(1)

Financial stability is a precondition for the real economy to provide jobs, credit and growth. The financial crisis has revealed important shortcomings in financial supervision, which has failed to prevent the accumulation of excessive risks within the financial system . The crisis has huge consequences for the tax payers, for many Union citizens who are now unemployed and for many small and medium size enterprises (SMEs). The Members States cannot afford to bail out financial institutions, in the event of a new crisis on the same scale, without breaching the rules of the Stability and Growth Pact .

(1a)

Long before the financial crisis, the European Parliament was already calling regularly for the reinforcement of a true level playing field for all actors at the Union level while pointing out significant failures in the Union's supervision of ever more integrated financial markets (in its resolutions of 13 April 2000 on the Commission communication on implementing the framework for financial markets: Action Plan (6), of 21 November 2002 on prudential supervision rules in the European Union (7), of 11 July 2007 on financial services policy (2005-2010) – White Paper (8), of 23 September 2008 with recommendations to the Commission on hedge funds and private equity (9), of 9 October 2008 with recommendations to the Commission on Lamfalussy follow-up: future structure of supervision (10), of 22 April 2009 on the amended proposal for a directive of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (11) and of 23 April 2009 on the proposal for a regulation of the European Parliament and of the Council on Credit Rating Agencies (12)).

(2)

In November 2008, the Commission mandated a High Level Group chaired by Mr Jacques de Larosière (the ‘de Larosière Group’) to make recommendations on how to strengthen European supervisory arrangements with a view to better protecting its citizens and rebuilding trust in the financial system.

(3)

In its final report presented on 25 February 2009 (the de Larosière Report) , the de Larosière Group recommended, among other things, the establishment of a Union level body charged with overseeing risk in the financial system as a whole.

(4)

In its Communication entitled ‘Driving European Recovery’ of 4 March 2009, the Commission welcomed and broadly supported the recommendations of the de Larosière Group. At its meeting of 19 and 20 March 2009, the European Council agreed on the need to improve the regulation and supervision of financial institutions within the EU and to use the report from the de Larosière Group as a basis for action.

(5)

In its Communication entitled ‘European Financial Supervision’ of 27 May 2009, the Commission set out a series of reforms to the current arrangements for safeguarding financial stability at Union level, notably including the creation of a European Systemic Risk Board (ESRB) responsible for macro-prudential oversight. The Council on 9 June 2009 and the European Council at its meeting of 18 and 19 June supported the view of the Commission and welcomed the Commission’s intention to bring forward legislative proposals so that the new framework is in place in the course of 2010. In line with the views of the Commission, it concluded inter alia that the ECB ‘should provide analytical, statistical, administrative and logistical support to the ESRB, also drawing on technical advice from national central banks and supervisors’. The support provided by the ECB to the ESRB as well as the tasks conferred upon and assigned to the ESRB should be without prejudice to the principle of the independence of the ECB in the performance of its tasks pursuant to the Treaty on the Functioning of the European Union (TFEU).

(5a)

Given the integration of international financial markets, there is a need for a strong commitment on the part of the Union at the global level. The ESRB should draw expertise from a high-level scientific committee and take on all the global responsibilities required in order to ensure that the voice of the Union is heard on financial stability matters, in particular in cooperating closely with the International Monetary Fund (IMF), the Financial Services Board (FSB) and all the partners of the Group of Twenty (G-20).

(5b)

The ESRB should contribute, inter alia, towards implementing the recommendations of the IMF, the FSB and the Bank for International Settlements (BIS) to the G-20, in the initial consideration of their report on Guidance to Assess the Systemic Importance of Financial Institutions, Markets and Instruments published in October 2009 which states that systemic risk must be dynamic to take into account the evolution of the financial sector and of the global economy. Systemic risk may be seen as a risk of disruption to financial services that is caused by an impairment of all or parts of the financial system and has the potential to have serious negative consequences for the real economy.

(5c)

The report on Guidance to Assess the Systemic Importance of Financial Institutions also states that the assessment of systemic risk is likely to vary depending on the economic environment. It will also be conditioned by the financial infrastructure and crisis management arrangements, and the capacity to deal with failures when they occur. Institutions may be systemically important for local, national or international financial systems and economies. The key criteria helping to identify the systemic importance of markets and institutions are size (the volume of financial services provided by the individual component of the financial system), substitutability (the extent to which other components of the system can provide the same services in the event of a failure) and interconnectedness (linkages with other components of the system). An assessment based on those three criteria should be complemented with reference to financial vulnerabilities and the capacity of the institutional framework to deal with financial failures.

(5d)

The ESRB's task should be to monitor and assess systemic risk in normal times for the purpose of mitigating the exposure of the system to the risk of failure of systemic components and enhancing the financial system’s resilience to shocks. In this respect, the ESRB should ensure financial stability and mitigate the negative impacts on the internal market and the real economy. In order to accomplish its objectives, the ESRB should analyse all the relevant information, in particular relevant legislation with a potential impact on financial stability, such as accounting, bankruptcy and bail-out rules.

(6)

A proper functioning of Union and global financial systems and the mitigation of threats thereto require enhanced consistency between macro and the micro supervision. As stated in the Turner review, ‘A regulatory response to the global banking crisis’, of March 2009, ‘Sounder arrangements require either increased national powers, implying a less open single market, or a greater degree of European integration’. Given the role of a sound financial system in terms of its contribution to competitiveness and growth in the Union and its impact on the real economy, the Union institutions, as recommended in the de Larosière Report, have opted for a greater degree of European integration.

(6a)

This newly designed system of macro supervision requires credible and high-profile leadership. Therefore, given its key role and its international and internal credibility, and in the spirit of the de Larosière Report, the President of the ECB should be the Chair of the ESRB. In addition, the accountability requirements should be increased as well as the enlargement of the composition of the ERSB bodies to encompass a wide range of experience, backgrounds and opinions.

(6b)

The de Larosière Report also states that macro-prudential supervision is not 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.

(6c)

A European System of Financial Supervision (ESFS) should be established, gathering the actors of financial supervision both at a national and at the Union level, to act as a network. Pursuant to the principle of sincere cooperation in accordance with Article 4(3) of the Treaty on European Union, the parties to the ESFS should cooperate with trust and full mutual respect, in particular to ensure that appropriate and reliable information flows between them. At the Union level, the network should comprise the ESRB and three micro-supervisory authorities: the European Supervisory Authority (Banking), established by Regulation (EU) No …/2010, the European Supervisory Authority (Securities and Markets), established by Regulation (EU) No …/2010, and the European Supervisory Authority (Insurance and Occupational Pensions) established by Regulation (EU) No …/2010.

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(7a)

The ESRB should comprise a General Board, a Steering Committee, a Secretariat, and an Advisory Scientific Committee.

(8)

The ESRB should, where appropriate, issue and make public warnings and recommendations of a general nature concerning the Union as a whole, individual Member States or groups of Member States, with a specified timeline for the relevant policy response. Where such warnings or recommendations are addressed to individual, or a group of, Member States, it may be possible for the ESRB to propose appropriate support measures. Where appropriate, the Commission on its own initiative or at the request of the ESRB, an Authority, the European Parliament or the Council, may adopt a decision addressed to an Authority, determining the existence of an emergency situation

(8a)

The ESRB should decide whether a recommendation should be kept confidential or made public, bearing in mind that public disclosure can help to foster compliance with the recommendations in certain circumstances.

(8b)

A colour code should be elaborated by the ESRB, in order to allow interested parties better to assess the nature of the risk.

(9)

In order to increase their weight and legitimacy, such warnings and recommendations should be transmitted through the European Parliament, the Council , the Commission, the addressees and, where appropriate, the ESAs .

(10)

The ESRB should also monitor compliance with its recommendations, based on reports from addressees, in order to ensure that its warnings and recommendations are effectively followed. Addressees of recommendations should adequately justify any failure in duly complying with the ESRB recommendations (the ‘act-or-explain mechanism’) , in particular towards the European Parliament . The ESRB should be able to have recourse to the European Parliament and to the Council in cases where it is not satisfied with the addressees' response to the recommendations .

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(12)

The ESRB should report to the European Parliament and the Council at least annually, and more frequently in the event of widespread financial distress.

(13)

The ECB and the national central banks should have a leading role in macro-prudential oversight because of their expertise and existing responsibilities in the area of financial stability. The participation of micro-prudential supervisors in the work of the ESRB is essential to ensure that assessment of macro-prudential risk is based on complete and accurate information about developments in the financial system. Accordingly, the chairpersons of the European Supervisory Authorities should be members with voting rights . In a spirit of openness, six independent persons, who should not be members of an ESA, chosen on the basis of their general competence and commitment to the Union and their diverse backgrounds in academic fields or in the private sector, in particular in SMEs, trade-unions or as providers or consumers of financial services and offering all guarantees in terms of independence and confidentiality, should be members of the General Board. One representative of the national competent authorities of every Member State should attend meetings of the General Board without voting rights.

(14)

The participation of a Member of the Commission will help to establish a link with the macro-economic and financial surveillance of the Union , while the presence of the Chairman of the Economic and Financial Committee reflects the role of finance ministries in safeguarding financial stability.

(14a)

Because banks and financial institutions from third countries that are members of the European Economic Area or the European Free Trade Association may operate within the Union, it should be possible to invite one high-level representative from each of those countries to participate in meetings of the General Board subject to authorisation from their home country.

(15)

It is essential that the members of the ESRB perform their duties impartially and only consider the financial stability of the European Union as a whole. Where a consensus cannot be reached, voting on warnings and recommendations within the ESRB should not be weighted and decisions should as a rule be taken by a simple majority.

(16)

The interconnectedness of financial institutions and markets implies that the monitoring and assessment of potential systemic risks should be based on a broad set of relevant macro-economic and micro-financial data and indicators. Those systemic risks include risks of disruption to financial services caused by a significant impairment of all or parts of the Union's financial system that have the potential to have serious negative consequences for the internal market and the real economy. Any type of financial institution and intermediary, market, infrastructure and instrument has the potential to be systemically significant. The ESRB should therefore have access to all the information necessary to perform its duties while preserving the confidentiality of these data as required.

(17)

Market participants can provide valuable input to the understanding of the evolutions affecting the financial system. Where appropriate, the ESRB should therefore consult private sector stakeholders (financial sector representatives, consumer associations, user groups in the financial services area established by the Commission or Union legislation …) and give them a fair opportunity to provide their comments. Furthermore, given that there is no rigid definition of systemic risk and that the assessment of systemic risk may vary depending on the economic environment, the ESRB should ensure a wide range of experiences and skills among its staff and advisors.

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(19)

The establishment of the ESRB should contribute directly to achieving the objectives of the Internal Market. The Union macro prudential oversight of the financial system is an integral part of the overall new supervisory arrangements in the Union as the macro-prudential aspect is closely linked to the micro-prudential supervisory tasks attributed to the European Supervisory Authorities. Only with arrangements in place that properly acknowledge the interdependence between micro- and macro-prudential risks can all stakeholders have sufficient confidence to engage in cross-border financial activities. The ESRB should monitor and assess risks to financial stability arising from developments that can impact on a sectoral level or at the level of the financial system as a whole. By addressing such risks, the ESRB should directly contribute to an integrated Union supervisory structure necessary to promote timely and consistent policy responses among the Member States, thus preventing diverging approaches and improving the functioning of the Internal Market.

(20)

Since an effective macro-prudential oversight of the Union financial system cannot be sufficiently achieved by the Member States because of the integration of the European financial markets, the Union may adopt measures in accordance with the principle of subsidiarity, as set out in Article 5 of the Treaty. In accordance with the principle of proportionality, as set out in that Article, this Regulation does not go beyond what is necessary to achieve those objectives,

(20a)

As suggested in the de Larosière Report, a step-by-step approach is necessary and the European Parliament and the Council should conduct a full review of the ESFS, the ESRB and the ESAs by … (13),

(a)

the ESRB;

(b)

the European Supervisory Authority (Securities and Markets) established by Regulation (EU) No …/2010 [ESMA];

(c)

the European Supervisory Authority (Insurance and Occupational Pensions) established by Regulation (EU) No …/2010 [EIOPA];

(d)

the European Supervisory Authority (Banking) established by Regulation (EU) No …/2010 [EBA];

(e)

the European Supervisory Authority (Joint Committee) provided for by Article 40 of Regulation (EU) No …/2010 [EBA], of Regulation (EU) No …/2010 [ESMA] and of Regulation (EU) No …/2010 [EIOPA];

(f)

the authorities in the Member States as specified in Article 1(2) of Regulation (EU) No …/2010 [EBA], of Regulation (EU) No …/2010 [ESMA] and of Regulation (EU) No …/2010 [EIOPA];

(g)

the Commission, for the purposes of carrying out the tasks referred to in Articles 7 and 9 of Regulation (EU) No …/2010 [EBA], of Regulation (EU) No …/2010 [ESMA] and of Regulation (EU) No …/2010 [EIOPA].

(a)

‘financial institution’ means any undertaking covered by the legislation referred to in Article 1(2) of Regulation (EU) No …/2010 [EBA], of Regulation (EU) No …/2010 [ESMA] and of Regulation (EU) No …/2010 [EIOPA], and any other undertaking or entity operating in the Union, whose financial activities may pose a systemic risk even if they have no direct links with the public at large;

(b)

‘financial system’ means all financial institutions, markets , products and market infrastructures;

(ba)

‘systemic risk’ means a risk of disruption in the financial system with the potential to have serious negative consequences for the internal market and the real economy. All types of financial intermediaries, markets and infrastructure may be potentially systemically important to some degree .

(a)

determine and/or collect, as appropriate, and analyse all the relevant information , including legislation with a potential impact on financial stability such as accounting, reorganisation and winding-up rules, for the objectives described in paragraph 1;

(b)

identify and prioritise systemic risks;

(c)

issue warnings where such systemic risks are deemed to be significant and, where appropriate, make them public ;

(d)

issue recommendations for remedial action in response to the risks identified and, where appropriate , make them public ;

(da)

issue a confidential warning addressed to the Commission when the ESRB deems that an emergency situation as defined in Article 10 of Regulation (EU) No …/2010 [ESMA], of Regulation (EU) No …/2010 [EIOPA] and of Regulation (EU) No …/2010 [EBA] may arise. The ESRB shall provide with an assessment of the situation, in order for the Commission to determine the need to adopt a decision addressed to the ESAs determining the existence of an emergency situation.

(e)

monitor the follow-up to warnings and recommendations;

(f)

cooperate closely with all the other parties to the ESFS and, where appropriate, provide the ESAs with the information on systemic risks required for the achievement of their tasks; in particular the ESRB shall, in collaboration with the ESAs, develop a common set of quantitative and qualitative indicators (risk dashboard), which will serve as the basis to assign a supervisory rating to cross-border institutions that potentially could pose a systemic risk.

(fa)

participate, where appropriate, in the Joint Committee;

(g)

coordinate with international financial organisations, particularly the International Monetary Fund and the Financial Stability Board as well as the relevant bodies in third countries on matters related to macro-prudential oversight;

(h)

carry out other related tasks as specified in Union legislation.

(a)

the President and the Vice-President of the ECB;

(b)

the Governors of the national central banks;

(c)

a Member of the European Commission;

(d)

the Chairperson of the European Banking Authority;

(e)

the Chairperson of the European Insurance and Occupational Pensions Authority;

(f)

the Chairperson of the European Securities and Markets Authority ;

(fa)

six independent persons appointed by the Members of the General Board with voting rights on the proposal of the Joint Committee; the nominees must not be Members of the ESAs and shall be chosen on the basis of their general competence as well as for their diverse backgrounds in academic fields or other sectors, in particular in small and medium size enterprises, trade-unions or as providers or consumers of financial services; at the time of their nomination, the Joint Committee shall indicate which persons are designated also to serve on the Steering Committee; in carrying out their responsibilities, the persons nominated shall neither seek nor take instructions from any Government, institution, body, office, entity or private person; they shall refrain from any action incompatible with their duties or the performance of their tasks .

(a)

one high level representative per Member State of the competent national supervisory authorities , in accordance with paragraph 3 of this Article ;

(b)

the President of the Economic and Financial Committee.

(a)

the Chair of the ESRB;

(b)

the first Vice-Chair of the ESRB;

(ba)

the Vice-President of the ECB;

(c)

four other members of the General Board who are also members of the General Council of the ECB , with regard to the need for a balanced representation of Member States and those within and outside the euro area . They shall be elected by and from among the Members of the General Board who are also members of the General Council of the ECB for a period of three years ;

(d)

a Member of the European Commission;

(e)

the Chairperson of the European Supervisory Authority (Banking) ;

(f)

the Chairperson of the European Supervisory Authority (Insurance and Occupational Pensions) ;

(g)

the Chairperson of the European Supervisory Authority (Securities and Markets) ;

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(ha)

three of the six independent persons referred to in Article 6(1)(fa) .

(a)

nine experts with acknowledged competence and guaranteed independence proposed by the Steering Committee, who shall represent a wide range of experiences and skills and who shall be approved by the General Board for a four-year, renewable mandate in carrying out their responsibilities, the persons nominated shall neither seek nor take instructions from any Government, institution, body, office, entity or private person; they shall refrain from any action incompatible with their duties or the performance of their tasks ;

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(c)

one representative of the European Supervisory Authority (Banking) ;

(d)

one representative of the European Supervisory Authority (Insurance and Occupational Pensions) ;

(e)

one representative of the European Supervisory Authority (Securities and Markets) ;

(f)

two representatives of the Commission;

(g)

one representative of the Economic and Financial Committee.

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(a)

it is appropriate to simplify and reinforce the architecture of the ESFS in order to increase the coherence between the macro and the micro levels as well as between the ESAs;

(b)

it is appropriate to increase the regulatory powers of the ESAs;

(c)

the evolution of the ESFS is consistent with that of global developments in this area;

(d)

there is sufficient diversity and excellence within the ESFS;

(e)

accountability and transparency in relation to publication requirements are adequate.