Commission staff working document - Accompanying document to the Communication from the Commission : European financial supervision - Impact assessment {COM(2009) 252 final} {SEC(2009) 716}
Date: 2009-05-27
Institutions: European Commission
Subjects: European Commission, European Monetary System, economic recession, financial control, financial cooperation

EN 

EN 

 
COMMISSION OF THE EUROPEAN 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} 

EN 

 
 
  
 
 
 
 
 
 
 
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 impacts 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 

2

 
 
 
 
1. 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  financial  supervision  before  the  end  of  May 
2009,  for  discussion  at  the  June  European  Council.  This  initiative  is  part  of  a  broader 
programme  for  financial  market  reform  announced  in  that  Communication,  consisting  of  a 
series  of  initiatives  for  adjusting  the  EU  regulatory  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  result  of  fragmented  national  responses  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  banks),  protecting  consumers  and 
SMEs (e.g., initiatives to foster responsible lending and borrowing), improving incentives to 
reduce excessive short-term risk-taking (e.g., initiatives 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  supervision  takes  due  account  of  and  builds  on  the 
findings and recommendations of the High Level Group on financial supervision in the EU, 
created by President Barroso in October 2008 and chaired by J. de Larosière. The de Larosière 
report1, which cannot be quoted in extenso here, examines  in  detail 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  should  co-operate  globally.    The  Group  brought 
forward a number of recommendations on regulation 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  Financial  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") and 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  the  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/finances/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.  

3

 
 
                                                 
basis  for  action.  At  the  informal  Ecofin  Council  in  Prague  on  4  April  2009,  EU  Finance 
Ministers and Central Bank Governors discussed the key principles for the reform of financial 
market supervision, including establishing a European body responsible for the oversight on 
the  stability  of  the  financial  system  and  the  transformation  of  the  existing  Committees  of 
three  new  European  Supervisory  Authorities.  These  discussions 
Supervisors 
demonstrated that there was a large agreement on the objectives that should be achieved. The 
informal Ecofin confirmed that the June European Council wishes to analyse this issue again, 
on the basis of a document from the Commission. 

into 

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  financial  sector,  which  will  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  international  and  regional 
crisis  management.  The  leaders  have  also  agreed  on  reshaping  their  regulatory  systems  to 
strengthen  macro-prudential  supervision,  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 financial risks at the 
global level. The US is putting in place a powerful 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 financial 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  experts  representing  the  supervisory  and  regulatory 
authorities  at  the  EU  and  international  level  as  well  as  various  segments  of  the  financial 
services industry5. Their input has been reflected in the conclusions of the final report.  

The Commission conducted a public written consultation 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 met 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 Financial 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. 

4

 
 
                                                 
The  IAB  opinion  was  delivered  on  24  April  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 analysed, strengthen the analysis of the impacts of 
the  preferred  options,  and  highlight  the  specific  case  of  cross-border  banks  and  financial 
conglomerates. The respective parts of the report have been revised accordingly. 

The  Impact  Assessment  Steering  Group  agreed  to  inform  the  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  financial  sector  has  been 
supervised in the EU has not been one of the primary causes of the crisis, there have been real 
and important failures, both of micro- and macro-prudential supervision6.  

As  highlighted  by  recent  events,  it  is  very  difficult  to  achieve  simultaneously  a  single 
financial market and stability in the financial system, while preserving 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 financial 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  stabilisers  to  cope  with  the  real 
economy effects of the crisis8. This has certainly not been the case amid the current financial 
crisis,  where  problems  in  the  banking  sector  have  disrupted  the  flow  of  credit  at  both 
wholesale and retail levels.  

From  an  Internal  Market  perspective,  the  ambition  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  economic  growth  will  be.  Completing  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  integrated,  especially  at  the  wholesale  level.  The 
banking  and  insurance  markets  are  dominated  by  pan-European  groups,  whose  risk 
management functions are centralised in the group's headquarters. There has been an increase 
in cross-border M&A transactions in  terms of value since 2003.  This trend was particularly 
strong  in  2005,  when  several  large-value  cross-border  transactions  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 

5

 
 
 
                                                 
 
have become more international than ever, expanding into foreign markets both in Europe and 
beyond.  Currently  around  70%  of  EU  banking  assets  is  in  the  hands  of  some  40  banking 
groups with substantial cross-border activities. Especially 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  are  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) 

100

90

80

70

60

50

40

30

20

10

0

EE CZ LU SK RO BG LT PL LV FI

HU UK IE GR MT CY SI

EU-25 BE PT DK AT

EMU-12 NL IT ES DE FR SE

Source: European Commission, European Financial Integration Report 2008 (2009) 

As  for  financial  markets,  the  available  evidence  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 infrastructure. Table 1 provides an 
overview  of  the  level  of  integration  of  the  various  segments.  It  should  be  noted  that  due  to 
intensive  cross-border  consolidation  of  stock  exchanges,  concentration  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 

Money market 

Bond markets 

•  government bonds 

• 

corporate bonds 

Equity markets 

Banking markets 

• 

• 

• 

interbank/wholesale activities 

capital market related activities 

retail banking activities 

Degree of integration 

High degree 

Considerable degree 

Considerable degree 

Increasing integration 

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 situation where the supervision of the EU markets and 

6

 
 
 
 
 
 
financial  groups  is  fragmented  and  exercised  at  the  national  level,  both  with  respect  to 
prudential  and  conduct  of  business  supervision  (e.g.  disagreements  between  national 
supervisors  regarding  the  prudential  assessment  of  cross-border  mergers  of  financial 
institutions  in  the  cases  of  ABN  AMRO/Antonveneta  in  2005  and  Unicredit/Bank  BPH  in 
2006). 

The crisis which in 2008 hit the European financial sector as a whole has brought into sharp 
focus  the  weaknesses  of  the  present  arrangements  to  guarantee  adequate  protection  for 
depositors, policy-holders and investors, as well as financial stability 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  informed  by  national  interests.  Supervisors  were 
unable to adopt rapid common decisions to tackle the most imminent cross-border problems 
(e.g.  various  unco-ordinated  national  bans  on  short  selling  of  different  durations).  Some 
Member  States  took  unilateral  decisions  which  had  the  potential  of  undermining  the 
soundness  of  other  Member  States'  financial  institutions  (e.g.  difficulties  of  collaboration 
between  national  supervisors  in  the  case  of  Fortis).  Member  States  have  appeared  strongly 
divided  in  the  search  for  urgent  and  radical  measures  which  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 facilitate the agreement of 
a framework for intervention in the financial sector, 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  national  rules  in  member  States  continue  to  cause  incoherencies  in  the 
internal  market  (examples  include  the  wide  variety  of  definitions  of  "own  funds", 
impediments  to  asset  transfers  and  temporary  bans  on  short  selling  in  some  Member  States 
but not others). 

Another  serious  challenge  highlighted  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  firms,  and  too  little  on  risks  to  the  stability  of  the  financial 
system  as  a  whole.  Such  analyses  were  fragmented  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  Europe  is  serious  about 
building  a  stable  and  truly  integrated  market,  it  will  be  necessary  to  make  progress  in 
resolving  these  weaknesses  by  developing  a  new  concept  for  the  supervision  of  the  EU 
financial sector.  

In summary, the crisis exposed that the arrangements for financial 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 organisation of supervisory responsibilities. 

The  seriousness  of  this  problem  is  magnified  given  the  other  weaknesses  exposed  by  the 
crisis: 

•  Increased  risks  of cross-border  contagion for EU financial markets linked with the 
increased integration, both throughout the EU and with global financial markets. 

•  Undermined  confidence  of  consumers,  employees,  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. 

7

 
 
•  Risks of unco-ordinated policies driven by national interest with negative impact on 

the Single Market 

These  general  problems  are  common  to  both  micro-prudential  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 system and (long-run) economic growth9. Better functioning 
financial systems ease the external financing constraints that impede expansion of firms and 
institutions and offer individuals and firms the possibility to trade, diversify, and manage risk. 
Financial instability can therefore have a significant negative impact on the real economy and 
lead to substantial output losses. It can seriously impair the 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 economies – total financial assets often represent 
multiples of GDP, the fiscal costs of financial crises can be substantial. A study by the IMF10 
of 40 financial crisis episodes puts the fiscal costs associated with resolving financial crises in 
the average country at 16% of GDP. Although this average includes some small and emerging 
economies, the fiscal cost is equally high among industrialised economies - at 15% of GDP on 
average.  About  half  (or  8%  of  GDP)  of  these  fiscal  outlays  relate  to  costs  associated  with 
government-assisted recapitalisation 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).  While  not  all  of  these 
obligations and guarantees will actually be used, the fiscal costs of the current crisis are likely 
to be substantial. 

Due to their broad impact on the financial sector and the whole economy, financial instability 
will affect a very wide range of stakeholders, i.e.: 

•  Financial institutions, including their shareholders and employees; 

•  Users of financial services, including depositors, investors, pensioners, and non-financial 

companies, and 

•  Public authorities, including supervisors, central banks and finance ministries. 

To the extent that financial instability damages 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  organisation  of  financial  supervision  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. 

8

 
 
                                                 
supervision (see table 2). This division also holds 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 risks 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.,  excessive  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  countries,  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  particular  attention  to  common  or  correlated  shocks 
and  to  shocks  to  those  parts  of  the  financial  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  interlinkages  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  stresses  that  macro-prudential  supervision  cannot  be  meaningful 
unless  it  can  somehow  impact  supervision  at  the  micro-level;  whilst  micro-prudential 
supervision cannot effectively safeguard financial stability without adequately 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 

Ultimate Objective 

Consumer and user protection 

Limit risk of financial system-
wide stress due to macro-
economic developments 

Avoid correlated negative 
shocks that may threaten system 
stability and trigger output 
(GDP) costs 

3.4. Micro-prudential supervision  

The  current  system  of  prudential  supervision  in  the  EU  is  based  on  the  principle  of  home 
country  control  combined  with  minimum  prudential  standards  and  mutual  recognition.  A 
financial  institution  is  thus  authorised  and  supervised  in  its  home  country  and  can  expand 
throughout  the  EU  (by  offering  cross-border  services  in  other  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  can  also  choose  to  operate  through  subsidiaries 
(separate  legal  entities)  in  other  countries.  These  subsidiaries  are  separately  licensed  and 
supervised  by  the  host  country  authorities.  The  scope  for  control  by  host  countries  of  these 

9

 
 
 
 
subsidiaries is limited in practice, as key decisions 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 effective control of large 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 financial system can affect outcomes in host countries.. 

The  cross-border  nature  of  many  financial  institutions  requires  close  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  have  been  established  with  the  aim  of: 
ensuring convergence of supervisory practices; agreeing on common application of EU 
rules  with  non-binding  guidelines;  and  fostering  greater  mutual  trust.  Supervision  of 
financial conglomerates is carried out jointly by the Committees in the Joint Committee 
on  Financial  Conglomerates  (JCFC).  These  committees  are  institutionally  part  of  the 
Commission and have no regulatory or executive powers.  

•  Recently,  colleges  of  supervisors  have  started  to  be  created  for  the  larger  financial 
institutions  in  the  EU.  Within  these  colleges  co-operation  and  information  exchange 
between home and host authorities is reinforced. 

•  Ad hoc bilateral Memoranda of Understandings (MoUs) between respective supervisory 

authorities. 

As highlighted in the de Larosière report, the 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  problems  at  hand  have  a  European  dimension  and 
would require coordinated decisions and actions in order to achieve the best possible outcome 
for all.  

Against this background, the main issues in the area of micro-prudential supervision can be 
aggregated in the following problems: 

•  Imbalance  of  interests  of  the  home  and  host  countries  in  the  current  supervisory 
model (resulting in a misalignment of incentives in cross-border crisis management). 

•  Risks of competitive distortions in the Internal 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 representatives of national supervisory authorities, acting 
through  the  'Level  3'  committees  (CEBS,  CEIOPS  and  CESR).  The  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 States are complying with applicable legislation and it 
pursues enforcement action where required.  

10

 
 
                                                 
•  Lack of co-operation and information exchange between national supervisors, 

•  Excessive  costs  and  administrative  burden  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 various Member States, including: 

−  Failure  to  challenge  supervisory  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  that  is  systemically 
relevant in a host country. As national authorities are merely accountable 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  may  be  further  deepened  by  differences  in 
size between countries. The present processes and practices for challenging the decisions 
of a national supervisor on a cross-border basis have proven to be inadequate to address 
this (e.g. conflict between the Polish and Italian banking supervisors concerning minimum 
capital ratios of Pekao, the Polish subsidiary of Unicredit); 

−  Lack  of  consistent  rules,  powers  and  sanctions  across  Member  States,  mainly  due  to  a 
lack  of  harmonisation  in  certain  areas  (e.g.  national  discretion  under  the  Capital 
Requirements  Directive)  or  differences 
in 
in 
transposition  of  the  Transparency  Directive,  different  interpretation  of  the  Insurance 
Mediation Directive etc.)12; 

transposition  (e.g.  “gold  plating” 

−  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  perspectives  (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  financial  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 overview 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  responsibilities,  incomplete  co-ordination,  and  national 
mandates/interests,  actors  in  the  financial  sector  can  exploit  loopholes  and  arbitrage 
opportunities in the European financial system, causing risky activities to fall outside scope of 
supervision.  The  relations  between  the  general  problems  and  the  problems  specific  to  the 
areas of micro-prudential as well as their drivers 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. 

11

 
 
                                                 
Figure 2. Problem tree: micro prudential supervision 

Problem drivers 

Problems

General problems

Failures to challenge supervisory 
practices on a cross-border basis

Lack of consistent rules, powers and 
sanctions across Member States

Diverging interests of the home and host 
countries in the current supervisory 
model

Differences in supervisory practices

Risks of competitive distortions in the 
Internal Market and of regulatory 
arbitrage by financial companies 

Mismatch between the level of 
integration of EU financial markets and 
the organisation of supervision

Increased risks of cross border 
contagion for EU financial markets 
linked with the incresed integration, both 
throughout the EU and with global 
financial markets

Undermined confidence of consumers, 
employees, pensioners, small business 
and retail investors contributing to the 
economic recession

Fragmented responsibilities for 
supervision of the same financial group

Lack of cooperation and information 
exchange among EU national 
supervisors

Reduced global competitiveness of the 
European financial industry

Fragmented system of supervisory 
mandates leading to EU considerations 
not being taken into account

Absence of legal arrangements 
allowing for EU-wide supervision of 
specific institutions, e.g. credit rating 
agencies

Excessive costs and administrative 
burden to cross-border companies due 
to fragmented and inconsistent financial 
supervision

Risks of uncoordinated policies driven 
by national interests with negative 
impact on the Single Market

3.5. Macro-prudential supervision  

Macro-prudential  supervision  aims  to  identify  risks  in  the  economy  (including  macro-
economic  imbalances)  and  in  the  financial  system  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  Larosière  report  concludes  that 
there  has  been  a  lack  of  adequate  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 place 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 institutions 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  lowering  price  of  risk  for  example)  but  there 
was no EU mechanism to ensure that this assessment of risk was translated into action. 

Another  problem  driver  is  the  fragmented  approach  to  macro-prudential  supervision.  At 
present, a great number of different authorities are in one way or another involved in macro-
prudential  analysis  as  well  as  the  identification  of  possible  policy  measures,  including  the 
following  bodies:  The  Economic  and  Financial  Committee  (EFC),  The  Joint  Committee  on 
Financial Conglomerates, the  European System  of Central Banks (ESCB) and the European 

12

 
 
 
Central  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 stability has recently also been enhanced. All of these bodies are 
described elsewhere in this report13. 

As  a  result  of  the  problem  drivers  described  above,  the  specific  problems  affecting  the 
current EU arrangements for the safeguard of financial stability can be summarised as follows 
(see figure 2 below): 

•  Lack of appropriate analysis of macro-prudential risks  at EU  level, including risks 

stemming from macro-economic imbalances; 

•  Lack 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”; 

•  Lack  of  adequate  corrective  action,  cooperation  and  co-ordination  by  competent 

authorities during the building up and in the course of financial crisis. 

These conclusions are confirmed by the ECB (2009)14 which argues that the present crisis has 
revealed that micro-prudential supervision in many cases proved inadequate to identify, in a 
timely manner, the nature and size of accumulating 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 rise 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  reinforcing  impact  on  the  stability  of  the  financial 
system as a whole. In particular, the role of macro-financial factors, of the interconnectedness 
of markets and institutions and of cross-border financial integration in determining the size, 
nature  and  propagation  of  systemic  risk  calls  for  the  strengthening  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  pressures  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 the International Monetary 
Fund  (IMF)  to  provide  early  warning  of  macro-economic  and  financial  risks  at  the  global 
level. The US is putting in place a financial stability body as well. Further streamlining in the 
EU  is  therefore  critical  as  well,  as  macro-prudential  analysis  is  currently  fragmented  and 
executed  by  different  authorities  at  different  levels.  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 System”, organised by Bruegel, National Bank of Belgium 
and the International Monetary Fund, Brussels, 24 March 2009 
15 The successor to the Financial Stability Forum (FSF). 

13

 
 
                                                 
developments  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 relevant 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 side

Fragmented approach to macro-
prudential supervision poses 
challenges to information exchange 
between the relevant authorities

Lack of appropriate analysis of macro-
prudential risks at EU level, including risks 
stemming from macro-economic imbalances

Mismatch between the level of 
integration of EU financial markets and 
the organisation of supervision

Increased 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 EU

Lack 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 risks

Lack of adequate corrective action and 
coordination by competent authorities during 
the building up and in the course of financial 
crisis

Insufficient cooperation at international 
level on macro-prudential supervision

3.6. Baseline scenario 

Reduced global competitiveness of the 
European financial industry

Risks of uncoordinated policies driven 
by national interests with negative 
impact on the Single Market

The baseline scenario would be one in which the 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  recently-established  colleges  of  supervisors. 
Recent  reforms  of  the  three  Committees  of  Supervisors,  which  are  currently  being 
implemented, will reinforce the functioning of these bodies to a certain extent. In particular, 
the fact that the Committees will be able to take decisions by qualified majority should help 
accelerate the process of convergence in the implementation of EU Law. Moreover, once all 
colleges of supervisors are up and running, co-operation and information exchange between 
national supervisory authorities should be improved. This scenario 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 (see section 3.4). 

Within  this  scenario  the  EU  would  also  retain  its  fragmented  approach  to  macro-prudential 
oversight,  without 
to  warnings  and 
introducing  a  mechanism  ensuring  follow-up 
recommendations. While the recent lessons of the crisis would probably lead to an increased 
awareness of direct and indirect linkages in the financial system, it is questionable whether in 
the  absence  of  a  proper  institutional  framework  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.   

14

 
 
 
3.7. 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  integrated  financial  market,  it  must  put  in  place  a 
supervisory framework that acknowledges this.  

On micro-prudential supervision, the EU has reached the limits of what can be done with the 
present status of the EU Committees 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  possible  supervisory  decisions  for  cross-border 
institutions;  where  there  is  insufficient  co-operation  and  information  exchange  between 
national supervisory authorities; where all the technical details of financial regulation have to 
go through slow and cumbersome procedures; where joint action by national authorities needs 
to  take  account  of  the  patchwork  of  regulatory  and  supervisory  requirements;  where  only 
national solutions can be implemented in the face of European problems.  

The  weaknesses  of  the  present  macro-prudential  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  European  level  and,  where  necessary,  issue  risk 
warnings.  The  present  EU  arrangements  place  too  little  on  the  macro-prudential  side  of 
supervision; macro-prudential analysis is fragmented 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  subsidiarity  and  proportionality  is  included  in  the 
comparative assessment of options (Chapter 6).  

4. Objectives 

The  reform  of  EU  financial  supervision  has  general,  specific  and  operational  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 financial 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 markets supportive of sustainable development. 

These objectives are in line with the initiatives described in the Commission Communication 
'Driving  European  Recovery'  of  4  March  2009.  The  specific  objectives  set  in  the  areas  of 
micro-prudential  supervision  and  macro-prudential  supervision  (see  below)  are  aimed  at 
contributing to achieving these general objectives.  

15

 
 
4.1. Micro-prudential supervision  

The specific objectives in the area of micro-prudential supervision are to: 

1.  Balance  home  and  host  supervisor  interests,  i.e.,  reinforce  processes  and  practices 

for challenging the decisions 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 management 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 objectives in this area. 

Table 3. Problem drivers and objectives: micro-prudential supervision 

Problem drivers  

Operational objectives 

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 

Lack of consistent rules, powers and 
sanctions across Member States 

Provide for a possibility to adopt 
binding technical standards at EU 
level 

Differences in supervisory  practices 

Increase consistency of 
supervisory practices in the EU 

Fragmented responsibilities for 
supervision of the same financial 
group 

Ensure effective functioning of 
colleges of supervisors 

Fragmented system of supervisory 
mandates leading to EU 
considerations not being taken into 
account 

Create framework for pooling 
relevant information on supervised 
companies at EU level  

Strengthen EU dimension in 
prudential assessment of cross-
border mergers and acquisitions 

Provide for a strong coordination at 
EU level in crisis situations 

Ensure effective cooperation with 
3rd countries on supervisory issues 

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 

Specific objectives 

Home-
host 
balance 

Level 
playing 
field 

Crisis 
prevention 
and 
management 

Cost 
efficiency 

v 

v 

v 

v 

v 

v 

v 

v 

v 

v 

v 

v 

v 

v 

v 

v 

v 

v 

v 

v 

v 

v 

v 

v 

v 

v 

v 

v 

16

 
 
  
  
  
  
  
  
  
  
 
4.2. Macro-prudential supervision  

The specific objectives in the area of macro-prudential 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 objectives in this area. 

Table 4. Problem drivers and objectives: macro-prudential supervision  

Problem drivers  

Operational objectives 

Specific 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 

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 

Absence of adequate, EU-wide early 
warning mechanisms 

Issue warnings to the relevant 
actors and recommend the 
appropriate actions 

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 

Insufficient cooperation at 
international on macro-prudential 
supervision 

Ensuring effective interfacing with 
international organization dealing 
with financial stability  

v  

v 

v 

v 

v 

v 

v 

v 

v 

v 

v 

v 

v 

5. Identification of policy options 
To address the identified problems – and fulfil the objectives – two separate sets of options 
have  to  be  considered:  one  for  micro-prudential  supervision  and  one  for  macro-prudential 
supervision. These options have been identified by the Commission services on the basis of 
general ongoing debate on financial supervision among various stakeholders in the EU. 

5.1. Micro-prudential supervision  

The options for organising micro-prudential supervision in the EU may be considered in  two 
stages: 

17

 
 
  
  
•  Stage  1  considers  the  various  options  with  regard  to  the  solutions  for  organising  micro-

prudential supervision at the Community level; 

•  Stage  2  analyses  the  various  institutional  structures  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 constraints presented in the description 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  adopted  in  the  1970s  would  be 
restored.  The  First  Banking  Directive  (1977)  granted  full  responsibility  for  supervision  of 
banks  operating  in  a  given  country  to  national  supervisors.  It  also  stipulated  that  national 
supervisors should co-operate and that foreign identity could not be a ground for refusing a 
banking  licence.  It  allowed  for  cross-border  branching  under  the  host-country  rule,  which 
meant that a bank had to obtain permission to operate in a foreign country by the supervisory 
agencies  of  that  country.  The  foreign  branches  were  required  to  compete  on  equivalent 
standards with the host country’s own banks. The 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 have full control over the activities in their territory and to an 
extent,  fiscal  and  supervisory  responsibilities  would  be  clearer  (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  branch  would  have  to  pledge  (additional)  capital 
and  it  would  not  solve  the  problem  of  inadequate  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  the  supervisor  of  the  parent 
company of a number of cross-border subsidiaries (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 level. In its most radical form, it 
would  grant  full  powers  for  supervision  of  cross-border  financial  groups  to  the  home  state 
supervisor. Under this model, the lead supervisor would be the single point of contact for the 
financial institution and would be the sole authority for all matters of prudential supervision at 
the  level  of  the  group  and  its  constituents,  including  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  financial  stability  –  particularly  as  different 
approaches may be applied within the same jurisdiction. 

18

 
 
4. de Larosière proposal: European System of Financial Supervisors (ESFS) 

The  de  Larosière  report  recommended  that  the  EU  should  establish  an  integrated  European 
System  of  Financial  Supervisors  (ESFS)  by  transforming  the  existing  EU  Committees  of 
Supervisors  into  three  European  Supervisory  Authorities:  a  European  Banking  Authority 
(EBA), a European Insurance and Occupational Pension Authority  (EIOPA) and a European 
Securities Authority (ESA). The three new European Supervisory Authorities (whose role is 
essentially  coordination  rather  than  supervision)  would  work  in  a  close  network  with  the 
national financial supervisors, who would continue to be responsible for executing day-to-day 
supervision. They could also have the legal possibility 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  Supervisory  Authorities,  at  the  centre  of  the  new 
network,would fulfil all the missions of the current Committees of Supervisors, but with more 
power and authority. They would, in addition, make a greater contribution than at present to 
the  emergence  of  a  true  harmonised  rulebook  (for  example  by  issuing  guidelines  and 
recommendations, and adopting technical standards 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 supervisors for certain pan-
European  institutions  (such  as  credit  rating  agencies  or  Central  Counterparty  Clearing 
infrastructures).  They  would  thus  act  as  guarantors  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  supervision  etc).  Flexibility  and  a  network 
arrangement  would  be  at  the  heart  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 should be evaluated  after three years the and 
consideration of whether any further changes are necessary made. 

5. A single EU-level supervisor 

As  for  the  option  of  establishing  a  single  EU  supervisor  the  following  questions  need  to  be 
addressed: 

•  a single supervisor for all financial institutions or only the pan-European groups?, and 

•  should pan-European groups be supervised directly by the central EU agency or would it 

built on the existing network of national supervisors (i.e., a hub and spokes model)? 

As for the first, there are many small and medium-sized financial institutions 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 existing 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 the architecture of the European supervisor: 

(i)  a single EU supervisor which would replace national supervisors for supervision of cross-
border entities and would leave no role for national 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 for example ask national authorities to perform 

19

 
 
on-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 supervisor 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 network of national supervisors). It would also be responsible for 
creating  a  regulatory  and  supervisory  level  playing  field  between  pan-European  banks  and 
domestically oriented banks, as both are competing in the same markets.  

Stage 2: Institutional structure 

Once the preferred option at stage one has been identified, one can consider the best option in 
terms of institutional structure. The options listed 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  financial  conglomerates  could  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  (prudential  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  sector.  It  refers  to  a  separation  of  supervisory  functions 
between two supervisors: one that performs prudential 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  covers  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  with  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  separate  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 Directive (not yet adopted) for the insurance sector. 

20

 
 
                                                 
ordinate  the  supervisory  activities  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 for 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, supplementary 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  macro-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 proposed in the de Larosière report for the 
suggested ESRC.  

•  The Economic and Financial Committee (EFC)  

This  body  of  the  ECOFIN  Council  includes  representatives  of  ministries  of  finance,  the 
European  Commission,  the  ECB,  and  central  banks.  It  provides  high-level  assessments  of 
developments  in  financial  markets  and  services  and  advises  ECOFIN  and  the  European 
Commission. Twice a year the EFC meets as the "Financial 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), CEBS, CEIOPS, CESR, BSC, and the Commission. 
The  FST  brings  together  the  broadest  group  of  actors  in  matters  of  financial  stability 
(prudential,  monetary  and  fiscal  authorities)  and  is  a  forum  that  can  provide  policy  co-
ordination. 

•  The European System of Central Banks (ESCB)/European 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 tasks in the field of financial stability: 

−  Financial stability monitoring: the ECB, together with the ESCB, systematically monitors 
cyclical  and  structural  developments  in  the  euro-area/EU  banking  sector  and  in  other 
financial sectors. The purpose is to assess the possible vulnerabilities in the EU financial 
sector, and its resilience to potential shocks. The assessment is undertaken in collaboration 
with the EU national central banks 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  central  banks  and  the  banking  supervisory  authorities.  The 
Committee supports banking supervision and helps forge financial stability, for example, by providing advice to 

21

 
 
                                                 
− 

 Provision  of  advice:    the  ECB  is  frequently  asked  by  the  competent  authorities  at  EU 
level and national level to contribute 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,  together  with  the  ESCB,  promotes  co-operation 
between  central  banks  and  supervisory  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 Statute of the ECB, the 
new  tasks  and  related  powers  could  be  implemented  by  the  ECB  or  with  the  support  of  an 
“enlarged  and  empowered”  Banking  Supervision  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  supervision.  They  would  be  supported  by  the  network  of  national 
supervisors.  

The institutional structure of the EFSF – among the 4 options possible (see "stage 2" above) - 
would impact on the (hypothetical) practical feasibility of this option. Indeed, while a single 
body  could  also  be  tasked  with  the  responsibility  for  monitoring  macro-economic  risks,  it 
would  be  challenging  to  attribute  this  responsibility  to  the  ESFS  comprising  several 
authorities.  In  that  case  one  could  imagine  giving  the  functions  related  to  macro-prudential 
supervision to the overarching ESFS Steering Committee including the chairs of the different 
authorities (see description of ESFS above, "stage 1", point 4).  

C. Establish a new body (European Systemic Risk Council, ESRC)22 
This  option  foresees,  in  line  with  the  recommendations  of  the  de  Larosière  Group,  the 
establishment of a new body, the European Systemic Risk Council (ESRC). For such a new 
body to be effective, it would need to: (a) identify macro-prudential risks (risks to financial 
stability)  sufficiently  in  advance;  (b)  competently  identify  appropriate  measures  to  reduce 
these  risks;  and  (c)  trigger  corrective  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,  status,  mandate,  and  operating  procedures. 
Moreover, choices made in respect of these various factors would 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  report,  the  ESRC  would  be  an  independent  body 
placed outside the ECB, but chaired by the President of the ECB. Operational and technical 
support would primarily be provided by the ECB/ESCB. The Council 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  providing  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 the prevention and effective handling of financial crises. 
22 Further discussions between DG ECFIN and DG MARKT are needed on the functioning of the ESRC.  

22

 
 
 
                                                                                                                                                         
In  order  to  perform  this  role,  the  ESRC  would  carry  out  all  the  tasks  of  an  EU  macro-
prudential supervisor, that is: 

-  collect  and  analyse  all  information  relevant  for  financial  stability,  pertaining  to  macro-
economic conditions and macro-prudential developments 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  measures  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  Authorities.  However,  each  central  bank  governor 
should be accompanied by one senior representative of the national supervisory 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 issues to be discussed by the ESRC.   

All  ESRC  members  and  observers  would  have  the  right  to  attend  and  to  speak  at  these 
meetings. In order to streamline 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 Commission member would be voting members. 

Box 1. Composition of the European Systemic Risk Council (ESRC) 

Members: 
- 

- 
- 
Observers: 
- 

- 
- 
- 

- 
- 

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 European Supervisory Authorities;  
Member of the European Commission. 

A representative of the national supervisory authorities, accompanying the central 
bank Governor in a 1+1 formula; 
Chairperson of the Economic and Financial Committee; 
A representative of each national central 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  the  Specific  Objectives  which  have  been  set 
separately for the areas of micro- and macro-prudential supervision. The options will also be 
compared with regard to the criteria of effectiveness, efficiency and coherence, according to 
the following definitions: 

23

 
 
•  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 coherent with 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.23 

6.1. Micro-prudential supervision  

There  are  four  Specific  Objectives  defined  for  the  reform  of  the  EU  framework  for  micro-
prudential supervision, as presented in chapter 4: 

1.  Balance the home and host supervisor interests: reinforce processes and practices for 

challenging supervisory practices 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 analyse how effective the proposed 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  evolutionary  process  of  enhancing  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.  Recently,  the  system  has  been  strengthened  by 
improvement  of  decision  making  procedures,  formalising  supervisory  cooperation  on 
financial conglomerates and additional 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 much 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 national Parliaments/national taxpayers, host authorities can only 
hope that home authorities will take their situation 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 

24

 
 
                                                 
The Lamfalussy framework has proved suboptimal in ensuring consistent implementation and 
enforcement  of  EU  rules.  Diverging  national  interpretations  of  supervisory  rules  remain  the 
common problem. In some cases, even slight differences in the approach may favour national 
companies or act to the detriment of foreign competitors. Without legal powers to set binding 
supervisory standards and decisions on individual firms, CESR, CEBS and CEIOPS have not 
been  able  to  move  forward  much  in  this  area.  The  existing  situation  cannot  achieve  a  level 
playing  field.  The  lack  of  progress  in  harmonisation  of  supervision  also  causes  higher 
compliance costs for companies. 

The  existing  mechanisms  have  proved  to  be  ineffective  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  highly  dependent  on  the  quality  of  co-operation  and 
information  exchange  between  supervisors.    Problems  of  communication,  or  a  lack  of  trust 
between  supervisors,  can  severely  endanger  the  effective  control  of  the  institutions  or 
financial systems concerned.  

In  summary,  it  is  likely  that  the  EU  has  reached  the  limits  of  what  can  be  done  with  the 
present  status  of  the  Committees  of  European  Supervisors  as  advisory  bodies  to  the 
Commission.  If  serious  progress  is  to  be  made  on  building  a  stable  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  likely  be  beneficial  from  the  perspective  of 
consumer  protection  and  financial  stability.  On  the  other  hand,  taking  into  account  the 
prevention aspect, the main deficiency of this model is the lack of any kind of oversight of big 
cross-border financial groups. Moreover, the scope 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 financial health of the subsidiary is closely linked to that of the 
financial group as a whole. The effective control of large financial groups would therefore be 
primarily in the hands of the supervisor in the home country, but it would not take account of 
subsidiaries and branches in other 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  national  sets  of  supervisory  requirements  and 
practices,  incurring  significant  compliance  costs.  In  other  words,  host  country  control  could 
not work without significant financial disintermediation and removal of many of the benefits 
of  the  internal  market  in  terms  of  income  and  welfare.  For  example,  a  complete  legal  and 
operational  alignment  of  branches  and  subsidiaries  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 (in the case of branches) and from home country supervisors of 
subsidiaries to home country supervisors of the parent company. In a college of supervisors, 
the  lead  (home)  supervisor  would  make  use  of  the  expertise  and  knowledge  of  local 
supervisors  and  delegate  to  them  tasks  and,  where  possible,  responsibilities.  But  in  the  end 

25

 
 
decisions would be made by the home authority. This 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  States  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 would remain  responsible  for 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  prudential  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 this model, each financial group operating on a 
cross-border basis  would  indeed  have  to comply  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  would  create  an  increasing  risk  of  situations 
where in a given country companies operate according to various supervisory regimes: that of 
the  local  supervisor  –  for  domestic  firms,  and  those  of  various  lead  supervisors  –  for 
subsidiaries of financial groups based in other countries. Moreover, this model would create 
the risk of supervisory arbitrage in which lead supervisors could compete by easing the rules 
to favour their domestic undertakings. Another possibility would be that cross-border groups 
will choose to establish themselves in the Member State with the lightest prudential regime. 

Concerning  cost  reduction  for  financial  institutions,  the  lead  supervisor  concept  would 
allow for minimising supervisory costs at a company 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 failure linked with too lenient supervision.  

4. de Larosière proposal: European System of Financial Supervisors (ESFS) 

The proposal for a European System of Financial Supervisors (ESFS) addresses the specific 
problems  identified  in  the  area  of  supervision  in  the  EU.  It  ensures  the  necessary  co-
ordination  at  the  Community  level  while  preserving  Member  States'  primary  competence  in 
the area of supervision. The decision-making powers of the Authorities are primarily related 
to ensuring a correct and coherent application of EU law.  

To ensure the balance between the different supervisory interests, the Authorities would be 
granted certain powers. Specifically in case of conflicts between home and host authorities on 
the application of EU rules, the European Supervisory Authorities/y could be called in by the 
respective national authorities to settle disputes. With regard to instutitions for which global 
colleges of supervisors exist (in line with recent 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 Commission 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  the  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. 

26

 
 
                                                 
guidelines  which  would  be  applied  by  national  supervisory  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 exercise of ensuring consistent application of EU law and with 
regard to certain pan-European financial institutions 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  exchange  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 authorities to define and implement the 
right decisions. In specific crisis situations, the Authorities would adopt emergency decisions 
based on specific parameters set by legislation. For example, they could have played this role 
in the Fortis case quoted in chapter 3. 

The  ESFS  would  improve  cost  efficiency  of  supervision  for  supervised  companies,  as  they 
would benefit from (more) harmonised prudential and reporting rules.  

5. Full supervisory centralisation: a single EU Supervisor 

As explained above in 5.1, the working hypothesis for this option assumes that a single EU 
supervisor (organised either as a single central 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  national  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 supervised 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, standards 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  supervision  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  Supervisor  could  exercise  co-ordination  powers  to 
ensure harmonised supervisory approaches in each national market.  

The full harmonisation of supervisory standards and practices would also clearly lead to the 
reduction of compliance costs of cross-border financial groups.  

Centralised  supervision  at  the  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 given that certain decisions could 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  fail  to  meet  the  specific  objectives).  This  means  that  option  4  (ESFS, 
leaving  responsibility  for  day-to-day  supervision  with  national  supervisors  as  described 
above)  and  option  5  (EU  Supervisor,  with  EU-responsibility  for  cross  border  groups)  are 
retained for further comparative assessment.  

27

 
 
Table 5. Effectiveness in achieving the Specific Objectives (Level 1) 
(0 baseline; + positive; - negative; / difficult to establish) 

Options 

Specific Objectives 

Level 1: Supervisory system 

1. Status quo: Lamfalussy 
framework 

2. Stage back: host country model 

3. Lead supervisor model 

4. De Larosière proposal: ESFS 

5. Full centralisation: single EU 
supervisor 

Home-host 
balance 

Level 
playing 
field 

Crisis 
prevention 
and 
management 

Cost 
effectiveness

0 

-- 

-- 

++ 

++ 

0 

-- 

- 

++ 

++ 

0 

- 

- 

++ 

++ 

0 

-- 

++ 

++ 

++ 

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,  guarantee  adequate  protection  for 
depositors, policy-holders and investors, as well as financial stability in the EU.  

There  is  a  strong  case  for  decentralisation.  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  level  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  would  get  a  feeling  for  what  is  going  on  in  an 
institution  and  would  also  be  more  familiar  with  the  local  market  conditions  in  which  an 
institution  is  operating.  The  proposed  ESFS  recognises  this  by  building  on  the  existing 
decentralised  structure  and  preserving  experience,  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 supervisor would be that the distance between this 
body  and  the  supervised  institutions  may  be  too  large  –  both  physically  and  in  terms  of 
familiarity  with  local  circumstances.  So  the  single  EU  supervisor  could  not  fully  replace 
national  supervisors,  which  would  still  need  to  deliver  a  local  element  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 legal power to apply rules made 
at national level within the Member States. 

While  the  single  EU  supervisor  option  would  practically  eliminate  the  home-host  issue,  the 
ESFS option would also grant the necessary powers to the EU Authorities to enforce solutions 
balancing  the  interests  of  home  and  host  authorities  and  avoid  decision-making  deadlocks. 
Both  the  ESFS  and  the  single  EU  Supervisor  would  possess  the  competences  to  issue 
technical  standards  and  interpretations,  thus  fostering  a  level  playing  field  in  the  Internal 
Market.  

Concerning  crisis  prevention  and  management,  in  both  options  the  authorities  would  have 
access  to  the  relevant  information  at  the  EU,  individual  country,  and  individual  company 

28

 
 
level. While the preferred route to solving a failure of a financial institution is a private sector 
solution, recent events have shown 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 
transferring  additional  supervisory 
responsibilities to the EU level, would need to be accompanied by more detailed criteria for 
burden sharing. 

resolution  efforts, 

In  terms  of  legal  feasibility,  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  Supervisor  options  would  fulfil  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 create a network of EU financial 
supervisors,  based  on  the  principles  of  partnership  and  flexibility  within  a  network 
arrangement.  This  is  also  in  line  with  the  existing  responsibilities  in  the  field  of  crisis 
prevention and management. However, in line with the recommendations of the de Larosière 
Group, the functioning of the ESFS should be reviewed 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  responsibilities  for  cross-border  institutions  to  the  proposed 
Authorities). 

Efficiency 

The criterion of efficiency helps assess the extent 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  (supervisors);  and  other  stakeholders 
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-border  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 promotion of consistency and arbitration between 
national authorities, and by taking over responsibility for a number of decisions pertaining to 
EU-wide groups or firms.  A single EU supervisory 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  national  authorities  would  remain  in  place  to  oversee 
firms  active  in  one  Member  State  only).  However,  the  detailed  cost  and  staffing  of  the 
European Supervisory Agencies would depend on the specific tasks delegated to these bodies. 
It  is  evident  that  enhanced  resources  are  needed,  both  in  personnel  and  budget,  but  at  this 
stage it is not possible to specify the exact numbers. This requires a detailed management plan 
linked to the specific functions of these Authorities.   

29

 
 
In  terms  of  impact  on taxpayers,  both  proposals should  strengthen 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  the  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 would be relatively limited in comparison with the 
resources needed for the single EU supervisor (as the latter would replace national supervisors 
for the supervision of cross-border groups). From the perspective of the Community budget, 
the ESFS should at this stage be a better option as it would allow for achievement of the same 
objectives as the single EU supervisor, 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 two models at this stage. 

Coherence 

Under  the  criterion  of  coherence  we  shall  examine  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 objectives of the EU to contribute to sustainable 
economic  growth  and  job  creation,  to  foster  the  Single  Market  and  to  promote  EU  industry 
globally.  Numerous  studies  have  shown  the  positive  impact  of  well-functioning  financial 
markets and intermediaries on the real economy25. The financial sector in the EU is also an 
important  employer,  not  only  in  a  few  financial  centres  in  Europe  but  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 arrangements for supervision are an essential element in 
fostering  stable  and  integrated  financial  markets.  By  fostering  a  sound  and  prosperous 
financial  sector,  both  options  would  also  contribute 
international 
competitiveness of EU industry. 

increasing 

to 

Subsidiarity and proportionality 

Another important aspect of comparative assessment 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 achieve the objectives satisfactorily. The latter 
requires that any action at EU level is justified by the added value as compared 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  supervisors.  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  enforcement,  and  enhanced  co-operation  and 
information  exchange  at  all  levels.  The  ESFS  option  therefore  meets  both  the  criteria  of 
proportionality,  by  presenting  targeted  solutions  to  the  identified  problems,  and  of 
subsidiarity,  by  transferring  at  the  Community  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 

30

 
 
                                                 
The  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 supervision 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, the complexities entailed by such 
a  proposal  are  such  that  creating  a  single  EU  supervisor  would  be  disproportionate  to  the 
current problems and therefore out of keeping 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 depositors, 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  supervisors  would  conduct  day-to-day  supervision.  It  builds  on  the 
existing decentralised structure and therefore preserves 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 efficiency condition, the ESFS should at 
this stage be a better option as it would allow 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 also 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 

Effectiveness  Efficiency Coherence 

Subsidiarity 
and 
proportionality

++ 

++ 

++ 

++ 

++ 

- 

Level 1: Supervisory system 

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 the ESFS or a single EU supervisor is chosen. 
Four  options  exist,  involving  establishment  of  one,  two,  three  or  four  bodies  (see  the 
description in the previous section). These options must be analysed according 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 (co-ordination, harmonisation 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  states  "In  general,  no  one  model  has  proven  unambiguously  superior  in 
achieving all the objectives of regulation." 

31

 
 
                                                 
therefore evidence related to national supervisors, 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  Financial  Conglomerates,  so  any  move  towards  a 
different  structure  would  probably  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  oversight  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  suppose  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-efficiency. 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  assessments  accompanying  the  legislative  proposals  in  the 
autumn.  The  efficiency  of  a  "twin-peaks"  option  would  depend  on  the  balance  of  work  at 
ESFS level between prudential matters and conduct-of-business matters, which will be clearer 
after a few years of ESFS existence. 

Coming  to  coherence,  the  most  coherent  structure  would  be  that  which  best  reflects  the 
nature of financial regulation in the EU and the 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  the  ESFS  would  seem  therefore  to  be  the  most 
coherent  with  current  legislation.  Secondly,  although  many  EU  financial  institutions  are 
financial conglomerates, this trend may 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  sectoral  structure  of  the  three  Committees  of 
Supervisors by creating three European 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 entry into being of the ESFS. The proposed Steering 
Committee could ensure cross-fertilisation and interlinkage between the three Authorities and 
also  replace  the  current  Joint  Committee  on  Financial  Conglomerates.  If  the  future  review 
were  to  decide  that  effectiveness,  efficiency  and  coherence  could  be  better  achieved  by 
passing to a different supervisory model, taking account of the evolution of market structure 
in the meantime, then the existence of the Steering Committee could facilitate 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. 

32

 
 
                                                 
A. One body 

B. Two bodies 

C. Three bodies  

D. Four bodies 

/ (-)* 

/ (-) 

0 

/ (-) 

+ 

+ 

0 

- 

0 

0 

0 

- 

* (-) 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  objectives  (  see  section  4.2.) 
according  to  the  usual  criteria  of  effectiveness,  efficiency  and  coherence.  If  not  specified 
differently,  the  assessment  of  the  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 create jobs, to foster the Single Market and to 
promote  the  competitiveness  of  EU  enterprises.  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  approach  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 arrangements are not effective as they place too 
little emphasis on the macro-prudential 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 authorities 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 Council 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  committee.  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 highlighted with regard to the 
option of giving the EFC lead responsibility for macro-prudential assessment. First, the EFC 
Secretariat,  as  currently  stands,  would  not  provide  the  adequate  level  of  expertise  to 
effectively  undertake  the  operational  tasks  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 development of methodology (macro-systemic stress 
testing), and management of a complex  and  wide  set  of  early  warning indicators at EU and 

33

 
 
Member State level29. The latter also requires substantial resources (both in terms of staff and 
budget). 

As concerns pooling of information, the composition 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 information which may raise confidentiality issues (i.e. 
concerning  individual  systemically  relevant  institutions).  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 expertise of for example the ESCB).  

•  The ECB/ESCB 

In terms of effectiveness it would make sense to give central banks a leading role in macro-
prudential  supervision.  Historically,  the  two  main  objectives  of  central  banks  relate  to  the 
maintenance  of  monetary  and  financial  stability.  Both  objectives  are  closely  interlinked; 
monetary policy has significant implications for financial stability, while financial stability is 
an  essential  pillar  for  effective  monetary  policy.  Identifying  vulnerabilities  in  the  financial 
and non-financial sectors and potential shocks in these markets is therefore a vital part of the 
work  of  central  banks.  Moreover,  central  banks  have  a  clear  financial  safety  net  function 
through their role as lender of last resort. Safeguarding financial stability has therefore been 
and always will be a fundamental objective of central banks.  

The  European  Central  Bank  (ECB)/European  System  of  Central  Banks  (ESCB)  has  wide-
ranging macro-prudential expertise and is at the heart 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 prominent position in macro-prudential 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  presented  against  the  attribution  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 argued that the ECB/ESCB might be induced to take 
account of financial instability mainly to the extent that the latter is relevant for the prospects 
of inflation.  

Second,  there  would  be  a  reputational  risk  linked  to  the  conduct  of  macro-prudential 
supervision. A perceived failure in fulfilling the task of early warning or in advising on the 
most effective measures to react to risks identified might prove detrimental to the reputation 
of the ECB/ESCB, thereby jeopardising their credibility as a monetary authority as well.  

Third,  the  concentration  of  power  argument  could  also  be  mentioned;  attributing  to  the 
ESCB/ECB  the  powers  linked  to  macro-prudential  supervision  might  be  considered 

29 These must encompass Aggregate capital 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. 

34

 
 
                                                 
 
detrimental to the system of checks and balances 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 supervision 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 the leading role in macro-prudential supervision to the new 
Authorities with the support of the network of national supervisors.  

As  highlighted  before,  the  scope  of  macro-prudential  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 micro-prudential supervision, which is to limit the 
risk of episodes of financial distress at individual institutions, independently of their impact 
on the overall economy. Given this considerable difference 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 expertise of for example the ESCB).  

C. Establish a new body, i.e., a European 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  macro-prudential  supervision  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 them 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 operation of common factors affecting the stability of groups and 
intermediaries. 

The involvement of micro-prudential supervisors through the 3L3 Committees (or through 
the future European Authorities) as full members 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  between  supervisors  and  central  banks  will  be  enhanced.  This  is 
essential  particularly  for  the  detailed  knowledge  in  financial  markets  micro-prudential 
supervisors hold and because they play a crucial role in early intervention mechanisms in case 
of a financial crisis. 

Participation of the Commission would provide an essential contribution to the ESRC work. 
Indeed, the Commission plays a key role in macro-economic surveillance30; 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, monitor economic developments in each of the Member States and in the 

35

 
 
                                                 
be in position to confirm, complement or challenge the risks identified 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 analysis and providing advice on corrective 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  advisable  as  it  would  ease  the  information  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 responsibilities in the  crisis 
prevention  and  management.  Giving  the  EFC  (through  its  Chair)  the  possibility  to  attend 
meetings  of  the  ESRC  would  enhance  the  commitment  of  Finance  ministries  in  ensuring 
proper  follow-up  when  their  action  is  requested.  This  would  also  reflect  the  role  of  finance 
ministries  in  crisis  management  and  resolution  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 these 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 parties 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  potentially  increasing  its 
effectiveness  and  preventing  a  potential  blurring  of  responsibilities.  This  would  stem,  inter 
alia, from the level of homogeneity of voting Authorities. 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 involving for EU Central Banks the same drawbacks as placing 
the ESCR within the ESCB, i.e. a “reputational risk” in connection to their 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  mechanism  for  addressees  of  warnings  and 
recommendations to act on them. Proper follow-up to warnings and recommendations 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 purpose 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 information 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  monetary  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.  The  President  of  the  Council  may  be  invited  to  appear 
before  the  competent  committee  of  the  European  Parliament  if  the  Council  has  made  its  recommendations 
public” 

36

 
 
                                                                                                                                                         
• 

• 

supranational).  This  would 

the  ESRC  could  interact  directly  with  any  relevant  Authority  or  Institution  at  all  levels 
(national  and 
the 
recommendations  would  be  immediately  transmitted  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;  

its  effectiveness  as 

increase 

the  alternative  option  would  be  to  have  a  rather  limited  number  of  counterparts  at  EU 
level, like the ECOFIN Council and the 3 new European Authorities (which would then 
forward the recommendations to the final addressees) and at global level, like the FSB and 
the  IMF  This  would  ensure  better  coordination  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. This 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  judgement.  However,  bearing  in  mind  that  the 
recommendations by the ESRC would not be binding, public disclosure would be expected to 
increase their effectiveness. 

As regards the cost efficiency criterion the ERSC would be supported by a Secretariat staffed 
with officials working in the ECB31 with rather limited costs mainly related to the equipment 
and running costs. 

Conclusion 

Based on the previous assessment, the ESRC emerges clearly as the best solution for the EU 
framework for macro-prudential supervision. The envisaged architecture, status and operating 
procedures should allow this body to meet the three objectives in the most effective way. It 
would  be  effective  as  having  sole  responsibility  for  macro-prudential  risk  warnings  and  a 
composition  which  would:  create  valuable  synergies,  ensure  an  appropriate  level  of 
representation, and have a mutually reinforcing impact on the stability of the financial system. 
As for efficiency, it would build on operational and technical support from the ECB/ESCB.  

Subsidiarity and Proportionality 

Concerning the subsidiarity principle it can be observed that 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 Member 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  administrative  and  financial  costs,  as  it  would  obtain 
logistical  support  from  the  ECB.  Moreover  the  proposed  solution  would  achieve  the  right 
balance between the sovereignty of national authorities 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. 

37

 
 
                                                 
macro-prudential  supervision  at  EU  level.  Other  options  would  entail  a  sub-optimal 
representation of national/EU authorities.  

Table 8. Macro-prudential supervision: comparison of options 

Options 

Assessment criteria 

Status quo 

EFC 

Tasking the ESFS 

ECB/ESCB 

ESRC  

Effectiveness  Efficiency  Coherence 

Proportionality 

0 

+ 

+ 

+++ 

++++ 

0  

+ 

+ 

++ 

++ 

0 

+ 

+ 

+ 

+ 

0 

+ 

+ 

+ 

++ 

7. Impact of the selected options  

The selected options should achieve the objectives 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  appropriate  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  preferred  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. Secondly, regarding the competencies of the new Authorities, they 
will not include decisions with direct fiscal consequences. 

The  table  below  presents  the  comparison  of  the  impact  of  the  ESFS  and  ESRC  on  various 
groups  of  stakeholders,  including  consumers,  employees,  industry,  supervisors  etc,  as 
identified in the problem description. 

Table 9. Impact of the selected options on the stakeholders 

Micro-prudential supervision 

Macro-prudential supervision 

Financial industry: cross-border 

ESFS (3 Authorities) 

+ 

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 

ESRC 

+ 

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 

38

 
 
  
 
Financial industry: 3rd countries 

Consumers and users of financial 
retail 
services 
investors) 

(including 

Employees 

Pensioners 

Corporations  from  non-financial 
sector and SMEs 

Supervisors 

National governments 

due 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 

+ 

+ 

Attracting investments to Internal 
Market thanks to harmonised 
business environment and high 
quality supervision 

Attracting investments to Internal 
Market thanks to increased 
financial stability 

+ 

+ 

Greater convergence of conduct-of-
business supervision in Europe  

Increase confidence by 
strengthening financial stability 

+ 

+ 

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 

+ 

+ 

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. 

+ 

+ 

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.  

+ 

+ 

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. 

+ 

+ 

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 

39

 
 
arrangements 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 

reform: 

A number of indicators are applied to monitor the trends related to the General Objectives of 
the 
international 
financial  stability,  consumer  and  business  confidence, 
competitiveness  of  EU  financial  industry,  financial  integration  (see  the  European  Financial 
Integration Report32). However, it is difficult to establish the degree to which the EU policies, 
in particular the reform of financial supervision, 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  matched  with  the  specific  objectives  and  –where 
possible – also with the operational objectives. These indicators should serve to evaluate the 
performance of the ESFS and the ESRC in fulfilling 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 authorities, and verify the effectiveness of 
processes  and  practices  to  challenge  supervisory  practices  on  a  cross-border  basis.  For  the 
ESRC to be effective it would need to fulfil three key conditions: (i) it should 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 action to address the identified risks. These indicators should be 
developed in more detail in the impact assessment of legislative proposals implementing the 
supervisory reform. 

32 SEC(2009)19 final 

40

 
 
 
                                                 
Annex 1 – Comparison of the retained 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) 

41

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Annex 2- Summary of public submissions received 

The  total  number  of  submissions  received  to  date  in  reply  to  the  public  consultation  on 
financial  supervision  is  116  (including  those  which  arrived  after  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: 
Registered organisations: 
Individuals: 

26 
16 
74 

Many of the submissions covered not only supervisory 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  conclusions,  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 majority of contributions noted 
that  more  details  are  needed  on  the  powers  and  composition  of  both  macro-  and  micro-
supervisors in order to reach definitive positions. 

Submissions were received from public authorities in 18 EU and EFTA Member States and 
international  bodies  such  as  the  IMF  and  the  existing  "Level  Three  committees"  (for  some 
Member  States  more  than  one  submission  was  received  from  different  public  bodies  –  see 
annex). 

On micro-supervision, all submissions from public authorities strongly or cautiously support 
the  principle  of  the  ESFS,  with  one  exception,  which  withheld  its  support.  But  most 
submissions  have  issues  of  detail  to  express.  Three  submissions  explicitly  oppose  binding 
powers  for  new  ESFS  authorities  over  national  authorities.  Most  submissions  highlight  the 
need  to  resolve  issues  of  governance  independence  and  answerability  in  the  ESFS,  notably 
with regard to fiscal responsibility and burden-sharing arrangements. Most responses do not 
explicitly  refer  to  the  structure  of  the  new  authorities;  of  those  that  did,  one  favour  "twin 
peaks" and four favour a unitary authority. 

On  macro-supervision,  none  of  the  responses  from  public  authorities  opposes  the  proposed 
ESRC  but  while  some  replies  strongly  support  the  proposal  others  support  it  conditionally 
upon  further  details  being  provided.  Some  favour  an  ESRC  within  the  European  System  of 
Central Banks while others prefer it to be outside the ESCB. 

The three EFTA submissions are supportive of the de Larosière proposals. They all support a 
unitary  authority  for  micro-prudential  supervision,  and  all  advocate  for  observer 
representation of EFTA-EEA countries on both the ESFS and the ESRC. 

The joint response of the existing level 3 committees 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  core  of  supervision  of  cross-border  groups  in 

42

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
their  view.  On  macro-prudential  supervision,  they  support  the  ESRC  proposal,  while 
emphasising  that  information  should  be  fed  in  by  micro-supervisors  not  individual 
institutions. The IMF supports a "twin-peaks" model for micro-supervision, with some direct 
supervisory powers at EU-level. It strongly supports 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  participation  by  micro-prudential  supervisors  in  the 
macro-prudential body. 

The bulk of the contributions received are from financial sector associations and institutions, 
whether or not registered as representative 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  support  them,  subject  to  further 
clarifications  on  the  exact  powers  and  composition  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  question  the  mechanism  which  will  be  used  for 
ensuring  follow-up  to  ESRC  recommendations.  A  number  of  replies  emphasise  the 
importance  of  avoiding  double  reporting  requirements  and  of  confidential  treatment  of 
information received. 

On micro-prudential supervision, a majority of sectoral submissions 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 supervision of cross-border 
groups.  Regarding  supervisory  structure  (one,  two  or  three  bodies),  the  majority  of 
contributions  either  do  not  refer  to  this  question  or  favour  three  bodies.  Contributions  from 
insurance associations all oppose merging banking and insurance into one supervisory body. 
A small number of sectoral submissions favour "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 report. Very few of them explicitly 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 lack of clarity as to its competences, and on 
micro-supervision  supports  a  single  EU  supervisor  for  cross-border  institutions,  with 
strengthened national supervisors for other institutions. Another emphasises the general goals 
of  equality  and  sustainability  for  financial  supervision,  and  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  argues  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-making  powers  in  the  case  of  micro-supervision, 
while leaving day-to-day supervision at national level. All consumer contributions emphasise 
the  need  for  independence  and  transparency  of  supervisory  bodies,  and  for  involvement  of 
stakeholders including consumers (possibly via an advisory panel).  

43

 
 
 
 
 
 
 
 
All  of  the  three  trades  unions  which  responded  argue  for  the  need  for  consultation  of 
employees by both micro- and macro-level supervisors, via a consultative panel. All support 
the principle of the ESRC, though one favours global-level co-ordination of macro-prudential 
supervision. Two of the three union responses support direct EU-level supervision of cross-
border financial groups. 

44

 
 
 
 
 
 
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 Défense 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 Chartered Certified Accountants 

45

 
 
 
 
 
 
 
 
 
Association 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 Associations 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 

46

 
 
PriceWaterhouseCoopers 
Quoted Companies Alliance 
R K Associates 
S Walby 
Transparency International 
UNI Europa 
Unicredit 
Unite the Union  
Verbraucherzentrale Bundesverband  
Which? 
XBRL Europe 
Zentraler Kreditausschuss 

47