Axel A Weber: The reform of financial supervision and regulation in
Europe
Speech by Professor Axel A Weber, President of the Deutsche Bundesbank, at the Institute
of International and European Affairs, Dublin, 10 March 2010.
* * *
1. Introduction
Ladies and gentlemen
First of all, I would like to thank you for giving me the opportunity to speak to you here at the
Institute for International and European Affairs. It will come as no surprise to you that the
financial crisis will be the main topic of my speech. However, the onset of the crisis lies
nearly two and a half years in the past, and we are now seeing more and more signs of
stabilisation and recovery. Therefore, I shall leave aside the current state of financial markets
and shall instead try to look ahead, focusing on structural issues.
In this regard, the main challenge for the years to come will be to create a more stable and
more resilient financial system to prevent future crises. It is obvious, however, that such an
ambitious endeavour will not happen on its own. Instead, it requires strong commitment,
resolute efforts and broad reforms. Where to begin?
2. Lessons from the financial crisis
The first step in any serious reform should be to gain a clear understanding of the events that
occurred and their underlying causes. Even though it is a tempting thing to do, a crisis of the
magnitude we have been witnessing over the past two and a half years cannot be traced
back to a single cause. In fact, there could be a hundred narratives, and each would appear
to explain the events in a satisfying manner. The most popular of these narratives would
revolve around the following explanations for the crisis:

Gaps in the regulatory framework,

distorted incentives inside the financial system, such as short-termist remuneration
schemes,

an insufficient resilience of the financial system,

an institutional design of financial supervision that did not properly reflect the
crossborder dimension of crises, and

a lack of awareness of systemic risks.
All these narratives point to a number of lessons to be learned. And it is these lessons which
show us the direction for the reform of the financial system. With regard to financial
regulation and supervision, the lessons of the crisis cover, broadly speaking, the following
four areas:

First, we have to improve regulation and supervision at the microeconomic level.

Second, we have to pay greater attention to systemic risk control at the
macroeconomic level.

Third, we have to ensure an effective interplay between these two levels of
prudential supervision and a cross-check with the analysis of risks to price stability.

And fourth, the cross-boarder character of the crisis means that we also have to
ensure close cooperation between national supervisors.
To put it another way: there is more to a crisis than the microeconomic level, and there is
certainly more to it than the national level. Currently, a great deal of effort is being put into
transforming these lessons into the necessary reforms. For the remainder of my speech I
would like to focus on the European level and comment on some of these endeavours.
3. Institutional aspects of European financial supervision
Within the European Union, much work is being done in establishing a comprehensive
financial architecture. Drawing on the lessons learned, this work is pursuing two goals. The
first goal is to strengthen the macroprudential level of supervision and ensure an efficient
interplay with the microprudential level. The second goal is to strengthen cooperation among
member states in the field of prudential supervision. In my following remarks, I would like to
give a brief outline of the new architecture, address the role that central banks should play in
this framework, and point out some crucial issues that still need to be discussed.
3.1. Key components of the new European financial architecture
To gain an overview of the key components of the new architecture, let us start at the
Given the urgent need to reinforce the macroeconomic perspective
macroeconomic level.
of financial regulation and supervision, the European Commission decided to establish an
independent institution responsible for macroprudential oversight across the EU financial
system. The main goal of this European Systemic Risk Board (ESRB) will be to avert and
mitigate systemic risks to financial stability. To achieve this objective, the ESRB will set up an
early warning system to identify the relevant risks. Whenever necessary, the ESRB will then
issue warnings and recommendations to deal with the identified risks. These warnings and
recommendations could be addressed to the Community as a whole, to individual member
states, or to national supervisory authorities.
To strengthen the link between micro and macroprudential supervision, the ESRB will work in
close cooperation with the European System of Financial Supervisors (ESFS). The ESFS
forms the complementary part of the financial architecture at the microeconomic level. Its
main goal will be to strengthen cooperation between the national authorities to account for
the cross-border dimension of crises that arises from the existence of multinational financial
firms or possible contagion effects. With this objective in mind, the ESFS will establish a
network consisting of national financial supervisors and three new European supervisory
authorities. The new authorities will replace the existing Level 3 Committees and cover each
financial sector.

The European Banking Authority (EBA) will be responsible for supervision of the
banking sector,

the European Securities and Markets Authority (ESA) will be responsible for
supervision of securities markets, and, finally,

the European Insurance and Occupational Pensions Authority (EIOPA) will mainly
be responsible for the supervision of insurance companies.
Although the exact design of the new authorities is still under discussion, the current version
of the relevant bill would assign them a mostly coordinative role. Consequently, the main
objective of the new authorities will be to improve cooperation and coordination among
member states as well as convergence in supervisory practices. In addition, one of their
tasks will be to ensure coordinative action in emergencies.
3.2. The role of central banks
Let me now turn to the question of the role which central banks should play in this
framework. Owing to the close links that exist between the financial system and monetary
policy, central banks have a natural interest in safeguarding financial stability. They also
have a high level of expertise in monitoring macroeconomic developments that might impact
on financial stability. What the financial crisis also demonstrated was the crucial role that
central banks play in restoring financial stability once a crisis occurs. Moreover, in most
countries, central banks are directly involved in banking supervision and thus form a natural
link between the micro and the macroeconomic levels of prudential supervision.
Consequently, they should be adequately represented in the new financial architecture.
In line with the latest compromise on the structure of the ESRB, the European System of
Central Banks will indeed assume a leading role. With regard to the composition of the
General Board, for example, the compromise assigns 29 votes out of a total of 33 votes to
representatives of the ECB and the national central banks. However, discussions on the final
structure of the ESRB are still ongoing, and recent results have shown a tendency to weaken
the role of central banks. Let me emphasise here that retaining the pivotal role for central
banks, which was envisaged in the original compromise, is of great importance.
Regarding the it is especially the European Banking Authority where central banks
ESFS,
should be adequately represented. This is not yet the case, however. It is planned that only
the ECB will be represented on the board. Those central banks that are not the sole
supervisor but that are directly involved in banking supervision should have the right to
participate in the meetings and take part in confidential consultations.
3.3. Critical issues
The new financial architecture represents a major step towards more harmonised and
coordinated micro- and macroprudential supervision within the European Union. A critical
question in this context is how macroprudential and monetary policies and their respective
instruments should relate to each other. Answers to this question have to be found at both
the national and European levels. I have already argued that central banks should be
involved in macroprudential policy. Furthermore, an important lesson of the crisis for
monetary policy is to keep a closer look on developments on financial markets, given their
potentially large impact on inflation and output. At the same time, it is crucial to draw a clear
line between the mandate and instruments of monetary policy, on the one hand, and tasks
and instruments of financial regulation, on the other. Otherwise, the goal of securing price
stability might be compromised. This is why the Eurosystem has made it clear that
safeguarding price stability in the medium term remains the primary goal of its monetary
policy.
4. Conclusion
Ladies and gentlemen, with regard to the institutional design of prudential supervision, the
lessons of the crisis are clear. First, we have to improve cross-border cooperation and
harmonisation. Second, we have to strengthen the macroeconomic perspective of
supervision and integrate it properly with the microeconomic perspective. With the
establishment of the European Systemic Risk Board and the European System of Financial
Supervisors, the European Union has taken a number of steps in the right direction.
However, as usual, the devil lies in the detail of the reforms. Here, further efforts are required
in order to achieve the goal of a more stable and more resilient financial system.
Thank you for your attention.