EN    EN EN 
EN    EN  COMMISSION OF THE E UROPEAN COMMUNITIES 
Brussels, 27.5.2009 
SEC(2009) 716 
  
COMMISSION STAFF WORKING DOCUMENT 
Accompanying document to the 
 
COMMUNICATION FROM THE COMMISSION 
 
European financial supervision 
  
SUMMARY OF THE IMPACT ASSESSMENT  
  
 
{COM(2009) 252 final} 
{SEC(2009) 715} 
EN 2   EN 1. INTRODUCTION  
In its Communication "Driving European Recovery" of 4 Marc h 2009, the European 
Commission committed itself to come forward with proposals for reform of the EU framework for financial supervis ion. The Commission's action in this area builds on the report 
of the "de Larosière" Group on financial supe rvision in the EU, which recommended a new 
European financial supervisory framework for supervision of individual financial institutions (micro-prudential supervision) and supervision of  the stability of the financial system (macro-
prudential supervision).  
Consultations 
The Commission conducted a public written consu ltation on the de Laro sière report between 
10 March and 10 April 2009. 116 submissions were received, the great majority of them generally supportive of the superv ision proposals in the report.  
An Impact Assessment Steering Group to steer th e preparation of this  Impact Assessment, 
comprising representatives fr om various DGs, met twice. 
2. P
ROBLEM DEFINITION  
General Problems 
EU financial markets are increasingly integr ated, and dominated by pan-European groups 
whose risk management functions  are centralised in the groups ' headquarters. Especially in 
the EU-12, banking markets are dominated by foreign financial groups.  
Recent events have shown that it is very diffi cult to achieve a single financial market and 
stability in the financial system, while preservi ng nationally-based supe rvision. The crisis has 
brought into relief the weaknesses of the pr esent EU arrangements which place too much 
emphasis on prevention and management of crises concerning individual firms and too little on risks affecting the stability of th e financial system as a whole.  
Therefore, the current organisa tion of financial supervision in  the EU is characterised by a 
general problem of mismatch between the level of Euro pean integration of EU financial 
markets and the national organisation of supervisory responsibilities.  
This is magnified given the other General Problems  exposed by the financial crisis: 
• Increased risks of cross-bor der contagion for EU financial markets linked with the 
increased integration, both throughout the EU  and with global financial markets. 
• Undermined confidence of consumers, empl oyees, pensioners, small business and retail 
investors, contributing to  the economic recession. 
• Reduced global competitiveness of the European  financial industry, compared with what 
would have been the case with better supervisory practices. 
EN 3   EN • Risks of uncoordinated policies focussed on na tional considerations, with negative impact 
on the Single Market 
Affected stakeholders 
Due to its broad impact on the financial sector  and the whole economy, financial instability 
affects a very wide rang e of stakeholders, i.e.: 
• Financial institutions, including their shareholders and employees; 
• Users of financial services, including deposito rs, investors, pensi oners, and non-financial 
companies; and 
• Public authorities, including supervisor s, central banks and finance ministries. 
3. ANALYSIS OF SUBSIDIARITY  
On micro-prudential supervision, the EU has reach ed the limits of what can be done with the 
present advisory EU Committees of Supervisors.  The Internal Market needs a mechanism to 
ensure that national supervisors arrive at the be st possible decisions for cross-border financial 
groups. An integrated EU financial market, including companies operating on a cross-border 
basis, cannot work properly if  the supervision remains fr agmented along national lines. 
Therefore, transfer of competences to  the Community level is necessary.  
On macro-prudential supervision, the weaknesses of the present a rrangements clearly played a 
role in the recent financial sector turbulen ce. Like the G20 and the US, the EU should 
establish a new body responsible for identifying fina ncial stability risks at  European level and, 
where necessary, issue risk warnings and en sure follow-up. Only Community action could 
provide assessment at th e EU level and with an  EU-wide perspective, and effective responses 
to EU-level systemic risks.  
4. OBJECTIVES  
The following G eneral Objectives  apply to the reform of th e EU supervisory framework: 
(1) Establish a more effective framework for fi nancial supervision in the EU, adapted to 
the level of financial market integration; 
(2) Enhance financial stability in the EU (and th ereby contain potential risks to the real 
economy and to public finances); 
(3) Safeguard the interests of consumers, invest ors, other users of financial services and 
other relevant stakeholde rs, notably employees;  
(4) Increase the competitiveness of EU financial markets, and 
(5) Foster integration of EU financial market s supportive of sustai nable development. 
The following Specific Objectives have been set in the areas of micro-prudential supervision 
and macro-prudential supervision:  
EN 4   EN Specific Objectives 
Micro-prudential supervision  Macro-prudential supervision  
(1) Balance home and host supervisor interests, 
i.e., reinforce processes and practices for 
challenging the decisions of national supervisors on a cr oss-border basis; 
(2) Ensure a level playing field for financial 
institutions operating in various Member States; 
(3) Improve crisis prevention and crisis 
management on the European scale, and 
(4) Improve effectiveness and cost efficiency of 
supervision for supervised companies. (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. 
 
5. POLICY OPTIONS  
5.1. Micro-prudential supervision  
The options for organising micro-prudential superv ision in the EU have been considered in 
two stages: 
Stage 1: Supervisory system 
1. Dynamic status quo : based on the continuation of the current home country model and the 
Lamfalussy framework. 
2. Step back: host country model : granting to national supervisors full responsibility for 
supervision of both domestic and foreign-ow ned companies operating in a given country, 
including both subsidia ries and branches.  
3. Lead supervisor model : involving extended powers for the supervisor of the parent 
company of a cross-border group. In practise this would mean th at the home country authority 
of a cross-border group is give n full responsibility for EU-wid e operations, both branches and 
subsidiaries. This option could be an evolut ion of the existing supervisory framework.  
4. De Larosière proposal: European Sy stem of Financial Supervision (ESFS) : 
transforming the existing EU Committees of S upervisors into one, two or three European 
Supervisory Authorities. The new European Supervisory Authority/ies would work in a 
network with the national financial supervisors, which remain competent for the day-to-day supervision of individual institutions. These Authorities would co-ord inate supervision of 
cross-border groups in colleges of supervisors,  contribute to harmonisi ng detailed rules, lay 
down guidelines and have powers to interven e in certain strictly-defined cases of 
disagreement between national supervisors.
 
5. A single EU-level supervisor : involving giving all day-to-day supervisory competences 
for institutions with cross-bor der activities at the Community level in a single supervisor, 
leaving national supervisors responsible for co mpanies with domestic  activities only.  
EN 5   EN Stage 2: Institutional structure 
A. One body, i.e., the integrated approach : covering the whole fina ncial sector (banking, 
insurance and securities markets) and all aspects of financial supervision1 
B. Two bodies, the approach by objective (often referred to as "twin peaks"): based on 
separation of tasks between two supervisors: on e that performs prudent ial supervision and the 
other that carries out conduc t-of-business supervision.2 A steering committee could co-
ordinate between the two bodies. 
C. Three bodies, i.e., the sectoral approach : including a banking supervisor, an insurance 
and pensions supervisor, and a securities supervisor3, in line with the sectorally-based EU 
financial legislation4. This model could be compleme nted by an overarching steering 
committee. 
D. Four bodies, i.e., th e institutional approach : in addition to the th ree bodies responsible 
for supervision of the respective sectors, a distinct fourth body could be created for 
supervision of financial conglomerates. 
5.2. Macro-prudential supervision  
Five options have been assessed regarding the European framework for macro-prudential 
supervision: 
A. Dynamic status quo : according to this scenario macr o-prudential supervision would be 
carried out through the existing EU arrangemen ts, involving several institutions and bodies 
and lacking a mechanism to ensure proper follow-up to warnings and recommendations. 
B. Building on existing or proposed structures:  
Tasking the Economic and Financial Committee (EFC) : this body provides high-level 
assessments of developments in financial mark ets and services and advises ECOFIN and the 
European Commission. This opti on would involve the EFC taking over the key role in the 
future framework for macr o-prudential supervision.  
Tasking the European System of Central Banks (ESCB)/The European Central Bank 
(ECB) : Under this option, the ECB w ould be entrusted with the task of carrying out macro-
prudential supervision in the EU. In so far as co mpatible with the Treaty and the Statute of the 
ECB, the new tasks and relate d powers could be implemented by the ECB or with the support 
of an “enlarged and empowered” Banking Supe rvision Committee (including for instance the 
Chairs of the Committees of Supervisors). 
                                                 
1 Member States with a single su pervisory model separate from central banks: DE, AT, DK, HU, MT, 
PL, UK, SE. Member States with a single supervisory model with a link to (or integrated within) central 
banks: FI, IE, SK, BE, EE.  
2 This model is adopted only by NL in the EU.  
3 Member States with a sectoral model: CZ, ES, FR, EL, IT, LT, LU, PT, SI. 
4 For example, the Markets in Financial Instruments Directive for securities sector; the Capital 
Requirements Directive for banking sector and the Solvency II Directive (not  yet adopted) for the 
insurance sector. 
EN 6   EN Tasking the ESFS : under this option, the ne w European Authority(ies) as recommended by 
the de Larosière report to streng then EU micro-prudential superv ision, could also be entrusted 
with the task of macro-prude ntial supervision. They would be supported by the network of 
national supervisors. 
C. Establishing a new body: the European Systemic Risk Council : this option foresees, in 
line with the recommendations of the de La rosière Group, the establishment of a new body, 
the European Systemic Risk Council (ES RC). The ESRC would be an independent body 
placed outside the ECB, but chaired by the Pres ident of the ECB. Oper ational and technical 
support would primarily be provided by the ECB/ ESCB. Its main tasks would be to detect 
macro-prudential risks; to identify the appropr iate measures to reduce these risks; and to 
trigger remedial action by competent authorities via warnings. 
6. PRELIMINARY ASSESSMENT OF IMPACT S AND COMPARISON OF OPTIONS  
6.1. Micro-prudential supervision  
In the first stage the identified options were a ssessed with regard to effectiveness in fulfilling 
the objectives of the reform (see the Table above) . In light of this anal ysis, options 1 (Status 
quo), 2 (Step back) and 3 (Lead supe rvisor) were rejected as not fu lfilling the vast majority of 
the Specific Objectives.  
Option 4 (ESFS) and option 5 (EU Supervisor) were retained for further comparative 
assessment according to the criteria of effectiven ess, efficiency, coherence and subsidiarity & 
proportionality. This led to identifying the ESFS as  the preferred option for reform of the EU 
financial supervisory system. With respect to e ffectiveness, it is questionable whether a single 
EU-level supervisor would be sufficiently close to the activ ities of a financial group to 
guarantee adequate protection for depositors, policy- holders and investors, as well as financial 
stability of financial institutions  in the EU. Nor would it have the legal power to apply rules 
made at national level within the Member Stat es. Within the ESFS, the national supervisors 
would carry out day-to-day  supervision. It is a decentralised and evolu tionary model, allowing 
if needed for the transfer of additional superv isory responsibilities to the EU level over time. 
Another key point in favour of a decentralised so lution such as the ESFS is that at present 
there is no EU-level financing mechanism for us e when intervention is needed to assist an 
institution in difficulty. Both options are equally coherent with the other relevant EU policies.  
The four options for institutional set-up were then analysed according to the criteria of 
effectiveness, efficiency and coherence. A lthough no one option emerged as a clear leader 
under this analysis, it was cons idered at this st age that the most proportional solution, 
involving the minimum of necessary change, is to retain the current sectoral structure of the 
three Committees of Supervisor s by creating three European Authorities with the same 
sectoral mandates as these Committees, combined  with an analysis of  the functioning of the 
new structures three years after th e entry into being of the ESFS.  
6.2. Macro-prudential supervision  
The ESRC emerges clearly as the best soluti on for the EU framework for macro-prudential 
supervision. It would be effective as centra lising responsibility for macro-prudential risk 
warnings and having a composition which would enhance valuable synergies, ensure a balanced representation of a ll concerned EU and national inst itutions and authorities, and 
EN 7   EN contribute to the stability of the financial system. Tasking th e EFC, due to its political 
dimension, could jeopardise the candour of its an alysis. As for tasking the ESFS, the major 
drawback lies with the substantial differe nce between the scope of macro-prudential 
supervision and that of micr o-prudential supervision. Finall y, as far as the ECB/ESCB is 
concerned, three main arguments can be raised against that option: th e potential conflict of 
interest between financial and m onetary stability; th e reputational risk li nked to the conduct of 
macro-prudential supervision; and the excessive concentration of power with reference to the 
oversight of EU financial system. 
As for efficiency, the ESRC would build on operational and technical support from the 
ECB/ESCB with limited need  for additional resources. 
7. IMPACT OF THE SELECTED OPTIONS  
The selected options should fully achieve the objectives described in  section 4 by giving 
effect to a number of immediate changes to th e organisation of financ ial supervision in the 
EU. These expected changes are reflected by the Operational Ob jectives set for the ESFS and 
the ESRC. In general, by contributing to safe guarding financial stability and to a more 
effective control over the conduc t of financial companies, the proposed new framework would 
increase the welfare of most stakeholder groups in  the Internal Market: 
Financial institutions, including their shareholders and employees : by improving the 
business environment due to enhanced financial stability and more effective crisis prevention 
in the EU; ensuring a level playing field a nd reducing compliance co sts for cross-border 
companies; attracting investments to the Intern al Market from third countries thanks to 
enhanced financial stability; maintaining jobs and creating new jobs in the financial sector. 
Users of financial services, including deposito rs, investors, pensioners, and non-financial 
companies : by increasing consumer and investor c onfidence in relation to the increased 
reliability of the financial sector; reducing risk s of default of individual financial institutions; 
improving stability of pension funds and providing incentives for development of cross-border occupational pension funds; facilitati ng access to finance by strengthening the single 
capital market in the EU. 
Consumers and employees in the wider economy . The successful id entification and 
prevention by the ESRC of systemic  financial crises with the pot ential to spill over into the 
real economy can have a beneficial effect  in preventing or reducing macro-economic 
recessions and the associated eff ects on output consumption and jobs. 
Public authorities, including supervisor s, central banks and finance ministries : by 
clarifying roles and responsibilities at the na tional and Community level and establishing an 
effective framework for conflict resoluti on; indirect strengthening of supervisory 
independence; creating a framework linking micro-prudential supervision with macro-
prudential supervision; provi ding governments and other c oncerned authorities with 
recommendations for actions needed to prot ect macro-economic stability in the EU and 
individual Member States, a nd giving effectiveness to the analysis of macro prudential 
developments carried out in the central banks; and by diminishing risks of having to inject 
public money into the financial system. 
EN 8   EN 8. MONITORING AND EVALUATION  
To monitor effectively the impact of the EU act ion in the area of micr o- and macro-prudential 
supervisions, specific indicators should be developed to evalua te the performance of the ESFS 
and the ESRC. This should be done in the impact assessment of legislative proposals implementing the supervisory reform.