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Hight Level Group on Financial Supervision in the EU Report Appunti scolastici Premium

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... Vedi di più

Esame di Theories of Regulation docente Prof. L. Ammannati

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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

take risks.

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

that:

- 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

management systems.

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

32

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

6

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

7

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

institutions fail.

− 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

35

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

principle).

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

developed;

- 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

Recommendation 14:

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

I. INTRODUCTION

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

developments.

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

38

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

39

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

achieve this.

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

States supervisors.

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

41

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

9

purpose .

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

severely constrained.

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

standpoint.

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

this are:

- 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

supervision;

- 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

43

comparable economic effects, a system of micro-prudential supervision which was

excluded from considering insurance activities would run severe risks of fragmented

supervision.

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

responsibility.

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-

prudential supervision;

- 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

appropriate action.

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

45

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

(ESFS)

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

46

no longer be dealt with within their present legal structure (i.e. as advisory bodies to the

Commission).

This is why the Group proposes the establishment of a European System of Financial

Supervision (ESFS).

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

10

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

them.

It should rely on a common set of core harmonised rules and have access to high-quality

information.

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

required.

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

48

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

Supervision

a) Preparing for the transformation of the level 3 committees into European

Authorities.

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

supervisory culture.

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

Recommendation 19:

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

supervisory culture.

- 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

authorities.

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

problems.

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

Recommendation 20:

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

implemented rapidly:

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

codified.

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-

13

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

therefore:

- benefit from, under the Community budget, a significant reinforcement of their

resources;

- 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

Supervision

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

following:

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

52

disputes about different legal interpretations relating to supervisory

obligations…);

- 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

national supervisors;

- 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

EU.

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

supervision task;

- 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

Securities Authority.

- 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

responsibilities. 55

- 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

institutions;

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

supervision.

- 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

implementation plan.

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

where necessary)

Information on micro-prudential Early risk warning

developments

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

landscape.

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

Recommendation 24:

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

14

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

international institutions.

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

(IAIS). 59

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

firms.

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

60

close cooperation with market participants in order to be sufficiently close to market

realities.

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

benchmarks.

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

61

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

PREVENTION

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

63

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

64

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

zones".

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

even inexistent.

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

65

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

supervisors.

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

Recommendation 29:

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

are needed.

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

sectoral risks;

- 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

European levels.

The Group should present a report to the European Commission in view of the Council of

Spring 2009.

The Group will conduct hearings and organize a consultation as appropriate. 69


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DESCRIZIONE DISPENSA

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.


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Corso di laurea: Corso di laurea magistrale in economics and political science
SSD:
Università: Milano - Unimi
A.A.: 2011-2012

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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