EN EN 
 EN  COMMISSION OF THE E UROPEAN COMMUNITIES 
Brussels, 27.5.2009 
SEC(2009) 715 
  
COMMISSION STAFF WORKING DOCUMENT 
Accompanying document to the 
 
COMMUNICATION FROM THE COMMISSION 
 
European financial supervision 
  
IMPACT ASSESSMENT  
  
 
{COM(2009) 252 final} 
{SEC(2009) 716} 
 
 2 
Outline of the Impact Assessment report:  
1. Introduction ................................................................................................................ .......... 3  
2. Consultations and procedural issues .................................................................................. 4  
3. Problem definition.......................................................................................................... ...... 5  
3.1. General problems .......................................................................................................... .. 5 
3.2. Affected stakeholders..................................................................................................... .8  
3.3. Micro- and macro-prudential supervision: definitions.................................................... 8 
3.4. Micro-prudential supervision .......................................................................................... 9 3.5. Macro-prudential supervision ....................................................................................... 12 3.6. Baseline scenario......................................................................................................... .. 14 
3.7. Case for EU action ........................................................................................................ 15 
4. Objectives.................................................................................................................. .......... 15  
4.1. Micro-prudential supervision ........................................................................................ 16 
4.2. Macro-prudential supervision ....................................................................................... 17 
5. Identification of policy options.......................................................................................... 17  
5.1. Micro-prudential supervision ........................................................................................ 17 
Stage 1: Supervisory system ............................................................................................ 18 
Stage 2: Institutional structure.......................................................................................... 20 
5.2. Macro-prudential supervision ....................................................................................... 21 
6. Preliminary analysis of impact s and comparison of options.......................................... 23  
6.1. Micro-prudential supervision ........................................................................................ 24 
Stage 1 – Options for Supervision.................................................................................... 24 
Stage 2 – Institutional set-up............................................................................................ 31 
6.2. Macro-prudential supervision ....................................................................................... 33 
7. Impact of the selected options ........................................................................................... 38  
8. Monitoring and evaluation ................................................................................................ 40  
 
 
 31. Introduction 
In its Communication "Driving European recovery" of 4 March 2009, the European 
Commission committed itself to come forward with proposals for reform of the EU 
framework for financial supervision. It was specifically highlighted that the Commission 
would present a Communication on European fi nancial supervision before the end of May 
2009, for discussion at the June European Counc il. This initiative is part of a broader 
programme for financial market reform announ ced in that Communica tion, consisting of a 
series of initiatives for adjusting the EU re gulatory framework for financial services to 
address the problems revealed by the recent financial crisis.  
In the absence of adequate EU-action, there is a risk that the financial integration process in 
Europe will slow down as a re sult of fragmented national re sponses to the financial and 
economic crisis. The other initiatives undertaken  by the Commission – apart from the work on 
financial supervision – include improving and removing gaps in regulation (e.g. concerning 
alternative investment funds and capital requirements for ba nks), protecting consumers and 
SMEs (e.g., initiatives to foster responsible  lending and borrowing), improving incentives to 
reduce excessive short-term risk-taking (e.g., ini tiatives on remuneration in financial services) 
and strengthening sanctions for infringements of the rules. The Commission is also working 
to ensure that appropriate crisis intervention tools are available in all Member States to allow early intervention in ailing banks or insurance firms, in order to  guarantee the continuity of 
key financial services, whilst minimising costs to the taxpayer. Specific regulatory issues 
related to large and complex financial groups are being addressed in the context of the review 
of the Financial Conglomerates Directive (FCD). 
The Commission's action in the area of supe rvision takes due account of and builds on the 
findings and recommendations of the High Leve l Group on financial supe rvision in the EU, 
created by President Barroso in October 2008 and ch aired by J. de Larosière. The de Larosière 
report
1, which cannot be quoted in ex tenso here, examines in deta il the causes of the crisis. 
These were numerous, often with  a global dimension. The report  subsequently covers the 
issues of how to organise the supervision of financial institutions and markets in the EU; how 
to strengthen European co-operation on financial stability oversight, early warning and crisis 
mechanisms; and how EU supervisors shoul d co-operate globall y.  The Group brought 
forward a number of recommendations on regulati on of financial markets. However, it is the 
recommendations regarding the building blocks  for a new European financial supervisory 
framework which are relevant here . They are based on two pillars: 
• a European System of Fi nancial Supervisors (ESFS) , for the supervision of individual 
financial institutions ("micro-prudential supervision") consisting of new European 
Supervisory Authorities working in tandem with  the national financial supervisors, and  
• a European Systemic Risk Council (ESRC)  to oversee the stability of the financial system 
as a whole ("macro-prudential supervision") an d provide early warning of systemic risks 
and recommendations where necessary.  
The Spring European Council agreed on the need  to improve both regulation and supervision 
of financial institutions in th e EU and concluded that the de Larosière report is indeed the 
                                                 
1 "Report of the high-level group on financial supervision in the EU", chaired by J. de Larosière, Brussels 
25/2/2009. Available at: http://ec.europa.eu/internal_market/fin ances/docs/de_larosiere_report_en.pdf . The 
report has also been endorsed by the Spring European Council as a basis for action to reform financial supervision. See annex for a summary of the deviations from the de Larosière report in the options retained in 
this Impact Assessment.  
 
 4basis for action. At the informal Ecofin Council in Prague on 4 April 2009, EU Finance 
Ministers and Central Bank Gover nors discussed the key principles  for the reform of financial 
market supervision, including es tablishing a European body res ponsible for the oversight on 
the stability of the financial system and th e transformation of the existing Committees of 
Supervisors into three new European Supe rvisory Authorities. These discussions 
demonstrated that there was a large agreement on the objectives that should be achieved. The 
informal Ecofin confirmed that the June Europe an Council wishes to analyse this issue again, 
on the basis of a document from the Commission. 
Parallel efforts to strengthening financial supervision in the international context have also 
been undertaken at the global level by the G- 20. At the summit in London on 2 April, the 
heads of state agreed to "take action to build a stronger, more globally consistent, supervisory 
and regulatory framework for the future fina ncial sector, which w ill support sustainable 
growth and serve the needs of business and citizens"2. The Action Plan agreed at the first G-
20 summit in Washington in November 2008 includes as objectives the creation of 
supervisory colleges for all international banks  and strengthening inte rnational and regional 
crisis management. The leaders have also ag reed on reshaping their regulatory systems to 
strengthen macro-prudential supe rvision, both at the national and international level. The 
newly established Financial Stability Board (FSB)3 will collaborate with the International 
Monetary Fund (IMF) to provide early warning of macro-economic and fi nancial risks at the 
global level. The US is putting in place a powe rful financial stability body as well. The EU 
should also act and establish a new body responsible for identifying financial stability risks at 
European level and, where necessary, issue risk  warnings. Being the two largest financial 
markets in the world, the EU and the US must closely work together to contribute to global 
stability and security.  
This impact assessment provides an analysis of the rationale, the alternatives and the impact 
of the Commission proposals for reform of financ ial supervision in the EU presented in the 
Communication on European financial supervision4. It will be followed by a more 
comprehensive and detailed impact assessment for the envisaged legislative proposals to 
implement the reform. 
2. Consultations and procedural issues 
In preparing its report in the period November  2008 – February 2009, the de Larosière Group 
organised a number of hearings with expert s representing the supervisory and regulatory 
authorities at the EU and international level as well as various segments of the financial services industry
5. Their input has been reflected in th e conclusions of the final report.  
The Commission conducted a public written consu ltation on the de Larosière report between 
10 March and 10 April 2009. A list and summary of contributions received is included in annex.  
An Impact Assessment Steering Group was constituted in order to steer the preparation of this 
Impact Assessment, comprising representatives  from DGs: MARKT, ECFIN, SG, SJ,  ENTR, 
EMPL, COMP, SANCO. The Steering Group me t twice on 25 March and 6 April 2009 and 
there was a written consultation on the last draft of the text. The Impact Assessment was submitted on 15 April 2009 and discussed by the Impact Assessment Board on 22 April 2009. 
                                                
 
2 London Summit – Leaders' Statement, 2 April 2009, §13. 
3 The successor to the Fina ncial Stability Forum (FSF). 
4 COM(2009)XXX of  13 May 2009 
5 The list of consulted parties is included in Annex II of the de Larosière report. 
 
 5The IAB opinion was delivered on 24 Apri l 2009, endorsing the report with several 
suggestions for improvement, including the recommendation to delimit more clearly the scope of the initiative, better define the options anal ysed, strengthen the analysis of the impacts of 
the preferred options, and highl ight the specific case of cro ss-border banks and financial 
conglomerates. The respective parts of th e report have been revised accordingly. 
The Impact Assessment Steering  Group agreed to inform th e sectoral social dialogue 
committees in the financial services sectors (banking, insurance) about the initiative and 
impact assessment and to consult them, with the assistance of unit EMPL/F1, on the impact 
assessments for the upcoming legislative proposals. 
 
3. Problem definition 
3.1. General problems 
As the de Larosière report stated, although the way in which the financ ial sector has been 
supervised in the EU has not been one of the pr imary causes of the crisis, there have been real 
and important failures, both of micr o- and macro-prudential supervision6.  
As highlighted by recent events, it is very  difficult to achieve simultaneously a single 
financial market and stability in the financia l system, while preservi ng fragmented nationally-
based supervision and crisis management7.  
Financial stability is clearly a common good. It refers to a condition in  which the financial 
system is capable of withstanding shocks and the unravelling of financ ial imbalances, thereby 
mitigating the likelihood of disruptions in the financial intermediation process which may significantly impair the allocation of savings to profitable investment  opportunities and exert 
unsustainable pressure on public budgets and automatic stabilis ers to cope w ith the real 
economy effects of the crisis
8. This has certainly not been the case amid the current financial 
crisis, where problems in the banking sector ha ve disrupted the flow of credit at both 
wholesale and retail levels.  
From an Internal Market perspective, the am bition is to create an efficiently functioning 
internal market in financial services. Financial markets are crucial to the functioning of efficient economies. The more integrated these markets are, the more efficient allocation of 
capital and the higher long-run ec onomic growth will be. Comp leting the single market for 
financial services is therefore a crucial part of the overriding objective of delivering stronger, 
lasting growth, and creating more and better jobs.  
EU financial markets are increasingly integrat ed, especially at the wholesale level. The 
banking and insurance markets are dominat ed by pan-European groups, whose risk 
management functions are centralised in the gr oup's headquarters. There has been an increase 
in cross-border M&A transactions in terms of value since 2003. This tr end was particularly 
strong in 2005, when several large-value cr oss-border transact ions were conducted, 
amounting to over 50% of the total M&A value in the euro area banking system. EU banks 
                                                
 
6 De Larosière report §152. 
7 See Thygesen, Niels (2003) ‘Comments on the political economy of financial harmonisation in Europe’, in 
Jeroen Kremers, Dirk Schoenmaker and Peter Wierts (eds) Financial Supervision in Europe, Cheltenham: 
Edward Elgar. 
8 “A condition whereby the financial system is able to  withstand shocks without giving way to cumulative 
processes, which impair the allocation of savings to investment opportunities and the processing of payments in the economy”. See T.P. Schioppa, Central banks and financial stability  
 
 
 6have become more international than ever, e xpanding into foreign markets both in Europe and 
beyond. Currently around 70% of EU banking asse ts is in the hands  of some 40 banking 
groups with substantial cross-bo rder activities. Esp ecially in the EU-12, banking markets are 
dominated by foreign (mostly Western European ) financial groups (see figure 1). In these 
countries, on average 65% of banking assets ar e in foreign-owned banks. In countries like 
Estonia, the Czech Republic and Slovakia over 92% of banking assets are in foreign-owned 
banks.  
Figure 1. Market share of foreign- owned banks (% of total assets) 
0102030405060708090100
EECZ LU SKROBGLT PL LVFIHU UKIEGR MT CYSI
EU-25BE PTDKAT
EMU-12NL ITES DEFR SE
Source: European Commission, European Financial Integration Report 2008 (2009)  
As for financial markets, the available evid ence suggests that integration has progressed 
considerably, but varies depending on the market segment, and is to a large extent correlated 
with the degree of integration of the underlying financial infras tructure. Table 1 provides an 
overview of the level of integra tion of the various segments. It should be noted that due to 
intensive cross-border consolida tion of stock exchanges, con centration of the underlying 
infrastructures is increasing (i.e. the market share of the five largest stock exchanges in 
Europe exceeded 90% in 2006).  
 
Table 1. Integration of various market segments  
Market segment Degree of integration 
Money market High degree 
Bond markets 
• government bonds 
• corporate bonds  
Considerable degree Considerable degree 
Equity markets Increasing integration 
Banking markets 
• interbank/wholesale activities 
• capital market related activities 
• retail banking activities  
Increasing integration Increasing integration 
Fragmented 
 
Whilst the Lamfalussy process has since 2001 contributed to a closer co-operation between 
national supervisors, the EU is still in a situat ion where the supervision of the EU markets and 
 
 7financial groups is fragmented and exercised at the national level, both with  respect to 
prudential and conduct of bus iness supervision (e.g. disa greements between national 
supervisors regarding the prudential assessm ent of cross-border mergers of financial 
institutions in the cases of  ABN AMRO/Antonveneta in 2 005 and Unicredit/Bank BPH in 
2006). 
The crisis which in 2008 hit th e European financial sector as  a whole has brought into sharp 
focus the weaknesses of the present arrangem ents to guarantee adequate protection for 
depositors, policy-holders and investors, as well  as financial stabilit y in the EU. Even though, 
at national/regional level, small groups of Member States took urgent and coordinated 
decisions to rescue cross-border institutions, overall the response was characterised by 
decisions which were ad hoc and mainly inform ed by national interests. Supervisors were 
unable to adopt rapid common d ecisions to tackle the most imminent cross-border problems 
(e.g. various unco-ordinated natio nal bans on short selling of different durations). Some 
Member States took unilatera l decisions which had the pot ential of undermining the 
soundness of other Member States' financial institutions (e.g. difficulties of collaboration between national supervisors in the case of Fortis). Member St ates have appeared strongly 
divided in the search for urge nt and radical measures whic h could rebuild confidence and 
stabilise the situation. All this contributed to further weaken confidence and render the 
financial sector even more fragile.  
On the other hand, the Commission intervened in October 2008 to facilita te the agreement of 
a framework for intervention in the financial s ector, including respect for the state aid rules 
and prevention of distortions of competition. Overall, the EU can do much better, both in 
preventing and managing future financial crises. In  this respect it should also be stressed that 
variations between nati onal rules in member States conti nue to cause incoherencies in the 
internal market (examples in clude the wide variety of de finitions of "own funds", 
impediments to asset transfers and temporary ba ns on short selling in some Member States 
but not others). 
Another serious challenge highl ighted by the crisis is the fact that the present EU 
arrangements – like arrangements at national and global level - place too much emphasis on 
the supervision of individual firm s, and too little on risks to the stability of the financial 
system as a whole. Such analyses were frag mented and executed by different authorities at 
different levels. To the extent to which risks were identified there was no EU mechanism to ensure that this assessment of  risk was translated into action.  If Eur ope is serious about 
building a stable and truly integrated market , it will be necessary to make progress in 
resolving these weaknesses by developing a ne w concept for the supervision of the EU 
financial sector.  
In summary, the crisis exposed that the arrangements for financ ial supervision in the EU can 
create risks to stability through the mismatch between the level of  European integration of 
EU financial markets and the national or ganisation of supervis ory responsibilities.  
The seriousness of this problem is magnified  given the other wea knesses exposed by the 
crisis: 
• Increased risks of cross-border contagion fo r EU financial markets linked with the 
increased integration, both throughout the EU and with global financial markets. 
• Undermined confidence of consumers, em ployees, pensioners, small business and 
retail investors contributing to the economic recession. 
• Reduced global competitiveness of the Euro pean financial industry, compared with 
what would have been the case wi th better supervisory practices. 
 
 8• Risks of unco-ordinated policies driven by na tional interest with negative impact on 
the Single Market 
These general problems  are common to both micro-pr udential supervision and macro-
prudential supervision. 
3.2. Affected stakeholders 
Both theoretical and empirical research confirms that there is a strong positive link between 
the functioning of the financial sy stem and (long-run) economic growth9. Better functioning 
financial systems ease the external financing co nstraints that impede expansion of firms and 
institutions and offer individuals  and firms the possibility to tr ade, diversify, and manage risk. 
Financial instability can therefor e have a significant negative impact on the real economy and 
lead to substantial outp ut losses. It can seriously impair th e lending of funds from savers to 
borrowers, resulting in a sharp reduction in the ability of the financial system to allocate credit. It can severely reduce the possibilities for individuals to diversify risks and smooth 
their consumption over time. 
Given the fact that – especially in advanced eco nomies – total financial assets often represent 
multiples of GDP, the fiscal costs of financial crises can be substantial. A study by the IMF
10 
of 40 financial crisis episodes puts the fiscal costs associated with resolving financial crises in 
the average country at 16% of  GDP. Although this av erage includes some small and emerging 
economies, the fiscal cost is equally high am ong industrialised economies - at 15% of GDP on 
average. About half (or 8% of GDP) of these fi scal outlays relate to costs associated with 
government-assisted recapitalisati on of banks. The remainder relate  mainly to costs associated 
with government asset purchase and debtor relief programs. 
Up to now, EU governments have pledged around EUR 3 trillion in recapitalisation 
obligations and different guarantee schemes (i .e., 28-30% of GDP). Wh ile not all of these 
obligations and guarantees will actually be used, th e fiscal costs of the current crisis are likely 
to be substantial. 
Due to their broad impact on th e financial sector and the whol e economy, financ ial instability 
will affect a very wide range of stakeholders, i.e.: 
• Financial institutions, including their shareholders and employees; 
• Users of financial services, including deposit ors, investors, pensi oners, and non-financial 
companies, and 
• Public authorities, including supervisor s, central banks and finance ministries. 
To the extent that financial instability dama ges the economy, a whole range of stakeholders 
will be affected (e.g., employees and consumers) and to the extent that public intervention is 
required, taxpayers will also be affected. 
3.3. Micro- and macro-prudential supervision: definitions 
In analysing the problems related to organisati on of financial supervis ion in the EU, the de 
Larosière Group distinguished between micro- prudential supervision and macro-prudential 
                                                 
9 Levine, R. (2005), Finance and Growth: Theory and Evidence, in: P. Aghion and S. Derlauf (eds.), Handbook 
of Economic Growth, chapter 12, 865-934, North-Holland: Elesevier. 10 Laeven, L. and F. Valencia, 2008. “Systemic Banking Crises: A New Database”, Working Paper No. 08/224, 
International Monetary Fund. 
 
 9supervision (see table 2). This division also hol ds throughout the subsequent analysis, so it is 
important to define these concepts at the outset.  
The main objective of  micro-prudential supervision  is to supervise and limit the risk of 
distress in individual financial institutions. By preventing the failure of individual financial 
institutions, micro-prudential supervision attempts to protect the clients of the institutions and 
prevent (or at least mitigate) the risk of contagion and the subsequent negative externalities in terms of confidence in the overall financial system. However, the fact that the financial system as a whole may be exposed to common ri sks is not always fully taken into account. 
Macro-prudential supervision  focuses on limiting risks to the financial system as a whole 
that may arise from broad developments in  the economy (e.g., excess ive domestic credit 
expansion). While risks to the financial system can in principle arise from the failure of one financial institution alone if it is large enough in relation to the country concerned and/or with 
multiple branches/subsidiaries in other countri es, the much more important systemic risk 
arises from a common exposure of many financial institutions to the same risk factors. Macro-
prudential analysis therefore must pay particul ar attention to common or correlated shocks 
and to shocks to those parts of the financia l system that trigger contagious knock-on or 
feedback effects. Obviously it should also focus on any other contagion mechanisms that 
could be a source of systemic risk, like inte rlinkages between financial institutions and 
overreactions provoked by imperfect information.  
Micro-prudential supervision and macro-prudential supervision are interlinked. In this respect 
the de Larosière report stress es that macro-prude ntial supervision cannot be meaningful 
unless it can somehow impact supervision at  the micro-level; whilst micro-prudential 
supervision cannot effectively sa feguard financial st ability without ade quately taking account 
of macro-level developments.  
 
Table 2. Micro- and macro-prudential supervision 
 Micro-prudential supervision Macro-prudential supervision 
Immediate Objective Limit risk of distress in 
individual institutions Limit risk of financial system-
wide stress due to macro-
economic developments 
Ultimate Objective Consumer and user  protection Avoid correlated negative 
shocks that may threaten system 
stability and trigger output 
(GDP) costs 
3.4. Micro-prudential supervision  
The current system of prudentia l supervision in the EU is based on the principle of home 
country control combined with minimum pr udential standards and mutual recognition. A 
financial institution is thus authorised and supervised in its home country and can expand throughout the EU (by offering cr oss-border services in ot her EU member States or 
establishing branches in those States) without additional supervision. The host country has to 
recognise supervision from the home country  authorities on most  prudential issues. 
In practice, however, financial institutions ca n also choose to operate through subsidiaries 
(separate legal entities) in ot her countries. These s ubsidiaries are separately licensed and 
supervised by the host country au thorities. The scope for cont rol by host countries of these 
 
 10subsidiaries is limited in practice, as key deci sions are often taken at the parent company in 
the home country and the financial health of the subsidiary is closely linked to the well-being 
of the financial group as a whole. The primary e ffective control of larg e financial groups as a 
whole is therefore essentially in the hands of the consolidated supervisor in the home country. 
The latter may create tensions as decisions by home country authorities to preserve the 
stability of their national fi nancial system can affect outcomes in host countries.. 
The cross-border nature of many financial inst itutions requires clos e co-operation between 
national supervisory authorities. This co- operation takes place in three main ways: 
• Within the Lamfalussy framework11 national supervisors are grouped in three 
committees (known as the Lamfalussy level 3 Committees): the Committee of European 
Banking Supervisors (CEBS), the Committee of  European Insurance and Occupational 
Pension Supervisors (CEIOPS)  and the Committee of European Securities Regulators 
(CESR). These Committees of Supervisors ha ve been established with the aim of: 
ensuring convergence of supervisory practi ces; agreeing on common application of EU 
rules with non-binding guideline s; and fostering greater mutu al trust. Supervision of 
financial conglomerates is carried out jointl y by the Committees in the Joint Committee 
on Financial Conglomerates (JCFC). These co mmittees are institutionally part of the 
Commission and have no regul atory or executive powers.  
• Recently, colleges of supervisors have starte d to be created for the larger financial 
institutions in the EU. Within these colle ges co-operation and information exchange 
between home and host authorities is reinforced. 
• Ad hoc bilateral Memoranda of Understandi ngs (MoUs) between respective supervisory 
authorities.  
As highlighted in the de Larosière report, th e situation nevertheless remains sub-optimal, as 
these co-operation mechanisms do not have the potential of removing the most serious 
inefficiencies of the present supervisory set-up. Supervisors are still not  able to take binding 
decisions at the EU level. National supervisors will tend to take decisions on the basis of domestic considerations, even when the probl ems at hand have a European dimension and 
would require coordinated decisi ons and actions in order to ac hieve the best possible outcome 
for all.  
Against this background, the main issues in th e area of micro-prudentia l supervision can be 
aggregated in the following problems : 
• Imbalance of interests of the home and ho st countries in the current supervisory 
model (resulting in a misalignment of incen tives in cross-border crisis management). 
• Risks of competitive distortions in the In ternal Market and of regulatory arbitrage 
by financial companies (arising in part  from differing supervisory rules and 
practices), 
                                                
 
11 The Lamfalussy framework  is a four-level legislative procedure procedure. It divides the legislation into 
high-level framework provisions and implementing measures. Under the Lamfalussy arrangements, the 
Commission proposes framework legislation and it is adopted under the 'co-decision' procedure by Council and 
Parliament (Level 1). It is supplemented at Level 2 by more detailed implementation measures, adopted by the 
Commission and endorsed by a qualified majority of Member States. The detailed Level 2 legislation is prepared 
by the Commission on the basis of advice provided by re presentatives of national su pervisory authorities, acting 
through the 'Level 3'  committees (CEBS, CEIOPS and CESR). Th e Level 3 committees also aim to foster 
supervisory convergence and best practice, principally through the creation of (non legally binding) guidance. 
Finally, at Level 4, the Commission ensures that Member St ates are complying with applicable legislation and it 
pursues enforcement action where required.  
 
 11• Lack of co-operation and information ex change between national supervisors, 
• Excessive costs and administrative bur den to cross-border companies due to 
fragmented and inconsistent financial supervision 
They are linked with a number of particular problem drivers  encountered in day to day 
practice of co-operation between national supervisors from vari ous Member States, including: 
− Failure to challenge supervisor y practices on a cross-border basis . Home country 
authorities are given powers over branches but may well be unable or unwilling to use them, while host countries are losing powers that  they have been willing to use. This gap 
may become a real problem once there is a banking group or bank th at is systemically 
relevant in a host country. As national authorit ies are merely accountab le to their national 
Parliaments and taxpayers, there is no guarantee that host authorities will take the interests 
of host countries into account in the event of a crisis with  a cross-border dimension. The 
imbalance between home and host countries ma y be further deepened by differences in 
size between countries. The pres ent processes and pr actices for challeng ing the decisions 
of a national supervisor on a cross-border basi s have proven to be inadequate to address 
this (e.g. conflict betw een the Polish and Italian banki ng supervisors concerning minimum 
capital ratios of Pekao, the Po lish subsidiary of Unicredit); 
− Lack of consistent rules, powers and sanctions across Member States , mainly due to a 
lack of harmonisation in ce rtain areas (e.g. national discretion under the Capital 
Requirements Directive) or differences in  transposition (e.g. “gold plating” in 
transposition of the Transparency Directive,  different interpreta tion of the Insurance 
Mediation Directive etc.)
12; 
− Differences in supervisory practices , e.g. in areas where the host supervisor of a branch 
has supervisory discretion (such as in the area of liquidity  supervision), or in cases where 
supervisors take different pe rspectives (like an accounting perspective, which induces a 
focus on reporting, or a risk perspective, which induces a focus on group risk assessments with supervisory risk methodologies); 
− Fragmented responsibilities  (or lack of legal certainty regarding responsibilities) for 
supervision of the same European financ ial group complicate co -ordination, cause 
incomplete oversight of group-wide risks and of  growing risks, but also cause insufficient 
liability for decisions regarding group-wide risk management and capital allocation. There 
is no single entity which has the complete ove rview of the financial situation of a cross-
border group or a market and which is in a position to take the often extremely urgent 
decisions which need to be taken in potential crisis situations; 
− Absence of legal arrangements allowing for EU-wide supervision of specific institutions  
(e.g., credit rating agencies and post-trading infrastructures); 
As a consequence of fragmented responsibilit ies, incomplete co-ordination, and national 
mandates/interests, actors in the financial sector can exploit l oopholes and arbitrage 
opportunities in the European financial system, ca using risky activities to fall outside scope of 
supervision. The relations betw een the general problems and th e problems specific to the 
areas of micro-prudential as well as their driv ers can be visualised in  this problem tree:  
                                                
 
12 The Communication of 4 March "Driving European Recovery" announced a programme to review differences 
between national rules and achieve greater convergence. 
 
 12Figure 2. Problem tree: micro prudential supervision 
Problem drivers Problems General problems
Failures to challenge supervisory 
practices on a cross-border basisMismatch between the level of 
integration of EU financial markets and 
the organisation of supervision
Lack of consistent rules, powers and 
sanctions across Member StatesDiverging interests of the home and host 
countries in the current supervisory 
modelIncreased risks of cross border 
contagion for EU financial markets 
linked with the incresed integration, both 
throughout the EU and with global 
financial markets
Differences in supervisory practicesRisks of competitive distortions in the 
Internal Market and of regulatory 
arbitrage by financial companies Undermined confidence of consumers, 
employees, pensioners, small business 
and retail investors contributing to the 
economic recession
Fragmented responsibilities for 
supervision of the same financial groupLack of cooperation and information 
exchange among EU national 
supervisorsReduced global competitiveness of the 
European financial industry
Fragmented system of supervisory 
mandates leading to EU considerations 
not being taken into accountExcessive costs and administrative 
burden to cross-border companies due 
to fragmented and inconsistent financial 
supervisionRisks of uncoordinated policies driven 
by national interests with negative 
impact on the Single Market
Absence of legal arrangements 
allowing for EU-wide supervision of 
specific institutions, e.g. credit rating 
agencies 
3.5. Macro-prudential supervision  
Macro-prudential supervision aims to identi fy risks in the economy (including macro-
economic imbalances) and in the financial sy stem which may have implications for the 
stability of the financial system as a whole,  and, where necessary, advise on measures which 
could be taken to address these risks. In this  respect, the de Larosièr e report concludes that 
there has been a lack of adequa te macro-prudential supervision in Europe. In particular the 
report notes the following phenomena, which can be identified as problem drivers: 
• the present EU supervisory arrangements pla ce too much emphasis on the supervision of 
individual firms, and too little on the macro-prudential side . The soundness of individual 
firms was often supervised in isolation and there was little or no awareness of the degree 
of “interdependence” or “interconnectedness” between financial inst itutions and between 
markets; 
• early warning systems in the EU were largely ineffective , insofar as macro-prudential 
risks were identified (there was no shortage of comments about worrying developments in 
both macro-economic imbalances and the lo wering price of risk for example) but there 
was no EU mechanism to ensure that this a ssessment of risk was translated into action . 
Another problem driver is the fragmented approach to macro-prudential supervision . At 
present, a great number of diff erent authorities are in one wa y or another involved in macro-
prudential analysis as well as the identificat ion of possible policy measures, including the 
following bodies: The Economic and Financia l Committee (EFC), The Joint Committee on 
Financial Conglomerates, the European System of Central Banks (ES CB) and the European 
 
 13Central Bank (ECB), including its  The Banking Supervision Committee (BSC). The role of 
the EU Committees of Supervisors ("level 3 Committees", CEBS, CEIOPS, CESR) as regards 
the safeguarding of financial stab ility has recently also been e nhanced. All of these bodies are 
described elsewhere in this report13. 
As a result of the problem driver s described above, the specific problems  affecting the 
current EU arrangements for the safeguard of fi nancial stability can be summarised as follows 
(see figure 2 below): 
• Lack of appropriate analysis of macro-prude ntial risks at EU level, including risks 
stemming from macro-economic imbalances; 
• Lack of interaction between micro- and ma cro-prudential analysis. The soundness of 
individual firms' was often supervised in isolation and there was little or no 
awareness of the degree of “interde pendence” or “interconnectedness”; 
• Lack of adequate corrective action, coop eration and co-ordination by competent 
authorities during the building up and in  the course of financial crisis. 
These conclusions are c onfirmed by the ECB (2009)14 which argues that th e present crisis has 
revealed that micro-prudential supervision in many cases proved inadequate to identify, in a 
timely manner, the nature and size of accumula ting risks and to impose appropriate remedial 
action. Moreover, although the build -up of financial imbalances, the underpricing and lack of 
internalisation of risk and the ri se in the degree of leverage in the financial system had been 
identified as sources of potential instability by international institutions and central banks, it 
did not trigger appropriate responses either by  market participants or by the authorities 
responsible for the oversight of individual financial institutions or specific market segments.  
It is therefore argued that there is a manifest  need to strengthen both the macro-prudential and 
micro-prudential supervision of the financial system and to do so in a way that achieves 
valuable synergies and has a mutually reinforc ing impact on the stability of the financial 
system as a whole. In particular , the role of macro-financial f actors, of the in terconnectedness 
of markets and institutions and of cross-border financial integration in determining the size, 
nature and propagation of syst emic risk calls for the stre ngthening of macro-prudential 
supervision in Europe and globally. This should help prevent the recurrence of similar episodes of externalisation of risks, market excesses and corrections in the future, with disruptive effects on the real economy and unsustainable pre ssures on public budgets and 
social policy instruments to cope with these effects, and it should help ensure that the 
financial system is socially responsible, dynamically stable and resilient to shocks. 
Against this background, the G20 has decided to reinforce the global arrangements: the newly 
established Financial Stability Board (FSB)
15 will collaborate with th e International Monetary 
Fund (IMF) to provide early wa rning of macro-economic and fi nancial risks at the global 
level. The US is putting in pla ce a financial stability body as we ll. Further streamlining in the 
EU is therefore critical as we ll, as macro-prudential analysis is currently fragmented and 
executed by different authorities at different le vels. Once the crisis spread, this fragmented 
approach posed real challenges in terms of getting a timely and and reliable overview of 
                                                 
13 See section 5.2. This JCFC, not described in that section, includes CEBS and CEIOPS, and focuses 
exclusively on prudential issues in relation to the Financial Conglomerates Directive and on the identification/assessment of the potential risks of financial conglomerates 
14 Speech by Mr Lucas Papademos, Vice President of the European Central Bank, at the conference on “After 
The Storm: The Future Face of Europe’s Financial Syst em”, organised by Bruegel, National Bank of Belgium 
and the International Monetary Fund, Brussels, 24 March 2009 
15 The successor to the Fina ncial Stability Forum (FSF). 
 
 14developments in the economy and in the financial system relevant for the stability of the 
financial system. The latter is also related to legal and practical obstacles to information sharing between the re levant authorities.  
Figure 3. Problem tree: macro -prudential supervision 
Problem drivers Problems General problems
EU supervisory arrangements place too 
much emphasis on the supervision of 
individual firms, and too little on the 
macro-prudential sideMismatch between the level of 
integration of EU financial markets and 
the organisation of supervision
Fragmented approach to macro-
prudential supervision poses 
challenges to information exchange 
between the relevant authoritiesLack of appropriate analysis of macro-
prudential risks at EU level, including risks 
stemming from macro-economic imbalancesIncreased risks of cross border 
contagion for EU financial markets 
linked with the incresed integration, both 
throughout the EU and with global 
financial markets
Ineffective early warning mechanisms 
in the EULack of interaction between micro- and macro-
prudential analysis - the soundness of individual 
firms' was often supervised in isolation and 
there was little or no awareness of the degree 
of “interdependence” or “interconnectedness” Undermined confidence of consumers, 
employees, pensioners, small business 
and retail investors contributing to the 
economic recession
Lack of the appropriate process in the 
EU insitutional framework for ensuring 
follow-up to any warnings on macro-
prudential risksLack of adequate corrective action and 
coordination by competent authorities during 
the building up and in the course of financial 
crisisReduced global competitiveness of the 
European financial industry
Insufficient cooperation at international 
level on macro-prudential supervisionRisks of uncoordinated policies driven 
by national interests with negative 
impact on the Sin gle Market  
3.6. Baseline scenario 
The baseline scenario would be one in which th e EU would continue to build on its existing 
framework and continue to rely on the existing Committees of Supervisors, which are merely 
advisory bodies to the Commission, and the r ecently-established colleges of supervisors. 
Recent reforms of the three Committees of Supervisors, which are currently being 
implemented, will reinforce the f unctioning of these bodies to a ce rtain extent. In particular, 
the fact that the Committees will be able to take decisions by qualified majority should help 
accelerate the process of converg ence in the implementation of  EU Law. Moreover, once all 
colleges of supervisors are up  and running, co-operation and in formation exchange between 
national supervisory authorities should be im proved. This scenario ne vertheless remains sub-
optimal, as these co-operation mechanisms do not  have the potential of removing the most 
serious inefficiencies of the presen t supervisory set-up (see section 3.4). 
Within this scenario the EU would also retain  its fragmented approach to macro-prudential 
oversight, without introducing a mechanis m ensuring follow-up to warnings and 
recommendations. While the recent lessons of the crisis would probably lead to an increased 
awareness of direct and indirect linkages in th e financial system, it is questionable whether in 
the absence of a proper institutional framewor k the EU would be effective in pooling and 
analysing all relevant information and be able to trigger corrective action. 
The baseline scenario is presented as a " dynamic" status-quo option for both micro- and 
macro-prudential supervision.   
 
 153.7. Case for EU action 
Against the background of what is possibly the worst economic and financial crisis since the 
1930s, an overhaul of the European regulatory and supervisory system is needed. If Europe is 
serious about building a stable and integrat ed financial market, it must put in place a 
supervisory framework that acknowledges this.  
On micro-prudential supervision, the EU has reach ed the limits of what can be done with the 
present status of the EU Committ ees of Supervisors - which are merely advisory bodies to the 
Commission. The EU cannot remain in a situation where there is no mechanism to ensure that 
national supervisors arrive at the best pos sible supervisory deci sions for cross-border 
institutions; where there is insufficient co -operation and information exchange between 
national supervisory authorities; where all the te chnical details of financ ial regulation have to 
go through slow and cumbersome procedures; wh ere joint action by nati onal authorities needs 
to take account of the patchw ork of regulatory and supervis ory requirements; where only 
national solutions can be implemented in the face of European problems.  
The weaknesses of the present macro-prudentia l arrangements clearly have had dramatic 
consequences. Like the G20 and the US, the EU should establish a new body responsible for 
identifying financial stability risks at Eur opean level and, where necessary, issue risk 
warnings. The present EU arrangements place t oo little on the macro-prudential side of 
supervision; macro-prudential analysis is fragm ented and executed by different authorities at 
different levels; there is no mechanism in the EU to ensure that macro-prudential risk warnings and/or recommendations are translated into action.  
The analysis of the principles of subsidia rity and proportionality is included in the 
comparative assessment of options (Chapter 6).  
4. Objectives 
The reform of EU financial supervision has ge neral, specific and ope rational objectives. At 
each level, they correspond to the identified problems (the general problems, the problem 
drivers, and the specific problems).  
The general objectives  are the same for the reform of  the EU supervisory framework: 
1. Establish a more effective framework for fina ncial supervision in the EU, adapted to 
the level of financial market integration; 
2. Enhance financial stability in the EU (and thereby contain potential risks to the real 
economy and to the public finances); 
3. Safeguard interests of consumers, investors, other users of financial services and 
other relevant stakeholders, notably employees;  
4. Increase competitiveness of EU financial markets, and 
5. Foster integration of EU financial market s supportive of sustainable development. 
These objectives are in line with the initia tives described in the Commission Communication 
'Driving European Recovery' of 4 March 2009. The specific objectives set in the areas of 
micro-prudential supervision a nd macro-prudential supervision (see below) are aimed at 
contributing to achieving these general objectives.  
 
 164.1. Micro-prudential supervision  
The specific objectives  in the area of micro-prud ential supervision are to: 
1. Balance home and host supervisor interests, i.e., reinforce processes and practices 
for challenging the decision s of national supervisors on a cross-border basis; 
2. Ensure a level playing field for financial institutions operating in various Member 
States; 
3. Improve crisis prevention and crisis ma nagement on the European scale, and 
4. Improve effectiveness and cost efficiency of supervision for supervised companies. 
The table below links the problem drivers for micro-prudential supervision with the 
operational and specific obj ectives in this area. 
Table 3. Problem drivers and object ives: micro-prudent ial supervision 
Specific objectives 
Problem drivers  Operational objectives Home-
host 
balance Level 
playing 
field Crisis 
prevention 
and 
management Cost 
efficiency 
Failure to challenge supervisory 
practices on a cross-border basis Ensure adequate process for 
challenging decisions of national 
supervisors to balance home and 
host interests v v     
Lack of consistent rules, powers and 
sanctions across Member States Provide for a possibility to adopt 
binding technical standards at EU 
level   v v v 
Differences in supervisory  practices Increase consistency of 
supervisory practices in the EU v v v v 
Fragmented responsibilities for 
supervision of the same financial 
group Ensure effective functioning of 
colleges of supervisors v   v v 
Create framework for pooling 
relevant information on supervised 
companies at EU level    v v   
Strengthen EU dimension in 
prudential assessment of cross-
border mergers and acquisitions v v v   
Provide for a strong coordination at 
EU level in crisis situations v v v v Fragmented system of supervisory 
mandates leading to EU considerations not being taken into 
account 
Ensure effective cooperation with 
3rd countries on supervisory issues v v v   
Absence of legal arrangements 
allowing for EU-wide supervision of 
specific institutions, e.g. credit rating agencies Grant to an EU-level authority 
responsibility for licensing and 
supervision of specific EU-wide 
institutions v v v v 
 
 
 174.2. Macro-prudential supervision  
The specific objectives in the area of macro-prud ential supervision are to: 
1. Develop European macro-prudential risk assessment; 
2. Enhance effectiveness of Early Warning mechanisms, and 
3. Allow for risk assessments to be translated  into action by the relevant authorities. 
The table below links the problem drivers for macro-prudential supervision with the 
operational and specific obj ectives in this area. 
Table 4. Problem drivers and objectiv es: macro-prudential supervision  
Specific objectives 
Problem drivers  Operational objectives Developing a 
European risk 
assessment 
framework Enhance 
effectiveness 
of Early 
warning 
mechanisms Ensuring 
follow-up 
Current EU supervisory arrangement 
are quasi-exclusively focused on 
micro-prudential supervision Identify macro-prudential risks in 
Europe and analyse the 
interconnection with individual 
financial institutions’ soundness v  v   
Legal and practical obstacles to 
information sharing between 
supervisors, central banks and finance ministers Establish adequate procedures to 
pool information about macro-
economic risks for financial stability v v   
Absence of adequate, EU-wide early 
warning mechanisms Issue warnings to the relevant 
actors and recommend the 
appropriate actions v v v 
Lack of the appropriate process in 
the EU institutional framework for ensuring follow-up to any warnings on macro-prudential risks Ensure follow-up to warnings and 
recommendations v v v 
Insufficient cooperation at 
international on macro-prudential supervision Ensuring effective interfacing with 
international organization dealing 
with financial stability  v v v 
5. Identification of policy options 
To address the identified problem s – and fulfil the objectives – tw o separate sets of options 
have to be considered: one for micro-prudent ial supervision and one for macro-prudential 
supervision. These options have been identi fied by the Commission services on the basis of 
general ongoing debate on financial supervis ion among various stakeholders in the EU. 
5.1. Micro-prudential supervision  
The options for organising micro-prudential superv ision in the EU may be considered in  two 
stages: 
 
 18• Stage 1 considers the various options with re gard to the solutions for organising micro-
prudential supervision at the Community level; 
• Stage 2 analyses the various institutional st ructures possible for bodies tasked with 
financial supervision activities at the EU level.  
Stage 1: Supervisory system 
1. Dynamic status quo: home country model and the Lamfalussy 
framework 
This option implies a situation in which the room to improve the European supervisory 
framework is limited by the constr aints presented in the descript ion of problems in the current 
framework for micro-prudential supervision (section 3.4).   
2. Step back: host country model 
Under this option the model of  host country supervision a dopted in the 1970s would be 
restored. The First Banking Di rective (1977) granted full res ponsibility for supervision of 
banks operating in a given country to national s upervisors. It also stipulated that national 
supervisors should co-operate and that forei gn identity could not be a ground for refusing a 
banking licence. It allowed for cross-border br anching under the host- country rule, which 
meant that a bank had to obtain permission to ope rate in a foreign country by the supervisory 
agencies of that country. The foreign branch es were required to compete on equivalent 
standards with the host country’s own banks. Th e range of activities deployed by the branch 
was also limited by the host country’s legislation.  The advantage of this model would be that 
the relevant authorities would ha ve full control over the activities  in their territory and to an 
extent, fiscal and supervisory responsibilities would be clear er (although it should be noted 
that there is an increasing mismatch between the legal and operational structures of firms). 
However, it would be inefficient as every br anch would have to pl edge (additional) capital 
and it would not solve the problem of inade quate co-operation among supervisors in the 
context of cross-border banks. Furthermore, over time divergence of supervisory approaches 
might lead to increased risks to financial stability. 
3. Lead supervisor model 
The lead supervisor model, involving extended powers for th e supervisor of the parent 
company of a number of cross-border subsidiari es (already the case for branches), would be 
one option for evolution of the existing supervisory framework. There are different versions 
of this model foreseeable: the lead supervisor could be responsible for supervision merely on a consolidated level, or also on the solo and sub-consolidated leve l. In its most radical form, it 
would grant full powers for supervision of cros s-border financial group s to the home state 
supervisor. Under this model, th e lead supervisor w ould be the single point of contact for the 
financial institution and would be the sole author ity for all matters of prudential supervision at 
the level of the group and its constituents, in cluding model validations and authorisations, 
capital allocation etc.  However,  strengthening the role of the lead supervisor seems to be 
unrealistic as Member States remain reluctant to transfer powers to other Member States (as shown in Council discussions on the proposed changes to the Capital Requirements Directive 
for banks and Solvency II for insurance).  Furthermore, over time divergence of supervisory approaches might lead to increased risks to fi nancial stability – part icularly as different 
approaches may be applied within the same jurisdiction. 
 
 194. de Larosière proposal: European Sy stem of Financial Supervisors (ESFS) 
The de Larosière report recommen ded that the EU should establ ish an integrated European 
System of Financial Supervisors (ESFS) by tr ansforming the existing EU Committees of 
Supervisors into three European Supervisor y Authorities: a European Banking Authority 
(EBA), a European Insurance and Occupational Pension Authority  (EIOPA) and a European 
Securities Authority (ESA). The three new Euro pean Supervisory Author ities (whose role is 
essentially coordination rather than supervision) would work in a close network with the 
national financial supervisors, who would conti nue to be responsible for executing day-to-day 
supervision. They could also have the legal pos sibility to delegate supervisory tasks upwards 
to the EU-level authorities if they choose to do so, and not only between each other. 
At the EU-level, the new European Supervis ory Authorities, at the centre of the new 
network,would fulfil all the missions of the current  Committees of Supervis ors, but with more 
power and authority. They would, in addition, make  a greater contribution than at present to 
the emergence of a true harmonised ruleboo k (for example by issuing guidelines and 
recommendations, and adopting technical standard s and rules) and improve the supervision of 
cross-border institutions by developing common supervisory approaches settling possible disputes between home and host supervisors, and acting as direct superv isors for certain pan-
European institutions (such as credit rating agencies or Central Counterparty Clearing 
infrastructures). They would thus act as guarant ors of a consistent application of EU law. 
They could also exercise a role in crisis  management, and could represent the EU in 
international supervisory fora (participating in  global colleges of supervisors, liaising with 
multilateral bodies on micro-prudential supe rvision etc). Flexibility and a network 
arrangement would be at the he art of the arrangement, and the EU and national authorities 
would constitute a network within  which tasks could be shared. 
As a follow up, the supervisory set-up chosen s hould be evaluated afte r three years the and 
consideration of whether any furt her changes are necessary made. 
5. A single EU-level supervisor 
As for the option of establishi ng a single EU supervisor the fo llowing questions need to be 
addressed: 
• a single supervisor for all financial institu tions or only the pan-European groups?, and 
• should pan-European groups be supervised dire ctly by the central EU agency or would it 
built on the existing network of national s upervisors (i.e., a hub and spokes model)? 
As for the first, there are many small and medi um-sized financial inst itutions which operate 
mainly within national borders. For these institutions there is no need for any direct supervisory powers at the EU level (i.e., the ex isting national supervisors are best placed to 
supervise domestically oriented institutions). So the single EU supervisor should focus its 
attention on pan-European institutions. 
As for the second, there are two options for th e architecture of the European supervisor: 
(i) a single EU supervisor which would replace na tional supervisors for supervision of cross-
border entities and would leave no role for na tional supervisors in monitoring cross-border 
groups, and 
(ii) a single EU supervisor which would built on the existing network of national supervisors, 
so as to preserve experience, expertise and continuity (i.e., a "hub and spokes" model). In 
this particular case, the Authorities could fo r example ask national au thorities to perform 
 
 20on-site inspections on its behalf (as they are closer to the firm and more familiar with local 
market conditions).  
The further discussion is valid for both options , focussing on powers and responsibilities of a 
single EU supervisor. These would be the same ( centralised at the EU level), irrespective of 
the chosen organisation: a single central  entity or a "hub and spokes' model. 
Under this scenario all supervisory competences for institutions with cross-border activities 
would be consolidated at the Community level.  The single EU supervis or would bear the full 
responsibility for day-to-day supervision of the biggest cross-border institutions in the EU (and not rely on the existing networ k of national supervisors). It would also be responsible for 
creating a regulatory and supervisory level pl aying field between pan-European banks and 
domestically oriented banks, as both ar e competing in the same markets.  
Stage 2: Institutional structure 
Once the preferred option at stage one has been id entified, one can consider the best option in 
terms of institutional structure. The options liste d below may in principle apply to any of the 
options proposed at stage one. However, we assume that for Options 1, 2 and 3 presented 
above the Committees of Supervisors at level 3 of the current Lamfalussy framework would 
be maintained, to continue their current role, even though merging the existing committees or 
adding a new independent committee for fina ncial conglomerates c ould be potentially 
considered. The consideration of the institutional structure is clearly of direct relevance for 
Options 4 and 5, which imply the creation of new institutions at the EU level .16 
A. One body, i.e., the integrated approach 
One body could cover the whole financial sector (banking, insurance and securities markets) 
and all aspects of financial supervision (prude ntial oversight as well as conduct-of-business 
supervision).17 
B. Two bodies, the approach by objective 
This approach (often referred to as "twin peaks") would be based on the principle of 
supervision by objective not by se ctor. It refers to a separa tion of supervisory functions 
between two supervisors: one that performs pr udential supervision and the other focuses on 
conduct-of-business supervision.18 A Steering Committee could co-ordinate between the two 
bodies. 
C. Three bodies, i.e., the sectoral approach 
Under this approach each supervisory body c overs a particular sector, i.e., a banking 
supervisor, an insurance and pensions supervisor, and a securities supervisor19. This is for 
example the case of the current framework w ith the three EU Committees of Supervisors 
(CESR, CEBS and CEIOPS), in line with the sectorally-based EU financial legislation20. The 
three-body model could in particular benefit from an overarching steering committee to co-
                                                 
16 For a detailed discussion of different supervisory structures, see the G30 report "the structure of financial 
supervision: approaches and challenges in  a global marketplace", G30 6/10/2008. 
17 Member States with a single supervisory model sepa rate from central banks: BE, DK, EE, FI, IE (with a 
separate supervisor for pensions), HU, LA, MT, PL, UK, SE. Member States with a single supervisory model with a link to (or integrated within) central banks: AT, CZ, DE,  SK.  
18 In the EU this model is adopted only by NL.  
19 Member States with a sectoral model: BG, CY, ES, FR, GR IT, LT, LU, PT, RO, SI. 
20 For example, the Markets in Financial Instruments Directive for securities sector; the Capital Requirements 
Directive for banking sector and the Solvency II Dir ective (not yet adopted) for the insurance sector. 
 
 21ordinate the supervisory activ ities across sectors, incorporating the Joint Committee on 
Financial Conglomerates (JCFC), in which CEBS  and CEIOPS meet to discuss issues related 
to the supervision of financial conglomerates. 
D. Four bodies, i.e., the  institutional approach 
In addition to the three bodies responsible fo r supervision of banking, insurance and securities 
sectors, a distinct fourth body, replacing the JCFC, could be created for supervision of 
financial conglomerates (groups  including banking and insurance activities), following the 
Financial Conglomerates Directive, s upplementary to CRD and Solvency II. 
5.2. Macro-prudential supervision  
A. Status quo  
This scenario implies no or hardly any change  of the existing EU arrangements, i.e., the EU 
would retain its fragmented approach to m acro-prudential oversight, without introducing a 
mechanism ensuring follow-up to warnings and recommendations (see section 3.6). 
B. Build on existing or  proposed structures 
This option would involve one of the following existing or proposed bodies being tasked with 
the same macro-prudential responsibilities pr oposed in the de Larosière report for the 
suggested ESRC.  
• The Economic and Financial Committee (EFC)  
This body of the ECOFIN Council includes repres entatives of ministries of finance, the 
European Commission, the ECB, and central ba nks. It provides high-level assessments of 
developments in financial markets and serv ices and advises ECOFIN and the European 
Commission. Twice a year the EFC meets as the "F inancial Stability Table" in a configuration 
including the Chairs of the Banking Supervision Committee (BSC – see below) and the EU Committees of Supervisors.  Discussions are based on input from various sources, e.g., ECB, 
the Financial Services Committee (FSC), CE BS, CEIOPS, CESR, BSC, and the Commission. 
The FST brings together the broadest group of  actors in matters of financial stability 
(prudential, monetary and fis cal authorities) and is a foru m that can provide policy co-
ordination. 
• The European System of Central Ba nks (ESCB)/Europea n Central Bank 
(ECB) 
The ESCB contributes to the smooth conduct of policies pursued  by the competent authorities 
relating to the prudential supervision of credit institutions and the stability of the financial system. The ECB and the ESCB have three ta sks in the field of financial stability: 
− Financial stability monitoring: the ECB, togeth er with the ESCB, systematically monitors 
cyclical and structural developments in th e euro-area/EU banking sector and in other 
financial sectors. The purpose is to assess th e possible vulnerabilities in the EU financial 
sector, and its resilience to pot ential shocks. The assessment is undertaken in collaboration 
with the EU national central ba nks and supervisory agencies. They are all represented in 
the ESCB Banking Supervision Committee (BSC)21.  
                                                 
21 The Banking Supervision Committee (BSC), which was set up in 1999, is a committee of ESCB. Its members 
include representatives of the ECB, the national centr al banks and the banking supervisory authorities. The 
Committee supports banking supervision and helps forge financial stability, for example, by providing advice to 
 
 22−  Provision of advice:  the ECB is frequently  asked by the competent authorities at EU 
level and national level to cont ribute its technical expertise to  the design and definition of 
financial rules and supervisory requirements. The ECB can also make a contribution on its 
own initiative, and 
− Promotion of co-operation: the ECB, togeth er with the ESCB, pr omotes co-operation 
between central banks and supe rvisory authorities in the EU. This is primarily done 
through the BSC (see above). 
Under this option, the ECB would be entrusted with the task of  carrying out macro-prudential 
supervision in the EU. In so far as compatible with the Treaty and the St atute of the ECB, the 
new tasks and related powers could be implem ented by the ECB or with  the support of an 
“enlarged and empowered” Banking Supervisi on Committee (including for instance the 
Chairs of the Committees of Supervisors). 
• The ESFS  
Under this option, the new European authority  or authorities as recommended by the de 
Larosière report to strengthen EU micro-prudential supervision could be entrusted with the 
task of macro-prudential superv ision. They would be supporte d by the network of national 
supervisors.   The institutional structure of th e EFSF – among the 4 options possible (see "stage 2" above) - 
would impact on the (hypothetical) practical feas ibility of this option. Indeed, while a single 
body could also be tasked with the responsibi lity for monitoring macro-economic risks, it 
would be challenging to attr ibute this responsibility to the ESFS comprising several 
authorities. In that case one could imagine gi ving the functions related to macro-prudential 
supervision to the overarching ESFS Steering Co mmittee including the chairs of the different 
authorities (see description of E SFS above, "stage 1", point 4).  
C. Establish a new body (Europea n Systemic Risk Council, ESRC)22 
This option foresees, in line with the reco mmendations of the de Larosière Group, the 
establishment of a new body, the European Syst emic Risk Council (ESRC). For such a new 
body to be effective, it would n eed to: (a) identify macro-prude ntial risks (risks to financial 
stability) sufficiently in advance; (b) compet ently identify appropriate measures to reduce 
these risks; and (c) trigger co rrective action to address the identified risks. The effective 
functioning of the ESRC would be determined by a range of factors, including its status, 
composition, operational and technical support, st atus, mandate, and operating procedures. 
Moreover, choices made in respec t of these various factors woul d be crucial in  ensuring that 
the ESRC would enjoy the necessary legitimacy to  assure corrective action in response to its 
warnings.  
Under the proposal of the de Larosière repo rt, the ESRC would be an independent body 
placed outside the ECB, but chaired by the Pres ident of the ECB. Operational and technical 
support would primarily be pr ovided by the ECB/ESCB. The C ouncil would therefore not be 
built from scratch, so as to preserve experience, expertise and continuity.  
                                                                                                                                                         
the banking supervisory authorities. It focuses on macroeconomic issues, such as developments in the banking 
and financial system. Its activities also focus on pr oviding advice to the European Central Bank on issues 
relating to national and EU law where these issues affect  banking supervision and the stability of the financial 
system. It also promotes co-operation and exchange of information between central banks and supervisory authorities on issues of common interest, including th e prevention and effective handling of financial crises. 
22 Further discussions between DG ECFIN and DG MARKT are needed on the functioning of the ESRC.  
 
 23In order to perform this ro le, the ESRC would carry out all the tasks of an EU macro-
prudential supervisor, that is: 
- collect and analyse all information relevant for financial stabilit y, pertaining to macro-
economic conditions and macro-prudential deve lopments in all the financial sectors; 
- identify and prioritise risks to the stability of the EU financial system; 
- issue macro-prudential risk warnings; 
- give recommendations on the appropriate measur es to be taken in reaction to the risks 
identified; 
- ensure follow-up to warnings and recommendations, and 
- be the interface with the IMF, the FSB and third country counterparts. 
The composition of the ESRC is reflected in the box below. To ensure that the ESRC can 
work efficiently, the membership of supervisors in the ESRC would be limited to the three chairmen of the European Supervisory Author ities. However, each central bank governor 
should be accompanied by one senior representativ e of the national superv isory authorities as 
observer (i.e., a 1+1 formula). In those Member  States where there are several supervisory 
authorities, the representative accompanying the central bank governor could vary from meeting to meeting, depending on the issu es to be discussed by the ESRC.   
All ESRC members and observers would have th e right to attend and to speak at these 
meetings. In order to stream line the decision-making process, however, only ESRC members 
would have the right to vote, i. e. only central bank governors, the chairmen of the European 
Supervisory Authorities and the Commi ssion member would be voting members. 
Box 1. Composition of the European  Systemic Risk Council (ESRC) 
Members:
 
- Chairperson: President of the ECB (or alternatively a Governor elected by ESRC 
members); 
- Vice-Chairperson (elected by ESRC members); 
- Governors of the 27 national central banks; 
- President of the ECB (if the latter is the chairperson of the ESRC, the ECB would be 
represented by its Vice-President); 
- Chairpersons of the three Eur opean Supervisory Authorities;  
- Member of the European Commission.  
Observers:  
- A representative of the national supervis ory authorities, acco mpanying the central 
bank Governor in a 1+1 formula; 
- Chairperson of the Economic and Financial Committee; 
- A representative of each national centr al bank of the EFTA-EEA countries. 
6. Preliminary analysis of impacts and comparison of 
options 
This section examines the effectiveness of the identified options in achieving the set 
objectives. We are looking in particular at th e Specific Objectives which have been set 
separately for the areas of micro- and macro-pr udential supervision. The options will also be 
compared with regard to the crit eria of effectiveness, efficiency and coherence, according to 
the following definitions: 
 
 24• Effectiveness: The extent to which options achieve the objectives of the proposal with 
sufficient legal certainty;  
• Efficiency:  The extent to which objectives can be achieved for a given level of 
resources/at least cost (cost-effectiveness); 
• Coherence:  The extent to which options are cohe rent with the overarching objectives of 
EU policy, and the extent to which they are li kely to limit trade-offs across the economic, 
social, and environmental domain.23 
6.1. Micro-prudential supervision  
There are four Specific Objectiv es defined for the reform of the EU framework for micro-
prudential supervision, as presented in chapter 4: 
1. Balance the home and host supervisor int erests: reinforce processes and practices for 
challenging supervisory practi ces on a cross-border basis; 
2. Ensure a level playing field for financial institutions operating in various Member 
States; 
3. Improve crisis prevention and management on the European scale; 
4. Improve cost efficiency of supervision for supervised companies. 
Stage 1 – Options for Supervision 
At stage 1 of the assessment, we shall analys e how effective the propo sed options can be in 
achieving the above objectives.  
1. Dynamic status quo: home country model and the Lamfalussy 
framework 
The current supervisory framework in the EU , based on the proposals of the Lamfalussy 
committee, was a step forward in the evolutio nary process of enhanc ing co-ordination of 
financial supervision in the Internal Market. It  introduced the notion of  close co-operation of 
national supervisors to harmonise rules and practices and build mutual trust, as well as an institutional framework to achieve that. R ecently, the system has been strengthened by 
improvement of decision making procedures , formalising supervisory cooperation on 
financial conglomerates and ad ditional funding from the EU budget. Colleges of supervisors 
have been being set up for all major cross- border groups. However, during seven years of 
supervisory co-operation in the securities area  and four years in the banking and insurance 
sectors the progress has turned out to be mu ch slower and more limited than expected.  
In terms of achieving a balance between home and host  supervisor interest in the 
supervision of cross-border financial groups , the current system is clearly lacking a 
mechanism for solving conflicts between participating supervisors. As national authorities are merely accountable to their nati onal Parliaments/national taxpay ers, host authorities can only 
hope that home authorities will take their situa tion into account in the event of a crisis. The 
imbalance between home and host countries may be further deepened by differences in size between countries. 
                                                
 
23 Impact Assessment Guidelines 
 
 25The Lamfalussy framework has proved suboptimal  in ensuring consistent implementation and 
enforcement of EU rules. Diverging national in terpretations of superv isory rules remain the 
common problem. In some cases, even slight di fferences in the approach may favour national 
companies or act to the detriment of foreign competitors. Without legal powers to set binding supervisory standards and deci sions on individual firms, CESR , CEBS and CEIOPS have not 
been able to move forward much in this area. The exis ting situation cannot achieve a level 
playing field . The lack of progress in harmonisat ion of supervision also causes higher 
compliance costs  for companies. 
The existing mechanisms have proved to be in effective in ensuring a co-ordinated reaction 
during the recent financial crisis . Prudential supervision, as well as the capacity to manage the 
stability of the financial system, is highl y dependent on the quality of co-operation and 
information exchange between supervisors.  Pr oblems of communication, or a lack of trust 
between supervisors, can severely endanger th e effective control of the institutions or 
financial systems concerned.  
In summary, it is likely that the EU has re ached the limits of what  can be done with the 
present status of the Committees of Europ ean Supervisors as advisory bodies to the 
Commission. If serious progress is  to be made on building a stab le and integrated financial 
market, the costs of this option clearly outweigh the benefits.   
2. Step back: host country model 
By granting full powers to the host country supervisor, this model would not fulfil the 
objective of ensuring the appropriate balance between home and host  supervisors. 
Concerning crisis management , full control by national supervisors over companies 
operating in their domestic market would likel y be beneficial from the perspective of 
consumer protection and financ ial stability. On the other hand, taking into account the 
prevention aspect, the main deficiency of this m odel is the lack of any kind of oversight of big 
cross-border financial groups. Moreover, the sc ope for control of cross-border groups by host 
countries would be limited in practice, as key decisions are often taken by the parent company 
in the home country and the financ ial health of the subsidiary is  closely linked to that of the 
financial group as a whole. The effective contro l of large financial groups would therefore be 
primarily in the hands of the s upervisor in the home country, but  it would not take account of 
subsidiaries and branches in ot her countries. Furthermore, from the Internal Market point of 
view, the host country model would not fulfil the objective of creating a level playing field . It 
would also be ineffective in terms of reducing costs , as companies wishing to operate cross-
border would have to comply with various na tional sets of supervisory requirements and 
practices, incurring significant compliance costs. In other word s, host country control could 
not work without significant fina ncial disintermediati on and removal of many of the benefits 
of the internal market in terms of income a nd welfare. For example, a complete legal and 
operational alignment of branches and subsidiari es with the domestic legislation of the host 
country would lead to a complete unbundling of cross-border groups, which would damage 
efficiency. 
3. Lead supervisor model 
This model entails significant reallocation of  responsibilities to home country supervisors 
from host country supervisors (i n the case of branches) and from home country supervisors of 
subsidiaries to home country supervisors of th e parent company. In a college of supervisors, 
the lead (home) supervisor would make us e of the expertise an d knowledge of local 
supervisors and delegate to them tasks and, wh ere possible, responsibil ities. But in the end 
 
 26decisions would be made by the home authority. Th is raises serious questions with respect to 
ensuring an appropriate balance between home and host  interests, as reflected by the 
reluctance of a vast number of Member St ates to move towards stronger group-wide 
supervision24.  
While home country supervisors would be fully  responsible for oversight of cross-border 
financial groups, national (host) supervisors woul d remain responsible fo r financial stability 
in their own jurisdiction. As for crisis management , this option would result in a 
misalignment between the accountability of host authorities to their taxpayers and their 
(decreasing) competencies in terms of prudentia l requirements. In this respect, this option 
could have a particularly negative impact on the new Member States, where on average 65% 
of banking assets are in foreign-owned banks, while in countries like Estonia, the Czech 
Republic and Slovakia over 92% of banking assets are foreign-owned.  
Also in terms of ensuring a level playing field,  the lead supervisor model would not 
accomplish the objective of the reform. Under th is model, each financial group operating on a 
cross-border basis would indeed have to comp ly with only one set of supervisory standards 
and practices, as required by the lead supervisor . However, supervisors in different countries 
could still have differing requirements. This w ould create an increasin g risk of situations 
where in a given country companies operate accord ing to various supervisory regimes: that of 
the local supervisor – for domestic firms, a nd those of various lead supervisors – for 
subsidiaries of financial groups  based in other countries. More over, this model would create 
the risk of supervisory arbitrage in which l ead supervisors could co mpete by easing the rules 
to favour their domestic undertak ings. Another possibility woul d be that cross-border groups 
will choose to establish themselves in the Memb er State with the lightest prudential regime. 
Concerning cost reduction for financial institutions,  the lead supervisor concept would 
allow for minimising supervisory costs at a comp any level as there would be a 'one stop shop'. 
However, supervisory competition between lead supervisors could entail significant costs for companies and society in case of a failur e linked with too le nient supervision.  
4. de Larosière proposal: European Sy stem of Financial Supervisors (ESFS) 
The proposal for a European System of Financ ial Supervisors (ESFS) addresses the specific 
problems identified in the area of supervisio n in the EU. It ensures the necessary co-
ordination at the Community level while pres erving Member States' primary competence in 
the area of supervision. The decision-making pow ers of the Authorities are primarily related 
to ensuring a correct and cohere nt application of EU law.  
To ensure the balance between the different supervisory interests, th e Authorities would be 
granted certain powers. Specifical ly in case of conflicts between home and host authorities on 
the application of EU rules, th e European Supervisory Authorit ies/y could be called in by the 
respective national authorities to settle disputes . With regard to instut itions for which global 
colleges of supervisors exist (in line with recen t G20 conclusions), such interventions of the 
new Authorities could have the role of good examples. 
In order to ensure a level playing field  for all financial companies in the EU, the European 
Supervisory Authorities would be  called on to develop technical standards and interpretative 
                                                 
24 For example, the Member States rejected the Commi ssion proposals to strengthen home country control for 
capital add-ons in subsidiaries in other Member States under the banking Capital Requirements Directive. 
Likewise, they also vetoed Commission proposal under th e insurance Solvency II directive to allow the home 
based firm to allocate capital throughout the group in an efficient way, subject to safeguards to protect the 
financial soundness of all the legal entities belonging to the group. 
 
 27guidelines which would be applied by national s upervisory authorities.  This would bring 
about more harmonisation in the rules to be applied by supervisors as well as greater 
consistency in the execution of day-to-day supervisory tasks. 
They could also have direct decision-making  powers with regard to certain specific 
situations pertaining to their ex ercise of ensuring consistent application of EU law and with 
regard to certain pan-European financial instit utions which are regulated at a European level 
(Credit Rating Agencies, Central Clearing Counterparties, etc.). 
The powers of the new Authorities would also  allow them to be more effective in crisis 
prevention and management . They would: have a strong co -ordinating role in crisis 
situations; facilitate co-operation and exch ange of information between the competent 
authorities; act as mediator when that is needed ; verify the reliability of the information that 
should be available to all parties;  and help the relevant authoriti es to define and implement the 
right decisions. In specific cr isis situations, the Authorities would adopt emergency decisions 
based on specific parameters set by legislation. For example, they could have play ed this role 
in the Fortis case quoted in chapter 3. 
The ESFS would improve  cost efficiency of supervision for supervis ed companies, as they 
would benefit from (more) harmonise d prudential and reporting rules.  
5. Full supervisory centralisation: a single EU Supervisor 
As explained above in 5.1, the working hypothesi s for this option assumes that a single EU 
supervisor (organised either as a single centr al unit or as a 'hub and spokes' model with the 
central unit and national branches , which could be based on the existing national supervisory 
authorities) would replace nationa l supervisors for supervision of  cross-border entities. This 
would practically eliminate the issue of balance between the home and host  supervisory 
authorities, as all cross- border institutions would be superv ised by one central authority. Thus, 
it would completely fulfil one of the objectives of  the reform. In the same way, supervision at 
the EU level would guarantee a level playing field  across the Internal Market, with a fully 
uniform set of rules, standard s and practices for cross-border  groups applied in each Member 
State. The creation of a two-tier  system, with an EU supervisor for cross-border institutions 
and national supervision for institutions with domestic activities only,  could however risk 
creating an un-level playing field in superv ision between pan-European banks and banks 
operating within one Member State only, while both would be competing on the same market 
for customers. To address this, the EU Superv isor could exercise co -ordination powers to 
ensure harmonised supervisory appr oaches in each national market.  
The full harmonisation of supervisory standards a nd practices would also clearly lead to the 
reduction of compliance costs  of cross-border fi nancial groups.  
Centralised supervision at th e EU level would also be effective in co-ordination of crisis 
prevention and management mechanisms . However, this would need to be coordinated 
withburden-sharing arrangements gi ven that certain decisions coul d have fiscal consequences.  
Conclusion 
In light of the above analysis, options 1 (Status quo), 2 (a step  back) and 3 (Lead supervisor) 
are rejected (as they fa il to meet the specific  objectives). This means that option 4 (ESFS, 
leaving responsibility for day- to-day supervision with nati onal supervisors as described 
above) and option 5 (EU Supervisor, with EU -responsibility for cross border groups) are 
retained for further comparative assessment.  
 
 28Table 5. Effectiveness in achieving the Specific Objectives (Level 1) 
(0 baseline; + positive; - negative; / difficult to establish) 
Options Specific Objectives 
Level 1: Supervisory system Home-host 
balance Level 
playing 
field Crisis 
prevention 
and 
management Cost 
effectiveness
1. Status quo: Lamfalussy 
framework 0 0 0 0 
2. Stage back: host country model -- -- - -- 
3. Lead supervisor model -- - - ++ 
4. De Larosière proposal: ESFS ++ ++ ++ ++ 
5. Full centralisation: single EU 
supervisor ++ ++ ++ ++ 
Comparison of the selected options (4 &5) 
Effectiveness 
Any future structure should obviously have as  its prime objective to ensure the greatest 
possible effectiveness  of supervision and, thereby, gu arantee adequate protection for 
depositors, policy-holders and investors, as well as financial st ability in the EU.  
There is a strong case for d ecentralisation. First, there are many small and medium-sized 
financial institutions which operate exclusively within national borders. There is no need for 
direct supervisory involvement at the European  level for these institutions. Second, prudential 
supervision should be executed at the local leve l where the financial institutions are based. 
The use of field inspections is an important tool of prudential supervision. By being close to 
the actual activities of the firm, supervisors wo uld get a feeling for what is going on in an 
institution and would also be more familiar wi th the local market conditions in which an 
institution is operating. Th e proposed ESFS recognises this  by building on the existing 
decentralised structure and preserving experien ce, expertise and continuity. The focal point 
would remain at the national level, as the national supervisors would conduct day-to-day 
supervision. One drawback of a single EU superv isor would be that the distance between this 
body and the supervised institutions may be too large – both physica lly and in terms of 
familiarity with local circumstances. So the single EU supervisor could not fully replace 
national supervisors, which woul d still need to  deliver a local elemen t of supervision. This 
could be partly alleviated by having branches  within the Member States, but this would 
increase cost. Furthermore, an  EU body would not have the le gal power to apply rules made 
at national level within the Member States. 
While the single EU supervisor option would pr actically eliminate the home-host issue, the 
ESFS option would also grant the necessary power s to the EU Authorities to enforce solutions 
balancing the interests of home and host aut horities and avoid decision-making deadlocks. 
Both the ESFS and the single EU Supervisor  would possess the competences to issue 
technical standards and interpre tations, thus fostering a level playing field in the Internal 
Market.  
Concerning crisis prevention an d management, in both options the authorities would have 
access to the relevant information at the EU, individual country, and individual company 
 
 29level. While the preferred route to solving a failure of a financial institution is a private sector 
solution, recent events have s hown that in extreme situations  governments may be forced to 
step in so as to secure the stability of the financial system. As such, EU-level supervision 
could raise complicated issues with respect to  the fiscal costs of a possible bail-out (as 
highlighted before, over the past months, EU  governments have already pledged around EUR 
3 trillion in recapitalisation obligations and different guarantee schemes). However, the 
proposed ESFS addresses this by ensuring that the focal point remains at the national level 
(see the foregoing description in section 6.1).  In the absence of an EU-level mechanism for 
financing cross-border crisis resolution efforts, transferring additional supervisory 
responsibilities to the EU level, would need to be accompanied by more detailed criteria for 
burden sharing. 
In terms of legal feasibilit y, the competences proposed for the ESFS raise a number of 
challenges and specific solutions  would have to be sought within the current EU legal 
framework.  
In conclusion, both the ESFS and the EU Superv isor options would fu lfil well the specific 
objectives of the reform. However, in contrast to the single EU supervisor, the proposed ESFS 
clearly recognises the need for decentralisation and would creat e a network of EU financial 
supervisors, based on the principles of pa rtnership and flexibility within a network 
arrangement. This is also in line with the ex isting responsibilities in the field of crisis 
prevention and management. However, in line w ith the recommendations of the de Larosière 
Group, the functioning of the ESFS should be revi ewed after some time, among other things 
to examine the case for wider supervisory duties at the EU level (e.g., examine the case for transferring supervisory res ponsibilities for cross- border institutions to the proposed 
Authorities). 
Efficiency 
The criterion of efficiency helps assess the exte nt to which objectives can be achieved for a 
given level of resources/at least cost. We shall take into account the impact on the supervised 
financial companies, both operating cross-border and local (firms);  supervisors, regulators and 
other public authorities (supe rvisors); and other stakehol ders including consumers, 
employees, pensioners etc. (taxpayers). 
In terms of cost effectiveness for supervised companies , both models would lead to potential 
reduction of compliance cost for cross-bord er groups thanks to a harmonised set of 
supervisory rules. Both options would also entail no significant change of the compliance 
costs of domestic companies (i.e., small and medium-sized financial institutions which 
operate within national borders).  
Looking at the impact on supervisors , both options would enhance cost-efficiency. The ESFS 
would foster greater efficiency through the pr omotion of consistency and arbitration between 
national authorities, and by taki ng over responsibility for a numb er of decisions pertaining to 
EU-wide groups or firms.  A single EU superv isory authority for cross-border groups could 
be a way of making some economies of scale in  comparison to the present situation (although 
this would be limited by the fact that nationa l authorities would remain in place to oversee 
firms active in one Member State only). Howeve r, the detailed cost and staffing of the 
European Supervisory Agencies would depend on the specific tasks dele gated to these bodies. 
It is evident that enhanced resources are needed, both in pe rsonnel and budget, but at this 
stage it is not possible to specify the exact numbe rs. This requires a deta iled management plan 
linked to the specific functions  of these Authorities.   
 
 30In terms of impact on taxpayers , both proposals should strengthe n the resilience of the EU 
financial system, thereby lowering the risk of financial crises that could imply high fiscal 
costs. Both bodies would require their own budget, which could be financed by industry 
and/or contributions from th e public sector (including the EU budget). While the EU 
Supervisory Authorities within the ESFS would primarily rely on the execution of supervisory 
tasks at the national level, their resources woul d be relatively limited in comparison with the 
resources needed for the single EU supervisor (a s the latter would repl ace national supervisors 
for the supervision of cross-border groups). Fr om the perspective of  the Community budget, 
the ESFS should at this stage be a better option as it would allo w for achievement of the same 
objectives as the single EU superv isor, but at lower cost. Yet, looking from the perspective of 
EU taxpayers in the long-term, it is not possible to establish the differences in terms of 
general efficiency of the tw o models at this stage. 
Coherence 
Under the criterion of coherence we shall ex amine the extent to which options match the 
overarching objectives of EU policy,  and the extent to which they are likely to limit trade-offs 
across the economic, social, and environmental domain. 
Both options are consistent with the overall objec tives of the EU to contribute to sustainable 
economic growth and job creation, to foster th e Single Market and to promote EU industry 
globally. Numerous studies have shown the positive impact of well-functioning financial 
markets and intermediari es on the real economy25. The financial sector in  the EU is also an 
important employer, not only in a few financia l centres in Europe bu t practically in all 
Member States. A number of other studies, including Commission analyses26, have pointed to 
the interplay between the level of financial integration and the increased risk of cross-border contagion. So, effective cross-border arrangement s for supervision are an essential element in 
fostering stable and integrat ed financial markets. By fostering a sound and prosperous 
financial sector, both opti ons would also contribute to increasing international 
competitiveness of EU industry. 
Subsidiarity and proportionality 
Another important aspect of comparative assessme nt is testing the options with regard to the 
EU principles of proportionality  and subsidiarity . The former requires that Community 
action does not go beyond what is necessary to ach ieve the objectives satisfactorily. The latter 
requires that any action at EU level is justified by the added value as comp ared to action at the 
Member State level. 
The ESFS would be largely based on experience with the current supervisory framework. The 
proposed system consists of one or more new European Supervisory Authorities working in 
tandem with the national financial supervisor s. Key elements of the ESFS would be: 
decentralised day-to-day supervision by national supervisors, centralisation of specific tasks 
to foster harmonised rules and coherent en forcement, and enhanced co-operation and 
information exchange at all levels. The ESFS  option therefore meets both the criteria of 
proportionality, by presenting targeted soluti ons to the identified problems, and of 
subsidiarity, by transferring at the Communi ty level only the minimum of necessary 
competences.  
                                                 
25 London Economics (in association with PricewaterhouseCoopers and Oxford Economic Forecasting), 
Quantification of the Macro-Economic Impact of Integration of EU Financial Markets , Report to European 
Commission, November 2002.    
26 European Financial Integration Report  2007-2008, Financial Integration Monitor 2004-2006 
 
 31The above cannot be said of a single EU supervisor, which - apart from the competences 
necessary to address the problems identified – would transfer to the Community level all responsibility for financial superv ision of cross-border groups in  the EU. Full centralisation of 
supervisory responsibilities for cross-border groups can only be  considered when there are 
strong arguments in favour of such  a proposal. At this stage, th e complexities entailed by such 
a proposal are such that creati ng a single EU supervisor woul d be disproportionate to the 
current problems and therefore out of k eeping with the subsidiarity principle. 
Conclusion 
In light of the assessment criteria, the ESFS is the preferred option for reform of the EU 
financial supervisory system. Especially with respect to effectiveness, it is questionable 
whether a single EU supervisor would be sufficiently close to the activities of a financial 
group to guarantee adequate protection for deposito rs, policy-holders and investors as well as 
financial stability in the EU. Within the ESFS,  the focal point would remain at the national 
level, as the national superv isors would conduct day-to-day supervision. It builds on the 
existing decentralised structure and therefore pr eserves experience, expertise and continuity. 
It is also an evolutionary model, allowing if needed for the transfer of additional supervisory 
responsibilities to the EU-level  over time. As for the effici ency condition, the ESFS should at 
this stage be a better option as it would allo w for achievement of the same objectives as the 
single EU supervisor, but at lower cost. Another key point is that at present there is no EU-
level financing mechanism for use when intervention is needed to assist an institution in difficulty. Therefore, it will be important to al so make progress on burden sharing and crisis 
management and resolution arrangements  in the cross-border context.   
Table 6. Micro-prudential supervision: comparison of options (Level 1) 
(+ positive; - negative; / difficult to establish) 
Options Assessment criteria 
Level 1: Supervisory system Effectiveness Efficiency Coherence Subsidiarity 
and 
proportionality
4. De Larosière proposals: ESFS ++ ++ ++ ++ 
5. Single EU supervisor ++ ++ ++ - 
Stage 2 – Institutional set-up 
We may pass to assessing the institutional set-up for the new Authority or Authorities, a 
question which is valid regardless of whether th e ESFS or a single EU supervisor is chosen. 
Four options exist, involving establishmen t of one, two, three or four bodies (see the 
description in the previous section). These optio ns must be analysed ac cording to the criteria 
of effectiveness, efficiency and coherence. We  shall treat the option C with three Authorities 
as the baseline as it corresponds to the current Lamfalussy framework. 
Firstly, with regard to effectiveness , the empirical evidence which exists as to the different 
supervisory models is inconclusive and is in any case drawn from different regulatory 
environments around the world, as noted by the G30.27 The ESFS would have as its main 
tasks activities other than direct supervision (c o-ordination, harmonisati on of rules etc.), and 
                                                 
27 See the G30 report, "The Structure of Financial Supervision – approaches and challenges in a global 
marketplace" G30, 9/10/2008, which st ates "In general, no one model has proven unambiguously superior in 
achieving all the objectives of regulation."  
 
 32therefore evidence related to national supervisor s, whose main task is day-to-day supervision 
of individual entities, cannot be  directly applied. We can however note that the current 
structure of the Committees of Supervisors involves a sectoral approach with three 
committees and a Joint Committee for Financia l Conglomerates, so any move towards a 
different structure would proba bly involve a short- term drop in effectiveness during a 
transitional period. Furthermore,  if a non-sectoral approach were to be adopted (single 
supervisor or "twin peaks" for example), the effectiveness for each sector would depend on a 
good representation of that sector in the oversi ght management staff and work plan of the 
authority(ies) in question. We can  therefore only conclude that there is no decisive evidence 
as to the effectiveness of the different models  as regards the tasks proposed for the ESFS at 
EU level. 
As to efficiency , it would seem a priori logical to s uppose that the smaller the number of 
authorities, the lower the level of duplication of  administrative resources and expenses would 
be, and the higher the cost-efficien cy. This would point towards a single authority as the most 
efficient set-up, then a two-authority structure, and so forth. As mentioned above, the detailed 
costs and staff requirements for the different supervisory options is something that would 
need to be set out in the impact assessmen ts accompanying the legislative proposals in the 
autumn. The efficiency of a "twin-peaks" op tion would depend on the balance of work at 
ESFS level between prudential matters and conduc t-of-business matters, which will be clearer 
after a few years of ESFS existence. 
Coming to coherence , the most coherent structure woul d be that which best reflects the 
nature of financial regulation in the EU and th e structure of financial institutions in the EU. 
Here, it must first be observed  that EU regulation is currently  organised on a sectoral basis, 
with separate legislative acts and separate prudential and conduct of business requirements, 
for the banking insurance and securities sectors, and there is no sign that this will change in 
the foreseeable future. The current structure of  the Committees of Supervisors reflects this 
fact, and a similar sectoral structure for th e ESFS would seem therefore to be the most 
coherent with current legisl ation. Secondly, although many EU financial institutions are 
financial conglomerates, this trend ma y not continue and may even reverse28.  
Given the fact that no one option emerges as a clear leader under the above analysis,  it is 
considered at this stage that the most proportional solution, involving the minimum of 
necessary change, is to retain the current s ectoral structure of the three Committees of 
Supervisors by creating three Eur opean Authorities with the same sectoral mandates as these 
Committees, combined with a review clause which commits to an analysis of the functioning of the new structures three years after the entr y into being of the E SFS. The proposed Steering 
Committee could ensure cross-fert ilisation and interlinkage between the three Authorities and 
also replace the current Joint Committee on Fina ncial Conglomerates. If  the future review 
were to decide that effectiveness, effici ency and coherence coul d be better achieved by 
passing to a different supervisor y model, taking account of the e volution of market structure 
in the meantime, then the existence of the Steering Committee could f acilitate any changes. 
Table 7. Micro-prudential supervision: comparison of options (Level 2) 
(+ positive; - negative; / difficult to establish) 
Options Assessment criteria 
Level 2: Institutional set-up Effectiveness Efficiency Coherence 
                                                 
28 For example, ING announced on 9/4/2009 that it will separate out its banking and insurance businesses. 
 
 33A. One body / (-)* + 0 
B. Two bodies / (-) + 0 
C. Three bodies  0 0 0 
D. Four bodies / (-) - - 
* (-) marks the drop of effectiveness in the short term due to transition to a new set-up 
6.2. Macro-prudential supervision  
The assessment will be carried out in relation to the specific objectiv es ( see section 4.2.) 
according to the usual criteria of effectiveness,  efficiency and coherence. If not specified 
differently, the assessment of th e single criterion is deemed to be referred to all of these 
objectives at the same time. 
As regards the criterion of coherence  all options (except for A – dynamic status quo), as 
regards all the specific objectives referred above, are consistent with the overall objectives of 
the EU to contribute to economic growth and cr eate jobs, to foster the Single Market and to 
promote the competitiveness of EU enterprise s. The setting-up of an EU framework for 
macro-prudential supervision will contribute to preserving financial stability, thus providing for one of the essential pre-conditions for the achievement of the goals mentioned above. The 
objective of a macro-prudential appr oach is indeed to limit the risk of episodes of financial 
distress with significant losses in terms of  real output for the economy as a whole. 
A. Dynamic status quo. 
As highlighted in section 3.5, the present EU ar rangements are not effect ive as they place too 
little emphasis on the macro-prude ntial side. Moreover, there is no mechanism in the EU to 
ensure that macro-prudential risk  warnings and/or recommendations  are translated into action. 
Nor are the present arrangements efficient, as macro-prudential analysis is fragmented and 
executed by different authorit ies at different levels. 
B. Build on existing or  proposed structures 
• The EFC 
As regards effectiveness  it could be argued that the role of this committee in preparing 
political discussion within the ECOFIN Counc il tends to discourage a candid assessment of 
risks and specific recommendations for corrective action as a search for consensus could lead 
to dilution in the messages coming from the co mmittee. Such drawbacks are heightened by 
the fact that Finance Ministers could be  direct addressees of risk warnings. 
In terms of powers and resources,  two main drawbacks can be hi ghlighted with regard to the 
option of giving the EFC lead responsibility fo r macro-prudential assessment. First, the EFC 
Secretariat, as currently sta nds, would not provide the ade quate level of expertise to 
effectively undertake the operational task s required for such a body. It is common 
understanding that central bank representatives would be better placed to provide the right 
level of analytical support, including the de velopment of methodology (macro-systemic stress 
testing), and management of a complex and wide set of early warning indicators at EU and 
 
 34Member State level29. The latter also requires substantial re sources (both in terms of staff and 
budget). 
As concerns pooling of information, the compos ition of the EFC (i.e. its political dimension 
due to the presence of ministries of finance) could induce national supervisors to adopt a quite 
conservative approach, particularly on informati on which may raise confidentiality issues (i.e. 
concerning individual systemically relevant in stitutions). Supervisory authorities might be 
reluctant to disseminate sensitive data to a body having not exclusively a technical dimension.  
In terms of cost efficiency  this option would lead to substantial cost (and duplication) if the 
necessary expertise and technical infrastructure would have to be built up from scratch (and 
not be based on existing experience and e xpertise of for example the ESCB).  
• The ECB/ESCB 
In terms of effectiveness it woul d make sense to give central banks a leading role in macro-
prudential supervision. Historical ly, the two main objectives of central banks relate to the 
maintenance of monetary and financial stabili ty. Both objectives are closely interlinked; 
monetary policy has significant implications for financial stability, while financial stability is 
an essential pillar for effective monetary polic y. Identifying vulnerabil ities in the financial 
and non-financial sectors and potent ial shocks in these markets is therefore a vital part of the 
work of central banks. Moreover, central bank s have a clear financia l safety net function 
through their role as lender of last resort. Safeguard ing financial stabilit y has therefore been 
and always will be a fundamental objective of central banks.  
The European Central Bank (ECB)/European Sy stem of Central Banks (ESCB) has wide-
ranging macro-prudential expertise and is at the h eart of the EU monetary system. It has also 
demonstrated its effectiveness in times of crisis management. The ECB/ESCB therefore 
seems to be uniquely placed to have a promin ent position in macro-prude ntial supervision. In 
view of the integrated financial market in  the EU and the geographical distribution of 
financial activities, it is however essential that  all EU central banks be associated, not merely 
those in the euro area.  
On the other hand, three arguments can be pres ented against the attr ibution of the macro-
prudential supervision to the ECB/ESCB. First, there may be a conflict of interest between 
financial and monetary stability, in connection with concerns that the ECB/ESCB for reasons 
of financial stability would pursue a more accommodating monetary policy than warranted for 
the pursuance of price stability. On the other hand, in the light of the primary task of 
maintaining price stability, it can also be argue d that the ECB/ESCB might be induced to take 
account of financial instability mainly to the exte nt that the latter is relevant for the prospects 
of inflation.  
Second, there would be a reput ational risk linke d to the conduct of  macro-prudential 
supervision. A perceived failure in fulfilling th e task of early warning or in advising on the 
most effective measures to react to risks iden tified might prove detrimental to the reputation 
of the ECB/ESCB, thereby jeopardising their cred ibility as a monetary authority as well.  
Third, the concentration of power argument could also be mentione d; attributing to the 
ESCB/ECB the powers linked to macro-pruden tial supervision might  be considered 
                                                 
29 These must encompass Aggregate cap ital adequacy ratios; financial gaps: liquidity, interest rate, funding and 
foreign exchange rate gaps; household indebtedness; balance sheet growth rate; level of provisions; non-
performing loans; risk concentration ratios; growth rate of domestic credit, rate of growth of house and other 
asset prices. 
 
 
 35detrimental to the system of checks and balanc es within the framework for managing the EU 
economy and financial sector. 
Having regard to the efficiency criterion, giving to the ECB/ESCB the mandate of 
undertaking the macro-prudential su pervision would allow to fully benefit from the available 
qualified resources to carry out the analytical and statistical work. Therefore the costs linked 
to implementation of this option would be reduced. 
• The ESFS 
This option would imply giving th e leading role in macro-prude ntial supervision to the new 
Authorities with the support of the network of national supervisors.  
As highlighted before, the scope of macro-prud ential supervision differs considerably from 
micro-prudential supervision. The former aims at  limiting the risk of episodes of widespread 
financial distress with significant losses in terms of the real output for the economy as a whole. This differs from the objective of micr o-prudential supervision, which is to limit the 
risk of episodes of financial distress at indivi dual institutions, independe ntly of their impact 
on the overall economy. Given this considerable di fference in scope, it would not be effective 
to transfer this task to the ESFS.
 
As for cost efficiency, this option would lead to substantial cost (and duplication) if the necessary expertise and technical infrastructure would have to be built up from scratch (and 
not be based on existing experience and e xpertise of for example the ESCB).  
C. Establish a new body, i.e., a Euro pean Systemic Risk Council (ESRC) 
The envisaged composition of the ESRC should attain high level of effectiveness  and provide 
the ESRC with an adequate level of legitimacy. In this respect, the de Larosière report argues that membership of any body responsible for m acro-prudential supervis ion should be at the 
highest level. Having both central bankers and supervisory authorities around the table would 
create valuable synergies and have a mutually reinforcing impact on the stability of the financial system. As indicated, it is vital to give central banks  a leading role in macro-
prudential supervision. Within the EU, the ESCB is  uniquely placed to provide the analytical 
and statistical support for the functioning of the ESRC.  
Central banks' focus on system stability puts th em in a position to better assess not only the 
likelihood and the potential of macro-shocks or disturbances in domestic and international 
capital markets, but also the ope ration of common factors affec ting the stability of groups and 
intermediaries. 
The involvement of micro-prudential supervisors  through the 3L3 Committees (or through 
the future European Authorities) as full memb ers and the presence of national supervisors as 
observers, would ensure a close cooperation and efficient and timely exchange of information. 
As a result the synergies betw een supervisors and central banks will be enhanced. This is 
essential particularly for the detailed knowle dge in financial markets micro-prudential 
supervisors hold and because they play a crucial ro le in early intervention mechanisms in case 
of a financial crisis. 
Participation of the Commission  would provide an essential c ontribution to the ESRC work. 
Indeed, the Commission plays a key ro le in macro-economic surveillance
30; it would therefore 
                                                 
30 See Art. 99, §3 and 4 of the EC Treaty:  “3. In order to ensure closer co-ordination of economic policies and 
sustained convergence of the economic performances of the Member States, the Council shall, on the basis of 
reports submitted by the Commission, m onitor economic developments in each of the Member States and in the 
 
 36be in position to confirm, comp lement or challenge the risks id entified and provide a broader 
perspective of risks to the financial system. Furthermore,  on its own initiative or upon 
invitation by the Council, the Commission could intervene in the follow-up to risk warnings 
and recommendations issued by the ESRC,  for example proposing legislation.  
The technical profile of members should avoid any major risk of interference of political 
stances in carrying out the anal ysis and providing advice on co rrective actions. Moreover, the 
level of members will provide the ESRC with the adequate legitimacy to perform its duties, in 
particular to ensure adequate follow-up to its advice. Involvement of the EFC Chair, albeit 
with observer status, is advisa ble as it would ease the inform ation exchange process with 
political authorities. Indeed, the latter will in many cases play a relevant role in the follow-up 
to the warnings, particularly in connection with  their prominent respons ibilities in the crisis 
prevention and management. Givi ng the EFC (through its Chair) the possibility to attend 
meetings of the ESRC would enhance the commi tment of Finance ministries in ensuring 
proper follow-up when their action is requested. Th is would also reflect the role of finance 
ministries in crisis management and resolu tion and ensure a smooth flow of information 
between the ESRC and the political authorities. 
As regards the decision-making mechanism, various  options can be envisaged at this stage: 
giving voting powers to ESCB Members only, extending th ese powers to the new European 
Supervisory Authorities and the Commission too, or even more widely also to (national) 
supervisors. The option of giving votes to all the part ies involved would be too unwieldy, as it 
would seriously hamper the effectiveness of the body. The first option would mean for ESRC 
activities to benefit from light and fast procedures, thereby pot entially increasing its 
effectiveness and preventing a potential blurring of responsibilities. This would stem, inter 
alia, from the level of homogeneity of voting Au thorities. As a possible negative effect this 
mechanism could impact on the commitment of  supervisors within the ESRC. Moreover 
giving voting power to the central bankers only might blur the distinction between the ESRC 
and the ECB/ESCB, thereby invol ving for EU Central Banks the same drawbacks as placing 
the ESCR within the ESCB, i.e. a “reputational ri sk” in connection to thei r participation in the 
ESRC. Letting European Supervisory Authorities  supervisors and the Commission participate 
in the decision-making process, might be an acceptable intermediate way which would 
increase the willingness of the EU Authorities to act more proactively within the ESRC and 
might reduce the reputational risk for individual Members for any potential failure of the new 
body and fully preserve their credibility in fulfilling their own specific mandates.    
The ESRC would introduce an effective mech anism for addressees of warnings and 
recommendations to act on them. Proper follow- up to warnings and re commendations would 
be ensured by introducing a "comply or explain" mechanism. As far as the addressees of its 
recommendations are concerned, there are two main options:  
                                                                                                                                                         
Community as well as the consistency of economic policies with the broad guidelines referred to in paragraph 2, 
and regularly carry out an overall assessment. For the pu rpose of this multilateral surveillance, Member States 
shall forward information to the Commission about important measures taken by them in the field of their 
economic policy and such other info rmation as they deem necessary. 
4. Where it is established, under the procedure referred to in paragraph 3, that the economic policies of a Member State are not consistent with the broad guidelines referred to in paragraph 2 or that they risk 
jeopardising the proper functioning of economic and m onetary union, the Council may, acting by a qualified 
majority on a recommendation from the Commission, make the necessary recommendations to the Member State concerned. The Council may, acting by a qualified majority on a proposal from the Commission, decide to make 
its recommendations public. The President of the Council and the Commission shall report to the European 
Parliament on the results of multilateral surveillance. Th e President of the Council may be invited to appear 
before the competent committee of th e European Parliament if the Council has made its recommendations 
public” 
 
 37• the ESRC could interact directly with any rele vant Authority or Institution at all levels 
(national and supranational). This w ould increase its effectiveness as the 
recommendations would be immediately transm itted to those that should implement the 
corrective measures suggested. On the other hand, interfacing with a wide range of Institutions and Authorities of  different nature and level could imply setting-up a quite 
complex network of institutional relationships, with a numerous and varied group of interlocutors;  
• the alternative option would be to have a ra ther limited number of counterparts at EU 
level, like the ECOFIN Council and the 3 ne w European Authorities (which would then 
forward the recommendations to the final addr essees) and at global le vel, like the FSB and 
the IMF This would ensure better coor dination and a proper overview of ongoing 
activities, reduce the administrative actions (and burden) for the ESRC and heavily simplify and speed-up its activities, offsetting in several cases the additional time needed 
for the transmission to the final recipients. Th is second option would seem to be the best 
one. 
The ESRC would decide in each case whether a recommendation should be kept confidential 
or made public, on the basis of its own judg ement. However, bearing in mind that the 
recommendations by the ESRC would not be bindi ng, public disclosure would be expected to 
increase their effectiveness. 
As regards the cost efficiency  criterion the ERSC would be s upported by a Secretariat staffed 
with officials working in the ECB
31 with rather limited costs main ly related to the equipment 
and running costs. 
Conclusion 
Based on the previous assessment, the ESRC emer ges clearly as the best solution for the EU 
framework for macro-prudential su pervision. The envisaged archit ecture, status and operating 
procedures should allow this body to meet the th ree objectives in the most effective way. It 
would be effective as having sole responsibil ity for macro-prudential risk warnings and a 
composition which would: create  valuable synergies, ensure  an appropriate level of 
representation, and have a mutua lly reinforcing impact on the stab ility of the financial system. 
As for efficiency, it would build on operationa l and technical support from the ECB/ESCB.  
Subsidiarity and Proportionality 
Concerning the subsidiarity principle it can be observed th at only Community action would 
provide an effective solution to the problems identified with the existing arrangements for 
macro-prudential supervision. Macro-prudential supervision requires, in addition to the 
judgement made by individual Me mber States, a judgement to be taken at the EU level. The 
“interconnectedness” of macro-prudential risks reflects a variety of direct and indirect 
linkages in the financial system and involves in -depth analysis across national and sectoral 
borders.  
Regarding the principle of proportionality,  the establishment of the ESRC, as explained 
above, would not involve excessive administra tive and financial costs, as it would obtain 
logistical support from the E CB. Moreover the proposed solution would achieve the right 
balance between the sovereignty of national author ities and the need to ensure an appropriate 
                                                 
31  The ESRC Secretariat could be also strengthened with personnel seconded from national Central banks or 
from national supervisors. 
 
 38macro-prudential supervision at EU level. Other options would en tail a sub-optimal 
representation of national/EU authorities.  
Table 8. Macro-prudential supervis ion: comparison of options 
Options Assessment criteria 
  Effectiveness Efficiency Coherence Proportionality 
Status quo 0 0  0 0 
EFC + + + + 
Tasking the ESFS + + + + 
ECB/ESCB +++ ++ + + 
ESRC  ++++ ++ + ++ 
7. Impact of the selected options  
The selected options should achieve the objecti ves of the reform by giving effect to a number 
of immediate changes to the organisation of micro-prudential and macro-prudential 
supervision in the EU, subject to the appropr iate legal framework. These changes will be 
achieved by work of the newly established ESFS and the ESRC, fulfilling the operational 
objectives listed in Chapter 4. 
It is important to emphasise that the preferre d options are neutral as to the organisation of 
supervision at the national level. They will be consistent with any of the models currently adopted in Member States. Second ly, regarding the competencies of the new Aut horities, they 
will not include decisions with direct fiscal consequences. 
The table below presents the comparison of th e impact of the ESFS and ESRC on various 
groups of stakeholders, including consumers,  employees, industry, supervisors etc, as 
identified in the pr oblem description. 
Table 9. Impact of the selected  options on the stakeholders 
 Micro-prudential supervision 
ESFS (3 Authorities) Macro-prudential supervision 
ESRC 
Financial industry: cross-border + 
Prevent failure of financial 
institutions through better co-
ordinated supervision. Ensure level 
playing field and reduce 
compliance costs thanks to 
harmonised standards and 
supervisory practices. Improve 
business environment thanks to 
financial stability and more 
effective crisis prevention in the 
EU + 
Prevention of failure of financial 
institutions through systemic 
contagion from other financial 
institutions in difficulty. Improved 
business environment due to 
financial stability and crisis 
prevention in the EU 
Financial industry: local = 
No significant changes, possible 
adaptation to the EU standards and 
improved business environment + 
Prevention of failure of financial 
institutions through systemic 
contagion from other financial 
 
 39due to more effective financial 
stability and crisis prevention in the 
EU institutions in difficulty. Improved 
business environment due to 
financial stability and crisis 
prevention in the EU 
Financial industry: 3rd countries + 
Attracting investments to Internal 
Market thanks to harmonised 
business environment and high 
quality supervision + 
Attracting investments to Internal 
Market thanks to increased 
financial stability 
Consumers and users of financial services (including retail 
investors) + 
Greater convergence of conduct-of-
business supervision in Europe  + 
Increase confidence by 
strengthening financial stability 
Employees + 
Preventing job losses in individual 
financial institutions by better 
detecting and remedying 
prudential-related difficulties + 
Preventing job losses in the 
economy as a whole arising from 
spill-over of financial sector 
difficulties to the real economy 
Pensioners + 
Providing incentives for 
development of cross-border 
occupational pension funds and 
strengthening their oversight. 
Improve stability of pension funds + 
Strengthened confidence of 
pensioners by strengthening 
financial stability. Improve 
stability of pension funds. 
Corporations from non-financial sector and SMEs + 
Facilitating access to finance by 
better preventing failure of 
individual institutions (e.g. 
European Authorities in oversight 
of credit ratings, approval of 
prospectuses) + 
Preventing major financial crises 
with damaging impacts on 
corporate equity value. Preventing 
major economic recessions linked 
with reduction of trade and 
demand.  
Supervisors + 
Ensuring more effective 
cooperation by clarifying the roles 
and responsibilities of supervisors 
at the national and Community 
level and establishing an effective 
framework for conflict resolution 
between supervisors. Indirect 
strengthening of supervisory 
independence. + 
Creating a framework linking 
micro-prudential supervision with 
macro-prudential supervision. 
Facilitating exchange of 
information and leading to 
creation of a common information 
pool. 
National governments + 
Establishing EU supervisory 
arrangements that are more 
consistent with European financial 
integration. Less risks of having to 
inject public money in the financial 
system. + 
Providing governments with 
recommendations for actions 
needed to protect macro-economic 
stability in the EU and individual 
Member States 
Central banks + 
Establishing EU supervisory + 
Giving effectiveness to the 
 
 40arrangements that are more 
consistent with European financial 
integration. analysis of macro prudential 
developments carried out in the 
central banks. Facilitating 
exchange of information and 
leading to creation of a common 
information pool. 
 
In general, by contributing to safeguarding financial stability and more effective control over 
conduct of financial companies, the ESFS and the ESRC would increase the welfare of most 
stakeholder groups in the Internal Market. 
8. Monitoring and evaluation 
A number of indicators are appl ied to monitor the trends related to the General Objectives of 
the reform: financial stability, consumer  and business confid ence, international 
competitiveness of EU financial industry, financ ial integration (see the European Financial 
Integration Report32). However, it is difficult to establis h the degree to which the EU policies, 
in particular the reform of financial supervis ion, influence the evolution of these indicators. 
To monitor effectively the impact  of the EU action in the area of micro- and macro-prudential 
supervisions, specific indicators should be matc hed with the specific objectives and –where 
possible – also with the operati onal objectives. These indicators should serve to evaluate the 
performance of the ESFS and the ESRC in fulfilli ng their tasks. As for the functioning of the 
ESFS, one could examine the progress in moving towards harmonised rules, powers and sanctions, measure confidence among supervisory au thorities, and verify the effectiveness of 
processes and practices to challenge supervisor y practices on a cross-border basis. For the 
ESRC to be effective it would need  to fulfil three key conditions: (i) it s hould be effective in 
identifying macro-prudential risks sufficiently in advance; (ii) it should be able to 
competently identify appropriate measures to reduce these risks;  and (c) it should be able to 
effectively trigger corrective ac tion to address the identified ri sks. These indicators should be 
developed in more detail in the impact asse ssment of legislative proposals implementing the 
supervisory reform. 
                                                
 
32 SEC(2009)19 final 
 
 41 
Annex 1 – Comparison of the retain ed options with the de Larosière 
report  
 
 
Major differences between the options retained by the Commission and the 
proposals of the de Larosière report 
 
 
     Micro-prudential supervision:       * Timing: implementation in one phase not two      * Sectoral coverage: European Insurance Authority to cover also occupational pensions 
       Macro-prudential supervision       * Composition of the ESRC: national supervisors would always be represented 
     * Voting in the ESRC: one vote per national delegation      * Addressee of ESRC warnings: only through ECOFIN Council and ESFS and not 
directly to national Central Banks and Supervisors (in addition to the EFC) 
 
 
 
 
 42 Annex 2- Summary of pu blic submissions received  
 
  The total number of submissions received to date in reply to the public consultation on 
financial supervision is 116 (i ncluding those which arrived af ter the deadline of 10 April 
2009, which were accepted). The breakdown is as follows (NB all submissions not containing a registration number for the submitting organisation have been classified as individual replies):  
Public authorities:         26 Registered organisations:        16 Individuals:          74 
 Many of the submissions covered not only supervis ory issues from the de Larosière report but 
also regulatory ones. A few did not  touch on supervisory issues at all. Most congratulated the 
de Larosière group and broadly supported its c onclusions, but some noted the lack of 
representativity of the group (being composed  only of bankers with no representatives of 
other financial sectors nor of consumers or employees). The ma jority of cont ributions noted 
that more details are needed on the power s and composition of both macro- and micro-
supervisors in order to re ach definitive positions. 
 Submissions were received from  public authorities in 18 EU and EFTA Member States and 
international bodies such as the IMF and th e existing "Level Three committees" (for some 
Member States more than one submission wa s received from different public bodies – see 
annex).  On micro-supervision , all submissions from public author ities strongly or cautiously support 
the principle of the ESFS, with one excep tion, which withheld its support. But most 
submissions have issues of detail to express.  Three submissions expl icitly oppose binding 
powers for new ESFS authorities over national au thorities. Most subm issions highlight the 
need to resolve issues of governance indepe ndence and answerability in the ESFS, notably 
with regard to fiscal respons ibility and burden-sharing arrangements. Most responses do not 
explicitly refer to the structure of the new au thorities; of those that  did, one favour "twin 
peaks" and four favour a unitary authority.  On macro-supervision , none of the responses from public  authorities oppos es the proposed 
ESRC but while some replies strongly support the proposal others support it conditionally 
upon further details being provide d. Some favour an ESRC within  the European System of 
Central Banks while others pref er it to be outside the ESCB. 
 The three EFTA submissions ar e supportive of the de Larosièr e proposals. They all support a 
unitary authority for micro-prudential su pervision, and all advocate for observer 
representation of EFTA-EEA countri es on both the ESFS and the ESRC. 
 The joint response of the existing level 3 commi ttees is supportive of the de Larosière report 
(with the exception of one national delegation ). On micro-prudential supervision, they 
emphasise the need for independence and accountability, and adequate legal powers (while recognising the legal challenges). They are open on the question of  the number of authorities. 
Colleges of supervisors should remain at the co re of supervision of cross-border groups in 
 
 43their view. On macro-prudent ial supervision, they supp ort the ESRC proposal, while 
emphasising that information should be fe d in by micro-supervisors not individual 
institutions. The IMF supports a "twin-peaks" model for micro-s upervision, with some direct 
supervisory powers at EU-level. It strongly s upports the ESRC, advocating mandatory follow-
up to ESRC recommendations and co-ordination with global bodies such as the IMF. Both responses argue in favour of strong particip ation by micro-prudential supervisors in the 
macro-prudential body.  The bulk of the contributions rece ived are from financial sector  associations and institutions, 
whether or not registered as representativ e interest groups, and views are diverse. 
 As a broad generalisation, those responses which refer to the macro-prudential  proposals of 
the de Larosière report either  cautiously or more openly s upport them, subject to further 
clarifications on the exact powers and comp osition of the ESRC. There is no explicit 
opposition to the ESRC proposal expressed in sectoral submissions. Many replies emphasise the importance of good linkage between the ESRC and micro-prudential supervisors, 
including exchange of information; others qu estion the mechanism which will be used for 
ensuring follow-up to ESRC recommendations . A number of replies emphasise the 
importance of avoiding double reporting requir ements and of confid ential treatment of 
information received.  On micro-prudential supervision , a majority of sectoral subm issions express cautious support 
for the proposal for an ESFS. A number note that  in their view colleges of supervisors should 
be the heart of supervision for cross-border groups, with lead supervision by the home 
country supervisor (and EU level oversight).  Views differed on the issue of binding powers 
for the ESFS authorities, and on the question of  direct EU-level supe rvision of cross-border 
groups. Regarding supervisory structure (one , two or three bodies) , the majority of 
contributions either do not refe r to this quest ion or favour three bodies . Contributions from 
insurance associations all oppose merging ba nking and insurance into  one supervisory body. 
A small number of sectoral submissions fa vour "twin peaks" or a single supervisor. 
 One contribution from the pensions  sector criticises the absence of any reference to pensions 
in the de Larosière report and argues in favour of  a separate mandate for pensions in any new 
supervisory structure.  On timing, a number of sectoral submissions argue for a cautious, two-stage approach, as 
proposed by the de Larosière re port. Very few of them explic itly favour a rapid approach. 
 Of the nine submissions from consumer and end- user associations, only  four cover the issue 
of supervision. One opposes the ESRC because of l ack of clarity as to its competences, and on 
micro-supervision supports a single EU supe rvisor for cross-border institutions, with 
strengthened national supervisors for other inst itutions. Another emphasi ses the general goals 
of equality and sustainability  for financial supervision, an d favours global level (not EU-
level) macro-prudential supervision. A third agrees with the need for a macro-prudential 
supervision body, and on micro-supervision argu es that co-operation between colleges of 
supervisors needs to be strengthened. Another argues in favour of European Agencies for both 
macro- and micro-supervision, with rule-maki ng powers in the case of  micro-supervision, 
while leaving day-to-day superv ision at national level. All c onsumer contributions emphasise 
the need for independence and transparency of  supervisory bodies, an d for involvement of 
stakeholders including consumers ( possibly via an advisory panel).  
 
 44 
All of the three trades unions  which responded argue for th e need for consultation of 
employees by both micro- and macro-level superv isors, via a consultati ve panel. All support 
the principle of the ESRC, though one favours gl obal-level co-ordination of macro-prudential 
supervision. Two of the three union responses support direct EU -level supervision of cross-
border financial groups.    
 
 45 
Annex 3 - List of public submissions received  
 
Public Authorities 
 
3L3 committees (joint response) 
Austria (finance ministry, financial market  authority, central bank joint response) 
Autorité des Marchés Financiers (FR) 
Bulgarian finance ministry 
Comisión Nacional del Mercado de Valores (ES) 
Czech Central bank 
Danish Financial Services Authority 
EFTA EEA Standing Committee 
Estonia finance ministry 
Hungarian Financial Supervisory Authority 
Hungarian Ministry of Finance 
Hungarian National Bank 
Iceland government 
IMF 
Ireland Ministry of Finance 
Irish Financial Regulator  
Latvian finance ministry 
Netherlands Finance Ministry 
NL Central Bank 
NL Financial Market Authority 
Norway (finance ministry, Central Bank & Supervisory authority joint submission) 
Polish Financial Supervision Authority 
Portugal Finance Ministry 
Slovak Republic  
Swedish FSA and Central Bank 
UK (government and FSA)   
 
Registered Organisations 
 
Association fédérative internationale des porteurs d'emprunts russes (AFIPER) 
Association of British Insurers (ABI) 
Bundesverband Investment und Asset Management (BVI) 
Comité Européen des Assurances (CEA) 
Eumedion (NL corporate governance forum) 
European Fund and Asset Management Association (EFAMA) 
Fédération des Associations Indépendantes de Défe nse des Epargnants pour la Retraite (FAIDER) 
Federation of Enterprises in Belgium (FEB) 
Forum of European Asset Managers (FEAM) 
German Insurance Federation ( GDV) 
Investment & Life Assurance Group (ILAG) 
La Voix des Emprunts Russes 
Luxembourg Banking association (ABBL)  
Nordic Finance Trade Union (NFU) 
Royal Institution of Chartered Surveyors (RICS) 
UK Investment Management Association (IMA) 
 
Individuals  
 
Alternative investment management association 
Association Française des entreprises privées 
Association Française des Marchés Financiers 
Association of Chartere d Certified Accountants 
 
 46Association of international life offices 
Associazione Bancaria Italiana 
Aviva 
Banco Santander 
Bank Track 
Barclays 
Baxter Fianncial Services 
Bundesverband Deutscher Banken 
German Association of Energy and Water Industries (BDEW) 
BEUC (Bureau Européen des Unions des Consommateurs) 
BIPAR (European Federation of Insurance Intermediaries) 
BNP-Paribas 
Business Reporting - Advisory Group 
British Bankers' Association 
Building Societies Association 
BVR-DSG-VÖB-VDP (German Banking Associations) 
Confederation of  British Industry 
Caisse des Dépôts and Cassa Depositi e Prestiti 
Confédération Européenne des Associatio ns de Petites et Moyennes Entreprises 
CFA Institute Centre for Financial Market Integrity 
Consumers International 
European Association of Co-operative Banks 
European Association of Public Banks 
European Banking Industry Committee 
European Financial Services Round Table 
European Federation for Retirement Provision 
European Savings Banks Group 
Euroclear 
European Banking Federation 
European Contact Group 
European issuers 
F Roels 
Fédération Bancaire Française 
Fédération Européenne des Conseils et Intermédiaires Financiers 
Federation of European Stock Exchanges (not for publication) 
Fédération des experts comptables européens 
Fédération française des sociétés d’assurance  
Fédération française des sociétés d’assurance mutuelles 
FIN USE 
Futures and Options Association 
Financial Services Consumer Panel 
Groupe Consultatif Actuariel Europeen 
HSBC 
Institute of Chartered Accountants of Scotland 
International Capital Market Association 
ING 
Irish Stock Exchange 
J P Marin Arrese 
LIBA, SIFMA, and ISDA 
M Wendschlag 
MAF, SMABTP, MACSF 
Managed Funds Association 
M Grinover 
NASDAQ OMX 
Nederlandse Vereininging van Banken 
NYSE-Euronext 
Omgeo 
Pan-European Insurance Forum 
 
 47PriceWaterhouseCoopers 
Quoted Companies Alliance 
R K Associates 
S Walby 
Transparency International 
UNI Europa 
Unicredit 
Unite the Union  
Verbraucherzentrale Bundesverband  
Which? 
XBRL Europe 
Zentraler Kreditausschuss