to be drawn from the crisis, as noted above, is the urgent need to upgrade
macro-prudential supervision in the EU for all financial activities.
174) Central banks have a key role to play in a sound macro-prudential system. However, in
order for them, and in particular the ECB/ESCB, to be able to fully play their role in
preserving financial stability, they should receive an explicit formal mandate to assess
high-level macro-financial risks to the system and to issue warnings where required.
175) Within the EU, the ECB, as the heart of the ESCB, is uniquely placed for performing
this task: i.e. identifying those macro-prudential risks which all national supervisors
should take account of. The ECB/ESCB therefore should be able to require from
national supervisors all the information necessary for the discharge of this
176) In view of the integrated financial market in the EU and the geographical distribution of
financial activities, it is essential that within the ESCB all national central banks are
associated to this process, not merely those of the euro area.
177) This could be achieved in the following way. A new group, replacing the current
Banking Supervision Committee (BSC) of the ECB, called the European Systemic Risk
Council (ESRC) should be set up under the auspices and with the logistical support of
the ECB. Its task will be to form judgements and make recommendations on macro-
prudential policy, issue risk warnings, compare observations on macro-economic and
prudential developments and give direction on these issues.
178) As the responsibility for conducting macro-prudential supervision is proposed to be
allocated to the ECB/ESCB, it is logical to compose the ESRC with the central banks of
the ESCB. It would therefore be composed of the members of the ECB/ESCB General
Council (the President of the ECB, the vice-president of the ECB and the Governors of
the 27 central banks), plus the Chairpersons of CEBS, CEIOPS and CESR and one
representative of European Commission. The President of the ECB would chair the
ESRC. The ESRC should be supported by a secretariat provided by the ECB.
179) But given the importance of having this group interact closely with those supervisors
who are not part of central banks, it should be clearly stated that whenever the subject
discussed justifies a wider presence of insurance and securities supervisors (as well as
banking supervisors for those countries where banking supervision is carried-out outside
the central bank), it would be assured. In such cases, a Governor could choose to be
represented by the Head of the appropriate national supervisory authority. 44
180) For a new system of macro-prudential supervision to work effectively, two main
conditions must be met:
- A proper flow of information between national supervisors and the ECB/ESCB must
be mandatory. Appropriate procedures will have to be put in place so that all
relevant information can be transmitted to the ECB/ESCB in a way which
guarantees confidentiality. In this context, ECB/ESCB staff could be invited to
attend meetings - and ask questions- between supervisors and the systemically
important financial groups in order to receive first-hand relevant information.
ECB/ESCB staff could be invited to participate in the relevant colleges of micro-
prudential supervisors. But the ECB/ESCB would not be responsible for micro-
- It is crucial that there is an effective early warning mechanism as soon as signs of
weaknesses are detected in the financial system. And a graduated risk warning
framework for ensuring that, in the future, the identification of risks translates into
181) Depending on the nature of the risks detected, a proper action has to be taken by the
relevant EU authorities. Different types of actions could be required. For example:
- if credit expansion appeared to become excessive in one or several member
countries, the ESRC would liaise with the relevant central bank (and/or banking
supervisor), give advice on the appropriate measures to be taken (e.g. triggering
dynamic provisions). Central banks would be expected to take into account the
findings of the ESRC. If the ESRC has issued a specific risk warning calling for a
response by national supervisors, the ESRC should review their responses, and, if
necessary, indicate whether and what further action it judged necessary, by reporting
to the Economic and Financial Committee (EFC), on the basis described below;
- if the issue is more related to a global dysfunction of the system (e.g. too high
maturity transformation, abuse of off-balance sheet transactions, abuse of regulatory
arbitrage by non-banks), the ESRC would have to warn the global supervisory
system (see chapter 4 on global repair) in order to define appropriate and coherent
actions at both the EU and global levels. If the problems pertain to prudential issues
in the EU, then the level 3 committees should be required to address them;
- If the concerns were related to fiscal matters (e.g. excessive deficits or the
accumulation of debt), the ESRC would immediately relate to the EFC.
182) As soon as the risks detected would appear to have a potentially serious negative impact
on the financial sector or the economy as a whole, the ESRC should inform the
Chairman of EFC. In such circumstances, the EFC, working with the Commission,
could play an essential role by developing an action-oriented strategy to deal with
serious risks requiring political or legislative action. It must be clear to everyone who
should act and according to which timetable. Furthermore, a process should be
established to regularly evaluate the effectiveness of the supervisory/regulatory actions
that have been agreed and decide whether other actions are necessary. A "rendez-vous
clause" should be set to check that the actions taken have actually been effective. It
would be the responsibility of the Chairman of the EFC to decide if and when the EFC
(in its full composition, i.e. with the central banks) and/or the ECOFIN Council should
be informed or associated in the deliberations. The EFC should also advise on how to
relate with the European Parliament and on whether the information needs to be made
public – which can be helpful in certain circumstances.
Recommendation 16: A new body called the European Systemic Risk Council (ESRC), to
be chaired by the ECB President, should be set up under the auspices and with the
logistical support of the ECB.
- The ESRC should be composed of the members of the General Council of the ECB, the
chairpersons of CEBS, CEIOPS and CESR as well as one representative of the
European Commission. Whenever the subject discussed justifies the presence of
insurance and securities supervisors, the Governor could choose to be represented by
the Head of the appropriate national supervisory authority;
- The ESRC should pool and analyse all information, relevant for financial stability,
pertaining to macro-economic conditions and to macro-prudential developments in all
the financial sectors.
- A proper flow of information between the ESRC and the micro-prudential supervisors
must be ensured.
Recommendation 17: an effective risk warning system shall be put in place under the
auspices of the ESRC and of the Economic and Financial Committee (EFC).
- The ESRC should prioritise and issue macro-prudential risk warnings: there should be
mandatory follow up and, where appropriate, action shall be taken by the relevant
competent authorities in the EU.
- If the risks are of a serious nature, potentially having a negative impact on the financial
sector or the economy as a whole, the ESRC shall inform the chairman of the EFC. The
EFC, working with the Commission, will then implement a strategy ensuring that the
risks are effectively addressed.
- If the risks identified relate to a global dysfunction of the monetary and financial
system, the ESRC will warn the IMF, the FSF and the BIS in order to define
appropriate action at both EU and global levels.
- If the ESRC judges that the response of a national supervisor to a priority risk warning
is inadequate, it shall, after discussion with that supervisor, inform the chairman of the
EFC, with a view to further action being taken against that supervisor.
c) Micro-supervision: moving towards a European System of Financial Supervision
183) After having examined the present arrangements and in particular the cooperation within
the level 3 committees, the Group considers that the structure and the role bestowed on
the existing committees are not sufficient to ensure financial stability in the EU and all
its Member States. Although the level 3 committees have contributed significantly to the
process of European financial integration, there are a number of inefficiencies which can
no longer be dealt with within their present legal structure (i.e. as advisory bodies to the
This is why the Group proposes the establishment of a European System of Financial
184) The ESFS should constitute an integrated network of European financial supervisors,
working with enhanced level 3 committees ("Authorities"). Therefore the ESFS would
be a largely decentralised structure, fully respecting the proportionality and subsidiarity
principles of the Treaty. So existing national supervisors, who are closest to the markets
and institutions they supervise, would continue to carry-out day-to-day supervision and
preserve the majority of their present competences (see annex 3).
185) But in order to be in a position to effectively supervise an increasingly integrated and
consolidated EU financial market (and especially the large cross-border institutions,
which pose systemic risks), the Authorities will carry-out a defined number of tasks that
are better performed at the EU level. The supervisor of the home Member State will
continue to function as the first point of contact for the firm, whilst the European centre
should coordinate the application of common high level supervisory standards,
guarantee strong cooperation with the other supervisors, and, as importantly, guarantee
that the interests of host supervisors are properly safeguarded.
186) As far as cross-border institutions are concerned, the ESFS should continue to rely
heavily on the colleges of supervisors to be introduced by the revised CRD and the
Solvency 2 directives. However, these colleges of supervisors should be strengthened by
the participation of representatives of the secretariat of the level 3 committees as well as
of ECB/ESCB observers.
187) The ESFS must be independent from possible political and industry influences, at both
EU and national level. This means that supervisors should have clear mandates and
tasks as well as sufficient resources and powers. In order to strengthen legitimacy and as
a counterpart for independence, proper accountability to the political authorities at the
EU and national levels should be ensured. In short, supervisory work must be
independent from the political authorities, but fully accountable to them .
10 Based on various internationally recognised standards and codes (i.e. the G10 Basel Core Principles for Effective Banking Supervision
(BCP), the IAIS Insurance Core Principles and the IOSCO Objectives and Principles of Securities Regulation), supervisory independence
can be defined as a situation in which the supervisor is able to exercise its judgment and powers independently with respect to the
enforcement of prudential and/or conduct of business rules, i.e. without being improperly influenced or overruled by the parties under
supervision, the government, the Parliament, or any other interested third party. As such, the supervisory authority must be empowered and
able to make its own independent judgements (e.g. with respect to licensing, on-site inspections, off-site monitoring, sanctioning, and
enforcement of the sanctions), without other authorities or the industry having the right or possibility to intervene. Moreover, the supervisor
itself must base its decisions on purely objective and non-discriminatory grounds. However, supervisory independence differs from central
bank independence (i.e. in relation to monetary policy), in the sense that the government (usually the Finance minister) remains politically
responsible for maintaining the stability of the financial system, and the failure of one or more financial institutions, markets or
infrastructures can have serious implications for the economy and tax payer's money10. Consequently, the supervisory authority should
operate within a certain scope of responsibilities and under an explicit delegation of powers in the form of legislation passed by
Parliament and the government should not exercise immediate powers on the supervisory authority and interfere directly in its day-to-day
activities. Independence should be balanced and strengthened by proper accountability arrangements and transparency of the regulatory and
supervisory process, consistent with confidentiality requirements. National authorities should however relinquish control mechanisms such
as having government representatives, chairing or actively participating in the management board of the supervisory authority, or giving the
government the right to intervene in the day-to-day operations of the supervisory authority. Their influence should be limited to the
possibility of amending the legal framework, imposing long-run strategic goals, and monitoring performance, on the condition that this is
done in an open and transparent manner. 47
188) The ESFS must work with a common set of core harmonized rules and rely on high-
quality and consistent information. This means proper, primary, timely information
exchange among all supervisors to enable complete assessment – from the national to
European to global levels.
189) Finally, the ESFS should be neutral with respect to national supervisory structures:
national supervisory structures have been chosen for a variety of reasons and it would be
impractical to try to harmonise them – even though it may well be that the current trend
could continue towards the emergence of a dual "twin peaks" system (banks, insurance
companies and other financial institutions being covered by the same authority and
markets/conduct of business by another one).
Recommendation 18: A European System of Financial Supervisors (ESFS) should be set-
up. This ESFS should be a decentralised network:
- existing national supervisors would continue to carry-out day-to-day supervision;
- three new European Authorities would be set up, replacing CEBS, CEIOPS and CESR,
with the role coordinate the application of supervisory standards and guarantee strong
cooperation between the national supervisors;
- colleges of supervisors would be set up for all major cross-border institutions.
The ESFS will need to be independent of the political authorities, but be accountable to
It should rely on a common set of core harmonised rules and have access to high-quality
IV. THE PROCESS LEADING TO THE CREATION OF A EUROPEAN
SYSTEM OF FINANCIAL SUPERVISION
190) The goal set out above is an ambitious one. It will require important institutional,
legislative and operational changes. It will also require the emergence of the broadest
possible political consensus on the necessity to move in this direction and the steps that
must be taken to do so. The Group hopes that all Member States will aspire to these
changes. If not, a variable geometry approach based on the mechanisms of Enhanced
Cooperation or an inter-governmental agreement provided for in the Treaty may be
191) The Group proposes a two stage process, to strengthen the supervision of the European
financial sector, thereby rebuilding confidence in the market. The process should be as
swift as possible, whilst giving sufficient time to all stakeholders involved to converge
towards the goal of a strengthened and more integrated system.
192) Whilst the transformation of current EU supervisory arrangements lie at the very heart
of this process, the Group considers that improvements in the organisation of
supervision cannot be looked at in isolation from the rules which supervisors have to
implement and from the crisis management and resolution arrangements that they have
to implement (together with finance ministries) when needed. Regulation, supervision
and crisis management/resolution arrangements are intertwined. They form a
continuum. There is no point in converging supervisory practices, if the basic financial
regulations remain fragmented. And it will be impossible to revamp the organisation of
European supervision, without clarity as to how a crisis, should it break-out, will be
managed and resolved by the relevant authorities.
193) The two stage process proposed below therefore brings together regulation, supervision
and crisis management/resolution.
A) Stage 1 (2009-2010): Preparing for a European System of Financial
a) Preparing for the transformation of the level 3 committees into European
194) The Commission, the Council and the Parliament should immediately start the necessary
legislative work building a consensus to transform the level 3 committees into three
European Authorities: a European Banking Authority, a European Insurance Authority
and a European Securities Authority. The actual transformation should be completed at
the start of the second phase (see below).
Concurrently, work should start in the following areas:
b) Upgrading the quality of supervision
195) The Member States and the level 3 committees should, as a matter of urgency, find
practical ways to strengthen the national supervisors. At national level, consideration
should be given to the following issues: aligning supervisors' competences and powers
on the most comprehensive system in the EU; increasing supervisors' remuneration;
facilitating exchanges of personnel between the private sector and supervisory
authorities; ensuring that all supervisory authorities implement a modern and attractive
personnel policy. At European level, the level 3 committees should intensify their
efforts in the areas of training and personnel exchanges to create a strong European
196) The European Commission should carry-out, in cooperation with the level 3
committees, an examination of the degree of independence of all national supervisors.
This examination should lead to concrete recommendations for improvement, including
the ways in which national supervisory authorities are funded.
197) The level 3 committees should prepare the modalities with the ESRC for a legally
binding mechanism, including for the transfer of information, whereby the identification
of risks by the ESRC translates into expeditious regulatory, supervisory or monetary
policy examination at EU level. 49
In the first stage (2009-2010), national supervisory authorities should
be strengthened with a view to upgrading the quality of supervision in the EU.
- Member States should give consideration to the following reforms: aligning
supervisors' competences and powers on the most comprehensive system in the EU,
increasing supervisors' remuneration, facilitating exchanges of personnel between the
private sector and supervisory authorities, ensuring that all supervisory authorities
implement a modern and attractive personnel policy.
- The level 3 committees should intensify their efforts in the areas of training and
personnel exchanges. They should also work towards the creation of a strong European
- The European Commission should carry-out, in cooperation with the level 3
committees, an examination of the degree of independence of all national supervisors.
This should lead to concrete recommendations, including on the funding of national
In this first stage, the European Commission should immediately begin the work to prepare
legal proposals to set up the new Authorities.
c) Moving towards harmonised rules, powers and sanctions
198) The European Institutions and the level 3 committees should initiate a determined and
concerted effort to equip the EU financial sector with a consistent set of core rules by
the beginning of 2013. A process should be set-up, whereby the key-differences in
national legislation will be identified and removed. 11
199) These differences stem from exceptions, derogations, additions made at national level ,
or ambiguities contained in directives which have a material impact on the market; are
laxer than the minimum core standards; or which may induce competition distortions or
regulatory arbitrage will be identified and removed. In its efforts to remove these
differences, the European Commission should concentrate its first efforts on the main
200) This process may not lead to identical rules in every case. However, the core
harmonised rules should be sufficiently comprehensive. To that effect, the level 3
committees will examine the differences that exist and propose to the Commission new
or further developments of level 1 and level 2 rules (e.g. harmonisation of the sanctions
regimes, definition of core capital rules, harmonisation in the areas of short-selling,
controls for security settlement systems).
201) The European Institutions should also set in motion a process which will lead to far
more consistent sanctioning regimes across the Single Market. Supervision cannot be
effective with weak, highly variant sanctioning regimes. It is essential that within the
EU and elsewhere, all supervisors are able to deploy sanctions regimes that are
sufficiently convergent, strict, resulting in deterrence. This is far from being the case
11 A practice sometimes referred to as "goldplating". 50
now. The same exercise should be initiated with respect to supervisory powers. These
12 . This cannot be conducive to
also differ greatly from one Member State to another
coherent and effective supervision in the Single Market.
In the first stage, EU should also develop a more harmonised set of
financial regulations, supervisory powers and sanctioning regimes.
- The European Institutions and the level 3 committees should initiate a determined
effort to equip the EU with a far more consistent set of rules by the beginning of 2013.
Key differences in national legislation stemming from exceptions, derogations,
additions made at national level or ambiguities contained in current directives should
be identified and removed, so a harmonized core set of standards is defined and applied
throughout the EU.
- The European Institutions should set in motion a process leading to far stronger and
consistent supervisory and sanctioning regimes in the Member States.
d) Immediate strengthening of the level 3 committees
202) The level 3 committees should be subject to a number of changes which should be
i) Reinforcement of the resources of the these committees, to be able to employ more
people, with a larger budget;
ii) Development of the presently embryonic peer review processes within each
committee, with a view to becoming binding mediation processes;
iii) Redefinition of their work and priorities to become more pro-active in identifying
problems and proposing solutions. The use of qualified majority voting should be
put into practice;
iv) Cooperation between the level 3 committees should be further intensified and
e) Supervisory colleges
203) The present relatively restricted use of supervisory colleges should be expanded
immediately. The Group believes that by the end of 2009 colleges for all major cross-
border firms should be established in the EU . By mid-2009, the level 3 committees
should make proposals for all major cross border financial firms within the EU to have
supervisory colleges and they should define clear supervisory norms for them.
12 For the time being, for example, only 10 insurance supervisors are empowered to approve internal risk models; only 6 of
them can increase capital requirements within firms ; and 2 of them are not empowered to grant licences.
13 As an order of magnitude, this could encompass at least 50 financial institutions having a significant market share in
another Member State. 51
Recommendation 21: The Group recommends an immediate step-change in the working of
the level 3 committees which can be dealt with at once. The level 3 committees should
- benefit from, under the Community budget, a significant reinforcement of their
- upgrade the quality and impact of their peer review processes;
- prepare the ground, including through the adoption of adequate supervisory norms, for
the setting-up of supervisory colleges for all major cross-border financial firms in the
EU by the end of 2009.
f) Crisis management and resolution
204) Legislative changes covering in particular aspects of company and insolvency laws (e.g.
winding-up, transferability of assets, bankruptcy), should be proposed by the
Commission as soon as possible if the EU is to deal with future crises in a more
effective and cost-efficient manner (see section VI of chapter 2).
B) Stage 2 (2011-2012): Establishing the European System of Financial
a) Role of the new European Authorities
205) As early as possible during this second phase, the level 3 committees would be
transformed legally into the three Authorities mentioned above.
206) These Authorities would continue to perform all the current functions of the level 3
committees (advising the Commission on regulatory and other issues, defining overall
supervisory policies, convergence of supervisory rules and practices, financial stability
monitoring, oversight of colleges).
207) National authorities would continue to remain responsible for the supervision of
domestic institutions. Cross-border institutions would continue to be supervised by
home and host supervisors. Disputes between home and host supervisors would be
subject to decisions by the relevant Authority.
208) But, in addition, the new Authorities would carry-out a number of new, specific tasks
which, in full conformity with the principle of subsidiarity, the Group considers would
be more effectively carried-out at the European level. These tasks would be the
i) In relation to cross-border institutions:
- A legally binding mediation role, allowing the new Authorities to solve disputes
between national supervisors. They should be able to, when no agreement can be
found between the supervisors of a cross-border institution, take certain
supervisory decisions directly applicable to the institution concerned (e.g.
approval of risk internal models, capital add-ons, licence withdrawal, resolving
disputes about different legal interpretations relating to supervisory
- The designation of Group supervisors (in cases where the process laid down in
the relevant directives has not led to an agreement on this question);
- The aggregation of all relevant information emanating from national supervisors
and pertaining to cross-border institutions;
- Staff from the Authorities could take part in on-site inspections carried out by
- The Authorities would ensure a true level playing-field for all cross-border
institutions and facilitate the monitoring of the systemic threats they pose;
- The Authorities would be tasked to ensure the consistency of prudential
supervision for all actors (and in particular between cross-border and smaller
institutions), thereby avoiding the risk of unfair competition between supervised
entities. To guarantee this, any financial institution (including purely domestic
ones) should be able to submit complaints to the Authority when they consider
that they suffer from any discrimination vis-à-vis a cross-border institution
which has its home supervisor in another Member State;
- The prudential assessment of pan-EU mergers and acquisitions (in combination
with the assessment made by the relevant Member States).
ii) In relation to specific EU-wide institutions:
- The Authority concerned would be responsible for the licensing and direct
supervision of some specific EU-Wide institutions, such as Credit Rating
Agencies and post-trading infrastructures.
iii) In the area of regulation:
- The Authorities should play a decisive role in the technical level 3 interpretation
of level 1 and level 2 measures and in the development of level 3 technical
standards. A legal mechanism should be put in place so as to ensure that, once
an Authority has decided on a given interpretation (through guidance,
recommendations etc), this interpretation becomes legally valid throughout the
iv) In relation to supervisory standards and practices:
- The Authorities would be responsible for defining common supervisory practices
and arrangements for the functioning of the colleges of supervisors;
- The Authorities should evaluate the organisation, processes, competences and
independence of the national supervisory authorities through peer reviews. These
evaluations should lead to concrete recommendations for improvements and
should take place frequently, without any scruples; 53
- The Authorities would have a significant new responsibility of ensuring that all
national supervisors meet necessary standards, by being able to challenge the
performance by any national supervisor of its supervisory responsibilities,
whether for domestic or cross-border firms, and to issue rulings aimed at
ensuring that national supervisors correct the weaknesses that have been
identified. In the event of the national supervisor failing to respond to this ruling,
a series of graduated sanctions could be applied, including fines and the launch
by the Commission of infringement procedures. In exceptional circumstances,
where serious issues of financial stability are at stake, the Authorities should be
able on a temporary basis to acquire the duties which the national supervisor is
failing to discharge.
v) In relation to macro-prudential issues:
- The Authorities would have binding cooperation and information sharing
procedures with the ESRC to allow the latter to perform its macro-prudential
- The Authorities should create and lead groups of national supervisors to deal
with specific events affecting several Member States (e.g. bankruptcy of a third
country systemic group).
vi) In the area of crisis management:
- In crisis situations, the Authorities should have a strong coordinating role: they
should facilitate cooperation and exchange of information between competent
authorities, act as mediator when that is needed, verify the reliability of the
information that should be available to all parties and help the relevant
authorities to define and implement the right decisions.
- Annex 5 to this chapter shows how supervisory competences could be shared
between national supervisors and the Authorities.
vii) In relation to international matters:
- The Authorities would prepare (and in some cases could adopt) equivalence
decisions pertaining to the supervisory regimes of third countries;
- They would represent the EU interests in bilateral and multilateral discussions
with third countries relating to supervision.
b) Governance and budget of the new Authorities
209) From a governance standpoint, each Authority would have a board structure comprised
of the highest-level representatives from national authorities. Their chairpersons and
director generals should be full-time independent professionals. These professionals
would be chosen and appointed by the board. This should not exclude recruiting an
independent external personality of the highest calibre. In addition, the appointment of
the chairs should be confirmed by the Commission, the Council of Ministers and the
European Parliament and should be valid for a period of 8 years. 54
210) The Authorities' decisions would be taken collectively, through the board structure
composed of the Heads of national supervisors, by qualified-majority. However, other
arrangements could be considered when dealing with binding mediation cases (e.g.
decisions by the chairpersons and director generals). The Authorities would have their
own autonomous budget, which could be financed by the industry and/or contributions
from the public sector (including the EU budget). These budgets would have to be
commensurate with their responsibilities.
211) The Authorities would have the highest degree of independence vis-à-vis the European
institutions, which should in not interfere in the internal processes and decisions of the
Authorities. However, the Authorities would be accountable to the Council, the
European Parliament and the Commission. They should report formally to these three
institutions on a frequent basis.
c) Crisis management and resolution
212) As soon as possible in this second phase, the legislative changes recommended in the
previous chapter would need to enter into force. An equal and high level of protection
to all depositors, investors and policy-holders should be guaranteed, avoiding
competition distortions between institutions and between sectors.
213) The changes recommended above are ambitious and will be complex to implement. It is
nevertheless vital to do so in order, in particular, to seriously tackle the issue of
confidence that affects the present relationship between home and host countries. Recent
developments in this crisis have strengthened this distrust. Fears of most countries have
deepened in terms of the ability of their own supervisors to prevent crises, stop
withdrawals by parent companies of liquidity held in local subsidiaries or branches. The
Group believes that the reforms described above could do a lot to reduce such
suspicions and provide effective, practical and legally binding mechanisms to resolve
disputes. We believe that this is probably the only way at this stage to combine the
efficiency and needs of large groups on the one hand and the necessary safeguards for
host countries on the other.
Recommendation 22: In the second stage (2011-2012), the EU should establish an
integrated European System of Financial Supervision (ESFS).
- The level 3 Committees should be transformed into three European Authorities: a
European Banking Authority, a European Insurance Authority and a European
- The Authorities should be managed by a board comprised of the chairs of the national
supervisory authorities. The chairpersons and director generals of the Authorities should
be full-time independent professionals. The appointment of the chairpersons should be
confirmed by the Commission, the European Parliament and the Council and should be
valid for a period of 8 years.
- The Authorities should have their own autonomous budget, commensurate with their
- In addition to the competences currently exercised by the level 3 committees, the
Authorities should have, inter alia, the following key-competences:
i) legally binding mediation between national supervisors;
ii adoption of binding supervisory standards;
iii) adoption of binding technical decisions applicable to individual financial
iv) oversight and coordination of colleges of supervisors;
v) designation, where needed, of group supervisors;
vi) licensing and supervision of specific EU-wide institutions (e.g. Credit Rating
Agencies, and post-trading infrastructures);
vii) binding cooperation with the ESRC to ensure adequate macro-prudential
- National supervisory authorities should continue to be fully responsible for the day-to-day
supervision of firms.
Recommendation 23: The Group recommends that planning for the 2 stages of the new
system be started immediately. To this effect, a group of high-level representatives of the
Finance Ministries, the European Parliament, the Level 3 Committees, and the ECB to be
chaired by the Commission, should come forward before the end of 2009 with a detailed
214) The following diagram illustrates how the ESRC and the ESFS would interact with
each other. 56
A new European Framework for Safeguarding Financial Stability
European Systemic Risk Council (ESRC)
[Chaired by President ECB] Main tasks of the European Systemic Risk Council: decide on
macro-prudential policy, provide early risk warning to EU
Macro-prudential Members of supervisors, compare observations on macro-economic and
supervision ECB/ESCB Chairs of European prudential developments and give direction on these issues.
General Council EBA, EIA Commission
(with alternates &ESA
Information on micro-prudential Early risk warning
European System of Financial Supervision (ESFS) Main tasks of the Authorities: in addition to the competences of
the existing level 3 committees, the Authorities would have the
Micro-prudential following key-competences: (i) legally binding mediation between
European European European
supervision national supervisors, (ii) adoption of binding supervisory
Banking Insurance Securities standards, (iii) adoption of binding technical decisions applicable
Authority Authority Authority to individual institutions, (iv) oversight and coordination of
(EBA) (EIA) (ESA) colleges of supervisors, (v) licensing and supervision of specific
EU-wide institutions (e.g., Credit Rating Agencies and post-
trading infrastructures), (vi) binding cooperation with the ESRC
to ensure adequate macro-prudential supervision, and (vii)
strong coordinating role in crisis situations.
Main tasks of national supervisors: continue to be fully
National National National responsible for day-to-day supervision of firms.
Banking Insurance Securities
Supervisors Supervisors Supervisors 57
V. REVIEWING AND POSSIBLY STRENGTHENING THE
EUROPEAN SYSTEM OF FINANCIAL SUPERVISION (ESFS)
215) The implementation of the arrangements described above will have to be monitored, and
their effectiveness carefully assessed. A full-review should take place no later than three
years after the entry into force of stage 2. Whilst it would be premature at this stage to
make detailed recommendations as to how the ESFS could be strengthened beyond
stage 2, if stage 2 proves to be insufficient, the following observations can be made.
216) There may be merit, over time, in evolving towards a system which would rely on only
two Authorities: The first would be responsible for banking and insurance issues, as
well as any other issue which is relevant for financial stability (e.g. systemically
important hedge funds, systemically important financial infrastructures). The second
Authority would be responsible for conduct of business and market issues, across the
three main financial sectors. Combining banking and insurance supervisory issues in the
same Authority could result in more effective supervision of financial conglomerates
and contribute to a simplification of the current extremely complex institutional
217) Furthermore, given the speed at which financial markets evolve, it is important to
maintain a consistent set of technical rules applying to all financial firms. If it appeared,
after the review mentioned above, that wider regulatory powers of horizontal application
were needed, such a strengthening of the Authorities should be envisaged.
218) Concerning one idea, that often appears, suggesting the unification of all supervisory
activities for cross-border institutions at the pan-EU level, the Group considers that this
matter could only be considered if there were irrefutable arguments in favour of such a
proposal. The complexities and costs entailed by such a proposal (which would result in
a two-tier supervisory system, one for cross-border institutions and one for domestic
institutions), its political implications and the difficulty of resolving cross-border
burden-sharing are such that the Group has doubts of it being implemented at this
juncture. This scenario could become more viable, of course, should the EU decide to
move towards greater political integration.
The functioning of the ESFS should be reviewed no later than 3
years after its entry into force. In the light of this review, the following additional reforms
might be considered:
- Moving towards a system which would rely on only two Authorities: the first Authority
would be responsible for banking and insurance prudential issues as well as for any
other issue relevant for financial stability; the second Authority would be responsible
for conduct of business and market issues;
- Granting the Authorities with wider regulatory powers of horizontal application;
- Examining the case for wider supervisory duties at the EU level. 58
CHAPTER IV: GLOBAL REPAIR
I. PROMOTING FINANCIAL STABILITY AT THE GLOBAL LEVEL
219) Although Europe was not at the root of the current financial crisis, it has nevertheless
both contributed to it and been hit severely by it. Global economic and financial
integration has by now reached a level where no country or region can any longer
insulate itself from developments elsewhere in the world. This points to the need for a
co-ordinated, global policy response not only in the area of financial regulation and
supervision, but also in the macroeconomic and crisis management field.
220) Since the financial crisis has started to unfold, the EU has played a pro-active role in
international efforts, trying to contain the economic fall-out from the financial crisis and
to reform the international financial architecture. The EU was at the origin of the G20
process launched at the Washington Summit in November 2008 and is contributing to
the political orientations agreed at that summit. However, beyond managing the current
crisis, attention must now be devoted to drawing the lessons from the weaknesses of the
current international financial architecture that have been revealed by the recent events.
221) A variety of international institutions and informal groups currently deal with financial
regulatory and supervisory issues, often in a segmented way despite the interactions and
risk transfers between different parts of the financial system . However, at present there
is an evident lack of a coherent framework for designing and enforcing minimum
regulatory standards, for identifying risks to financial stability and for coordinating
supervisory policies at the global level. Moreover, there are practically no arrangements
for cross-border financial crisis management at the global level and for enforcement.
What is needed now is a strengthened, more coherent and streamlined international
financial regulatory and surveillance system, building on the better use of existing
222) A start in addressing the weaknesses of the existing international financial architecture
has been made at the G20 Summit in Washington on 15 November 2008. By agreeing
on an action plan based on the need to strengthen transparency, to enhance sound
regulation, to promote integrity in financial markets and to reinforce international
cooperation, G20 leaders have set out the main priorities for the months and years to
come. However, international cooperation will not work without a proper representation
of the main players and key emerging market economies in each international
organisation or body.
223) It is clearly in the EU's interest to try to shape the reform of the international financial
architecture. The EU should take the lead by improving its own regulatory and
supervisory system, which, necessary in its own right, is also required for international
convergence. In other words, international convergence and agreement on high
14 These include the Basel Committee on Banking Supervision, other Basel-based Committees such as the Committee on the
Global Financial System and the Committee on Payment and Settlement Systems, the Bank for International Settlements
(BIS), the Financial Stability Forum (FSF) as well as bodies like the International Organisation of Securities Commissions
(IOSCO), the International Accounting Standards Board (IASB) and the International Association of Insurance Supervisors
standards needs strong EU enforceability through strong EU institutions. The EU has,
after all, a large share of world capital markets. The EU's policy development should
dovetail with international developments. Furthermore, convergence in international
regulatory and supervisory standards would ensure a level playing field for the highly
competitive globally integrated financial services sector.
II. REGULATORY CONSISTENCY
224) Chapter 2 of this report has set out the Group's recommendations for regulatory reform.
While some of the required improvements specifically refer to the legislative framework
in the EU, most of the recommended reforms either concern existing rules agreed at the
international level (Basel 2; international accounting standards) or new initiatives that
should preferably be implemented internationally (e.g. the regulation of credit rating
agencies, strengthened derivatives market rules or corporate governance rules). The EU
has a clear interest in promoting worldwide consistency of regulatory standards towards
the high level benchmarks.
225) Such moves towards to international consistency of regulatory standards will also avoid
unacceptable regulatory loopholes and regulatory arbitrage which could undermine
financial stability. It would moreover reduce the compliance burden associated with
cross-border economic activity and avoid distortions of competition. Finally, seen from
the point of view of public authorities, enhanced regulatory convergence would avoid
regulatory friction between jurisdictions and facilitate the supervision of globally active
226) International regulatory convergence towards a consistent set of rules could be promoted
by pursuing two parallel avenues. Firstly, a strengthening and broadening of bilateral
regulatory dialogues between the main financial centres. Secondly, a clear mandate,
including precise objectives and timetables, for international standard-setters as
currently discussed in the G20 context.
227) Who should be in charge of coordinating the international standard setting process?
Given its experience and track record as a standard-setter in the field of banking, the
Basel Committee would seem well placed to play an important role in developing
adequate standards in some of the above-mentioned areas. However, as a number of
international standard setters other than central banks are concerned by the regulation of
the different aspects of financial activity, the Group considers that a reformed FSF
would, in view of the broader range of its participants and expertise, be in the best
position for coordinating the work of the various international standard setters in
achieving international regulatory consistency.
228) However, the FSF in its current form would not be able to fulfil this task. It is therefore
proposed to strengthen the FSF by providing it with more resources and a stronger
governance structure (including a full-time chairperson). Moreover, the FSF should
become more accountable by reporting to the IMF and, like other international standard-
setters (e.g. Basel Committee) should swiftly enlarge its membership to all systemically
important countries. Clearly, all international standard-setters will need to combine
independence from political interference with political accountability. Furthermore, it
will be essential to prepare such international financial standards transparently and in
close cooperation with market participants in order to be sufficiently close to market
229) It would also be important to report regularly (at least once or twice a year) to the IMF's
International Monetary and Finance Committee (IMFC) in order to maintain the
political momentum and to ensure accountability. In this context, it would be advisable
to activate the Articles of Agreement of the IMF in order to transform the IMFC into a
decision making Council.
230) Over the medium term, thought might be given to establishing a full international
standard-setting authority, established by a treaty. The objective should be to put in
place an international standard setting process which would be binding on jurisdictions
and which would ensure implementation and enforcement of international standards.
This would have to be supplemented by providing the IMF with the tasks of surveying
(in the framework of Article IV Reviews) the enforcement of these standards.
Recommendation 25: The Group recommends that, based on clear objectives and
timetables, the Financial Stability Forum (FSF), in conjunction with international
standard setters like the Basel Committee of Banking Supervisors, is put in charge of
promoting the convergence of international financial regulation to the highest level
In view of the heightened role proposed in this report for the FSF, it is important that the
FSF is enlarged to include all systemically important countries and the European
Commission. It should receive more resources and its accountability and governance
should be reformed by more closely linking it to the IMF.
The FSF should regularly report to the IMF's International Monetary and Financial
Committee (IMFC) about the progress made in regulatory reform implementing the lessons
from the current financial crisis.
The IMFC should be transformed into a decision-making Council, in line with the Articles
of the IMF agreement.
III. ENHANCING COOPERATION AMONG SUPERVISORS
231) In order to address the serious supervisory failures experienced in the past, strengthened
international collaboration in the supervision of large complex cross-border financial
groups is of crucial importance. For this purpose, international colleges of supervisors
should be set up before summer 2009 for all the largest financial institutions along the
lines prepared by the FSF. Pragmatic solutions must be found on host supervisor
involvement, striking the right balance between efficiency and adequate representations
and information. As agreed by the G20 summit, major global banks should meet
regularly and at least once per year with their supervisory college for comprehensive
discussions on the assessment of their risks.
232) With a view to ensuring consistency and to identify potential systemic risks, in addition
to the participation of macro- and micro-prudential authorities, the participation of an
official from an international body like the Basel Committee in these colleges would be
highly desirable. On this basis, best practices could also be identified and promoted and
coherence could be ensured.
233) The emergence over the last few years of financial conglomerates who are very large in
size and active in many different business segments (including in proprietary trading)
throughout the world represents a particular supervisory challenge. There is a risk that
this trend will intensify as a result of the crisis (e.g. the merger between commercial
banks and investment banks), as ailing institutions are being acquired by others. If the
system is not going to move towards a clear separation between pure commercial
banking activities (and some investment activities carried-out for the clients) and banks
that basically act like an investment fund, then the world is moving towards a more
complex setting where both activities will be mingled.
234) Such complex institutions, as well as conglomerates combining banking and insurance,
pose indeed specific challenges both for their managers and their supervisors: most
frequently, increasing size goes hand in hand with increased complexity and increased
cross-border activity. Such financial giants are so vast and complex that it is a huge
challenge to assess in an adequate way the risks to which they are exposed or the risks
that they may represent for the wider economy. Given their size and the structural
function they have for the financial system as a whole, they are, to some extent, "too big
to manage" and "too big to fail" – which means that they can expose the rest of society
to major costs and are subject to acute moral hazard; in some instances, these
institutions can even be "too big to save", for example when they are head-quartered in a
relatively small country or when the organisation of a rescue package is simply too
complex to implement. However, although this may be desirable in instances of
excessive market dominance under anti-trust law, it is unlikely that large financial
institutions will be broken up into component parts.
235) All this calls for a particularly stringent supervision of these institutions. Supervisors
should be particularly attentive to them, step up international cooperation to ensure the
best possible oversight and carry-out robust comprehensive risk assessments. The
extent to which these institutions are leveraged and how they are funded should in
particular be closely scrutinised on an on-going basis. The way in which they allocate
and price capital within the firm is crucial to their risk management. Anti-trust
authorities will also have to enhance their vigilance in relation to these institutions and
be ready to take any appropriate measure.
236) Faulty risk management has played a key role in the run-up to the current crisis.
International firm supervisors should therefore pay greater attention to banks' internal
risk management practices and insist on proper stress tests.
237) In the light of the corporate governance weaknesses witnessed over the past few years,
supervisors will also need to pay greater attention to the incentive effects of corporate
remuneration schemes. Here as well, a common global approach would be optimal in
order to avoid regulatory arbitrage. Supervisors should therefore agree on a common
assessment of incentive alignment in financial institutions and apply such common
criteria under pillar 2 of Basel 2.
238) The IMF should play a significant role in surveying (in the framework of Article IV
assessments) the enforcement by member countries of international standards. 62
Recommendation 26: Barring a fundamental change in the ways that banks operate,
the Group recommends that the colleges of supervisors for large complex cross-border
financial groups currently being set up at the international level should carry out robust
comprehensive risk assessments, should pay greater attention to banks' internal risk
management practices and should agree on a common approach to promoting incentive
alignment in private sector remuneration schemes via pillar 2 of Basel 2.
The Financial Stability Forum (FSF), working closely with other relevant international
bodies, should ensure coherent global supervisory practice between the various colleges
and promote best practice.
IV. MACROECONOMIC SURVEILLANCE AND CRISIS
239) As has been described in chapter 1 of this report, international macroeconomic
developments and global imbalances have played a major role in leading to the current
crisis. While many were observing the emergence of at least some of these
developments and imbalances, only few rang the alarm bells. While the lack of relevant
aggregate data of a reliable nature admittedly rendered any such warnings less precise
and thus less effective, this is no excuse for the fact that, where concerns were actually
voiced, corrective action has been totally inadequate. Macroeconomic surveillance
therefore needs to be significantly improved and needs to get more teeth.
240) The experience of the last few years has highlighted the importance of establishing a
more robust macroeconomic framework for the global economy. To this end, the
surveillance of macroeconomic policies, exchange rates and global imbalances needs to
be reinforced. Central banks, on their side, should more closely monitor the growth in
monetary and credit aggregates.
241) Beyond the strengthening of the IMF's existing macroeconomic surveillance
mechanisms one of the priorities in crisis prevention should be the strengthening of
international early warning mechanisms building on the swift identification of systemic
vulnerabilities. A comprehensive early warning system, jointly run by the IMF and the
FSF, could build on the existing analytical framework for bilateral and multilateral
macroeconomic surveillance, but would have to give greater emphasis to macro-
prudential concerns. The existing financial reviews are not designed to provide an
assessment on macro-prudential risks or vulnerabilities ahead of crises. Drawing the
lessons from the past, it will moreover be important to ensure that any effective early
warning system is able to deliver clear and unambiguous messages to policymakers and
recommend pre-emptive policy responses. The key failure in the past was not so much
a lack of surveillance, although the messages emerging from the surveillance could have
been sharpened, but a lack of policy action. Thus, the follow-up to any such financial
system assessments needs to be strengthened significantly.
242) A comprehensive early warning system could also usefully be complemented by the
creation of an international risk map and an international credit register. The purpose of
such a risk map would be to build up a common data base containing relevant
information on risk exposures of financial institutions and markets, both at the national
and the international level. The risk map should contain all the information needed for
identifying systemic risks on a global scale. Clearly, in order to be effective, the risk
map should go beyond the banking sector and include major other financial institutions
like insurance companies and hedge funds. It should also include all major financial
products. Subject to suitable rules for protecting confidentiality of firm-level data, such
a risk map would close the information gap revealed in the current crisis and could
become an essential tool for everybody interested in assessing risks to financial stability.
243) An international credit register could be instrumental when preparing, on a regular basis,
a global financial risk map. Such a credit register, to be set up by the BIS in cooperation
with other relevant bodies like national central banks and the IMF, would consist of a
database compiling a coherent set of interbank and customer-specific credit data (above
a certain threshold and collected at regular intervals) for the major creditors. It would
therefore allow to better assess the risk exposure of key financial players.
Complementing existing national credit registers, an international credit register,
accompanied by a comparable securities register, would be a useful tool for all bodies
concerned about assessing risks to financial stability – provided this can be achieved
without excessive bureaucracy.
244) The International Monetary Fund (IMF) is in principle uniquely placed for playing an
over-arching role in ensuring high-quality macroeconomic and macro-prudential
surveillance even if it may need to further deepen its analysis of financial market
developments. The IMF has already, in collaboration with the FSF, undertaken
substantial work on setting up an early warning system (including a possible early
warning list) and on procedures for a future Early Warning Exercise (EWE). The
purpose of such a EWE should be to increase peer pressure in order to trigger timely
corrective action. The IMF, in cooperation notably with central banks, would also seem
to be the international institution best suited for preparing a global risk map.
245) In addition, the IMF/World Bank Financial Sector Assessment Programmes (FSAP)
should in the future become compulsory for all IMF member countries, based on a fixed
schedule particularly for systemically important countries. It should be at the same level
as macroeconomic surveillance and be fully integrated into the Art. IV consultation
process. Furthermore, the FSAP results should be published and countries should be
obliged to set out their reasons for not following IMF recommendations, similar to the
"comply or explain" procedure now used in the EU's level 3 committees.
246) When reinforcing global early warning mechanisms concerning risks to financial
stability, close cooperation between the IMF with its expertise in macro-prudential
matters, the FSF and the BIS/Basel Committee with their knowledge of micro-
prudential supervision will be required. These different tasks and warnings would be
regularly reported to the IMFC or to the IMF Council as suggested above. Moreover, in
order to build up an international credit risk map and credit register, market participants
and national regulators will need to be involved.
247) However, allowing the IMF to play its full role in addressing global macroeconomic
imbalances and in promoting financial stability will require a strong political will to
accept its independent professional advice. Too often in the past, the IMF was hindered
by the (large) member countries concerned either from undertaking the necessary
analysis (e.g. Financial Sector Assessment Programme, FSAP) or from voicing publicly
its concerns. It is therefore particularly important that the IMF reinforces its surveillance
over systemically important countries in an even-handed manner and that member
countries increase their commitment to implementing the IMF's precise policy
recommendations. Even acknowledging that there may always remain legitimate
intellectual disagreements, the objective must be to effectively address domestic policies
in systemically important member countries of the IMF which present a serious risk to
the stability of the international economic and financial system. The IMF's
recommendations – discussed and endorsed by the IMFC – should therefore become
internationally shared macroeconomic policy objectives. In this context, the IMF could
also usefully resume its multilateral consultations with key member countries.
248) As the experience of the last few years has demonstrated, analysis alone is not enough.
Corrective action is required. Although a high-level ex ante political commitment to the
implementation of IMF recommendations would help, more ambitious steps should be
taken. In particular, when thrashing out the early warning system, thought should be
given to the possibility of identifying "danger zones" for key variables, the entry of
which would be to trigger the presumption of the need for intervention, thus reversing
the "burden of proof".
Recommendation 27: The Group recommends that the IMF, in close cooperation
with other interested bodies, notably the FSF, the BIS, central banks and the
European Systemic Risk Council (ESRC), is put in charge of developing and
operating a financial stability early warning system, accompanied by an international
risk map and credit register.
The early warning system should aim to deliver clear messages to policy makers and
to recommend pre-emptive policy responses, possibly triggered by pre-defined "danger
All IMF member countries should commit themselves to support the IMF in
undertaking its independent analysis (incl. the Financial Sector Assessment
Programme). Member countries should publicly provide reasons whenever they do not
follow these recommendations.
The IMFC/Council should receive a report, one or twice a year, on this matter.
249) Any efforts to reduce the risks to financial stability are in danger of being undermined
by systemically relevant jurisdictions that refuse to use internationally agreed standards.
The international community therefore has to deal with jurisdictions that have weak
regulatory and governance standards, lack transparency or are not cooperating in
exchanging information, like certain offshore financial centres. Leaving aside money
laundering and tax issues, and focusing only on financial regulation, offshore financial
centres can pose a risk to financial stability and also create a substantial level playing
field problem: registration of financial institutions can be weak; initial capital
requirements (for services to non-residents) are low; and supervision substandard or
250) In order to correct the associated risks to the global financial system, different measures
have been proposed. These range from added financial statement disclosure rules
(requiring the disclosure of off-balance sheet structures on a jurisdiction by jurisdiction
basis in a separate annex to the financial statement, accompanied by a risk statement for
assets held in poorly regulated, and in some cases, "uncooperative" financial centres) to
more far-reaching rules prohibiting regulated financial institutions from transacting with
entities located in these jurisdictions.
251) Without judging the merits of these proposals at this time, which should be examined in
more detail, the Group considers that, already today, group supervisors have the
possibility of increasing capital requirements for those financial institutions that take
higher risks by holding assets in poorly regulated financial centres or where supervisors
feel hindered in getting pertinent information. Where necessary, these existing powers
should be used to the full.
252) The effectiveness of these arrangements should be monitored on a regular basis under
the auspices of the IMF. More generally, a transparent evaluation and benchmarking
process should be set up by the IMF and the FSF, in cooperation with the World Bank,
the Financial Action Task Force (FATF) and the OECD, in order to regularly assess the
regulatory framework in off-shore centres and other financial centres, the results of
which would be made public.
Recommendation 28: The Group recommends intensifying co-ordinated efforts to
encourage currently poorly regulated or "uncooperative" jurisdictions to adhere to
the highest level international standards and to exchange information among
In any event, in order to account for the increased risks, group supervisors should
increase capital requirements for those financial institutions investing in or doing
business with poorly regulated or supervised financial centres whenever they are not
satisfied by the due diligence performed or where they are unable to obtain or
exchange pertinent information from supervisors in these offshore jurisdictions.
The IMF and the FSF, in cooperation with other relevant international bodies,
should assess the existing regulatory standards in financial centres, monitor the
effectiveness of existing mechanisms of enforcing international standards and
recommend more restrictive measures where the existing applied standards are
considered to be insufficient.
V. CRISIS MANAGEMENT AND RESOLUTION
253) Even improved crisis prevention will not completely avoid crises from happening.
However, the current crisis has revealed a lack of effective crisis management and
coordination framework at the international level. There are no clear multilateral
arrangements for coordinating national responses to financial crises. Furthermore, the
difficulties in separating liquidity from solvency crises have again become apparent.
254) The experiences of the last twelve month have demonstrated the need for close
coordination between supervisory, monetary and fiscal authorities. Effective
information sharing and close cooperation are essential not only for efficient crisis
management, but they are also indispensable for avoiding negative spillovers,
distortions to competition and regulatory arbitrage. 66
255) In this context, strengthening the IMF's capacity to support countries facing balance of
payment problems in a financial crisis is critical. The Fund currently has insufficient
resources for assisting its members. EU Member States should therefore show their
readiness to contribute to increasing IMF resources.
The Group recommends that EU Member States should show their
support for strengthening the role of the IMF in macroeconomic surveillance and to
contribute towards increasing the IMF's resources in order to strengthen its capacity to
support member countries facing acute financial or balance of payment distress.
VI. EUROPEAN GOVERNANCE AT THE INTERNATIONAL LEVEL
256) While the European Union is one of the key international players, its representation in
international organisations and other international bodies is fragmented and lacks
coherence and continuity. In some cases, the EU's representation is incomplete (e.g. the
FSF or G20 at Ministerial level), while in other cases the EU as a whole – i.e. including
its Member States - is even perceived as being over-represented, to the detriment of
emerging market economies. This weakens the possibility of the EU speaking with a
single voice, and it is something that is also increasingly criticised by the EU's
international partners. It is therefore essential to organise a coherent European
representation in the new global economic and financial architecture. In the context of a
more ambitious institutional (and quota) reform of the IMF, this could imply re-
arranging constituencies and reducing the number of Executive Board members for the
EU to not more than two. A similar consolidation of the EU's representation should be
installed for other multilateral fora.
Recommendation 30: The Group recommends that a coherent EU representation in
the new global economic and financial architecture be organised.
In the context of a more ambitious institutional reform, this could imply a
consolidation of the EU's representation in the IMF and other multilateral fora.
VII. DEEPENING THE EU'S BILATERAL FINANCIAL RELATIONS
257) The EU has every interest in leading and developing its relations with the major
financial powers of the world. Over the past years, good technical work has been
carried out with the United States on complex regulatory and supervisory issues and
these efforts should be intensified with the new US administration to find the broadest
and deepest common ground. Likewise, with Japan and China, Brazil, India, Russia,
Saudi Arabia, and other emerging countries the EU should work to develop common
understanding on the global financial reforms that are needed. The EU has a unique
opportunity to strengthen its global influence and to promulgate its ideas and
approaches. But for this to happen – the EU's own supervisory and regulatory model
must not just be fit for purpose but a global example of effectiveness, utility, fairness,
cooperation, consistency and solidarity. 67
Recommendation 31: In its bilateral relations, the EU should intensify its financial
regulatory dialogue with key partners. ***
This report sets out the regulatory, supervisory and global reforms that the Group considers
Work must begin immediately. 68
ANNEX I: Mandate for the High-Level Expert Group on
financial supervision in the EU
The current financial crisis has highlighted the weaknesses in the EU's supervisory
framework, which remains fragmented along national lines despite the substantial progress
achieved in financial market integration and the increased importance of cross border entities.
If financial integration is to be efficient in terms of safeguarding systemic stability as well as
in delivering lower costs and increased competition, it is essential to accelerate the ongoing
reform of supervision.
Supervisory reform has so far relied on an evolutionary approach, whereby the so-called
Level 3 Committees in the Lamfalussy framework are expected to achieve significant
convergence in supervisory practices and procedures across member states. While certain
progress in convergence has been achieved, this progress has not allowed the EU to identify
and/or deal with the causes of the current financial crisis. The current national-based
organisation of EU supervision lacks a framework for delivering supervisory convergence and
limits the scope for effective macro-prudential oversight based on a comprehensive view of
developments in financial markets and institutions.
The Group is therefore requested to make proposals to strengthen European supervisory
arrangements covering all financial sectors, with the objective to establish a more efficient,
integrated and sustainable European system of supervision.
In particular the group should consider:
- how the supervision of European financial institutions and markets should best be
organised to ensure the prudential soundness of institutions, the orderly functioning of
markets and thereby the protection of depositors, policy-holders and investors;
- how to strengthen European cooperation on financial stability oversight, early warning
mechanisms and crisis management, including the management of cross border and cross
- how supervisors in the EU's competent authorities should cooperate with other major
jurisdictions to help safeguard financial stability at the global level.
The Group will examine the allocation of tasks and responsibilities between the national and
The Group should present a report to the European Commission in view of the Council of
The Group will conduct hearings and organize a consultation as appropriate. 69
+1 anno fa
Materiale didattico per il corso di Theories of Regulation della prof.ssa Laura Ammannati. Trattasi del rapporto dal titolo "The Hight Level Group on Financial Supervision in the EU", stilato dal gruppo presieduto da Jacques de Larosiére e avente riguardo al ruolo delle autorità di regolazione dei mercati nella prevenzione delle speculazioni e degli squilibri economici generatori di crisi.
I contenuti di questa pagina costituiscono rielaborazioni personali del Publisher Atreyu di informazioni apprese con la frequenza delle lezioni di Theories of Regulation e studio autonomo di eventuali libri di riferimento in preparazione dell'esame finale o della tesi. Non devono intendersi come materiale ufficiale dell'università Milano - Unimi o del prof Ammannati Laura.
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