ABBL

The current EU financial services committees (1) have advisory powers and can issue nonbinding guidelines and recommendations. National supervisors of cross-border financial institutions must co-operate within colleges of supervisors. In the event of disagreement
however, there is no mechanism to resolve the issue. Many technical rules are determined
at Member State level, and there is considerable variation between Member States. Even
where rules are harmonised, application can be inconsistent. This fragmented supervision
undermines the single market, imposes extra costs for financial institutions, and increases
the likelihood of failure of financial institutions with potentially additional costs for taxpayers.

(1) [1] The Committee of European Banking Supervisors (CEBS), Committee of European Insurance and Occupational Pensions Committee (CEIOPS) and the Committee of European Securities Regulators (CESR), widely known as the "Lamfalussy level 3 committees".

February 2009

Publication of the De Larosière report. A high level working group chaired by former managing director of the International Monetary Fund and former governor of the Bank of France Jacques De Larosière produced its findings on financial supervision in Europe.
The report called for :

• A common rulebook for similar supervision of financial institutions in Europe;
• The setting up of a systemic risk board to monitor for the buildup of risks in the bloc's
financial system as a whole;

The creation of three sector specific supervisory authorities to replace CEBS, CEIOPS and
CESR. The first new authority would cover the banking sector, the second the insurance
sector and the third the securities sector. These authorities would have the power to establish supervisory standards and settle disputes between national supervisors, for instance on whether or not to bail out a particular bank.

September 2009
The European Commission produces its proposals for a new European financial supervisory architecture. The proposals take the form of a package of regulations with the main objective of establishing the bodies suggested in the De Larosière report. The powers of the bodies are however somewhat toned down.
December 2009
Council (ECOFIN) adopts its draft common position on the topic. Among other things, this
position introduces an appeals system allowing governments to challenge decisions made
by the three sector specific supervisory authorities.
December 2009
Representatives of the four largest political groups in the EP’s Economic and Monetary
Affairs Committee issue a statement saying that the Council’s newly adopted position is not
workable and that much of the substance in the De Larosière report needed to be restored.
February 2010
The MEPs in charge of steering the package through Parliament present their proposals to
the Economic and Monetary Affairs Committee.

The rapporteurs have signalled that more European integration is necessary in the field of
financial supervision because the only other option is to have a less open single market.
They also argue that the structure which existed during the crisis led to fragmented responses and prevented a clear picture from emerging for the supervisory committees. For these reasons they consider that the De Larosière report’s suggestions are the lowest possible level for effective supervision in the EU.

All rapporteurs want to see a considerable reduction of the possibility for a Member State
to invoke the safeguard clause. This safeguard clause allows a Member State to avoid
implementing a decision of one of the European authorities if it considers that the decision
creates budgetary problems. According to the rapporteurs’ proposals the Member State
would need to provide much clearer proof than is currently required as to how the authority’s decision creates budgetary problems for the Member State. The rapporteurs also improve the review clause to enable the authorities to be strengthened further if, after a few years, this is considered necessary. The rapporteurs argue that this will allow the authorities to evolve over time, as events change and lessons are learnt. A number of innovations to the Commission’s proposals concern the European Banking Authority (EBA). Here the rapporteur is pushing for:

• Direct supervision by EBA of systemically important cross-border banks [1]with national
supervisors acting as agents of EBA
• The creation of two pan-EU funds, one to guarantee depositors money, the other a
bailout fund. These funds would kick in if a systemically important cross-border bank
ran into difficulties. The funds would be financed through bank contributions and are
intended to lessen the cost to tax payers in the event of a crisis.
• A binding mediating role for EBA with regard to conflict resolution between national
supervisors

For the European Securities and Markets Authority (ESMA), the rapporteur is proposing that the authority should have the authority to ban certain financial products if it considers that they pose too much risk. The rapporteur also proposes granting ESMA a similar supervisory system for cross border financial institutions as that being proposed for the EBA. In the case of the European Insurance and Occupational Pensions Authority (EIOPA)
the rapporteur is proposing to significantly improve the coordination between all three sector specific authorities primarily by strengthening the role of a joint committee which the Commission had proposed. This proposal will be taken up in the other two reports also.

(1) The FSB, BIS, IMF and the G-20 (28 October, 2009) defined systemic risk as "a risk
of disruption to financial services that is (i) caused by an impairment of all or parts of the
financial system and (ii) has the potential to have serious negative consequences for the
real economy All types of financial intermediaries, markets and infrastructure can potentially be systematically important to some degree”.