European financial supervision

The October 2008 financial crisis brought to light the need to completely revise the financial supervisory framework. Through this Communication, the European Commission proposes a more harmonised and better coordinated system which aims at anticipating any financial turbulence effectively.

ACT

Communication from the Commission of 27 May 2009 – European financial supervision [COM(2009) 252 final - Not published in the Official Journal].

SUMMARY

This Communication sets out the basic architecture for a new European financial supervisory framework. The European Commission proposes that this framework be composed of two new pillars:

• the European Systemic Risk Council (ESRC);
• the European System of Financial Supervisors (ESFS).

The European Systemic Risk Council (ESRC)

The financial crisis revealed the shortcomings of a system that was lacking in macro-financial supervision. Under the new system, it is essential to be able to identify risks to stability and to introduce an effective warning system. The current macro-prudential measure is too fragmented. It should be developed further.

The ESRC should be an independent body, responsible for safeguarding financial stability in the area of macro-prudential supervision at European level. It will not have any legally binding powers and shall be responsible for the following tasks:

• collecting information and identifying potential threats;
• prioritising risks according to their significance;
• issuing warnings where applicable;
• making recommendations if required;
• monitoring the measures that are taken;
• cooperating with the IMF, the FSB and third country counterparts.

Macro-prudential supervision will mainly be carried out by central banks. In this regard, the Commission proposes that the ESRC be composed of:

• the President of the European Central Bank (ECB), responsible for the presidency of the ESRC;
• a Vice-President (elected by the members of the ESRC);
• the central bank governors from the 27 Member States;
• the Vice-President of the ECB;
• the Chairpersons from the three European supervisory authorities;
• a member of the European Commission.

Each national central bank governor shall be accompanied by a representative of the national supervisory authorities, admitted as observers.

It is planned that the ESRC shall form part of the European legal and institutional framework. The Commission proposes that the ESRC should be established on the basis of Article 95 of the EC Treaty as a body without legal personality.

The European System of Financial Supervisors (ESFS)

The ESFS corresponds to a micro-prudential approach. Its duties are to set up a system which is in line with the objective of a stable and single market for financial services in the European Union. It will also be responsible for linking national supervisors into a strong Community network.

The ESFS shall form an operational European network. The three Committees of Supervisors are to be replaced by the following authorities, having a legal personality:

• the European Banking Authority (EBA);
• the European Insurance and Occupational Pensions Authority (EIOPA);
• the European Securities Authority (ESA).

These three authorities shall:

• establish a single set of harmonised rules;
• ensure consistent application of EU rules;
• manage disagreement between national supervisors;
• make recommendations if there is a manifest breach of Community law;
• create a common supervisory culture and consistent supervisory practices;
• have full supervisory powers for some specific entities;
• ensure a coordinated response in crisis situations;
• collect micro-prudential information.

The ESFS shall be composed of:

• the three supervisory authorities described above;
• a steering committee;
• national supervisory authorities.

With the establishment of the ESFS, and the three European Supervisory Authorities described above, the Commission intends to introduce a “single rule book” which will ensure uniform application of rules in the EU in order to safeguard the effective functioning of the internal market.

The ESFS is to be established on the basis of Article 95 of the EC Treaty.

Context

The October 2008 financial crisis revealed many shortcomings in financial supervision. As a response to this crisis, the Commission mandated a group chaired by Mr Larosière to propose recommendations in order to strengthen European supervisory arrangements. The Larosière Group thus presented a report on 25 February 2009 introducing a new system, which is set out in this Communication.

Last updated: 18.08.2009