ABBL

On May 27, 2009, the European Commission revealed its plan for establishing a new European Supervisory Framework, which is largely based on the recommendations of the de Larosière Group Report of February 2009.

The Commission articulates the new framework according to two levels of supervision:

• The micro-Prudential supervision, consisting in supervising the financial institutions on an individual basis;
• The macro-Prudential supervision, focusing on the stability of the financial system as a whole. It aims at mitigating the systemic risk and relies on macro-economic indicators.

At the micro-prudential level, the Commission proposes a European System of Financial Supervisors (the ESFS) with the following characteristics:
 

• Transforming the existing Level 3 Committees (CEBS, CEIOPS and CESR) into European Supervisory Authorities (the ESAs), which are granted legally binding powers to ensure the consistency and the convergence of supervisory rules and practices;
• Maintaining the responsibility for the day-to-day supervision of financial institutions with national authorities.

The relevant ESA would participate in the colleges of supervisors as an observer. In case of disagreement among the supervisors of a college the ESA would, after a conciliation phase, settle the disagreement by taking a binding decision.

(A New European Framework for Safeguarding Financial Stability - Source: ABBL/ European Commission)

At the macro-prudential level, the Commission proposes the creation of a European Systemic Risk Council (the ESRC) in charge of identifying, examining and reporting on vulnerabilities in the Single Market.

After tense discussions, the Commission’s proposal has finally received the political support of the European Council of June 19, 2009. The most controversial issue was the binding nature of the ESAs’ decisions and the transfer of sovereignty it implies. The compromise found by the Council stipulates that “decisions taken by the ESAs should not impinge in any way on the fiscal responsibilities of Member States”. For example, the ESA could not force a Member State to rescue a bank using public money.

The ABBL approves the Commission’s proposal and supports more specifically the following recommendations:

• The ESFS is a decentralised supervisory system which relies on the existing network of supervisors;
• The ESFS is balanced, as it transfers at EU level some key responsibilities and recognises the role of local supervisors for the day-to-day supervision. In that respect, we agree with the breakdown of responsibilities detailed in Annex V of the report: “Allocation of competences between national supervisors and the EU Authorities in the ESFS”.
• The ESFS provides a decision-making mechanism to settle the potential disagreements between supervisors of a college;
• The ESFS, coupled with the proposed new authority in charge of macro-Prudential supervision, the ESRC, will benefit to financial stability.

The ABBL is, however, somewhat concerned about the governance of the ESAs, which must be clarified.

As technical bodies, the ESAs must not be influenced by political considerations and their voting system must guarantee that decisions are taken in a neutral, effective and quick manner. A system of Qualified Majority Voting (QMV) as defined in the Treaty, which is primarily based on demographic weights, does not grant such guarantees of neutrality.

It is crucial that all Member States stand on an equal footing in the Board of Supervisors of the Authorities (be they big, small, Host or Home countries) in order to avoid political bargaining and to promote trust among the supervisory community.

In order to tackle this issue, the ESAs should adopt the “one member, one vote” principle as a fundamental principle to their decision-making mechanism. Such a principle is already in use in the Governing Council of the ECB and, without any exception, in the 22 Community Agencies set up in the first pillar of the EU Treaty framework.

---

Gilles Pierre (ABBL)

Adviser

Banking Supervision, Risk Management, Accounting & Reporting

 

Download the ABBL position paper on the subject.

(Article from the Luxembourg Banking Quarterly - 2/2009)