Commission staff working document - Accompanying document to the Communication from the Commission : European financial supervision - Summary of the impact assessment {COM(2009) 252 final} {SEC(2009) 715}
Date: 2009-05-27
Institutions: European Commission
Subjects: European Commission, European Monetary System, economic recession, financial control, financial cooperation

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 27.5.2009 
SEC(2009) 716 

COMMISSION STAFF WORKING DOCUMENT 

Accompanying document to the 

COMMUNICATION FROM THE COMMISSION 

European financial supervision 

SUMMARY OF THE IMPACT ASSESSMENT 

{COM(2009) 252 final} 
{SEC(2009) 715} 

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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. The Commission's action in this area builds on the report 
of the "de Larosière" Group on financial supervision in the EU, which recommended a new 
European financial supervisory framework for supervision of individual financial institutions 
(micro-prudential supervision) and supervision of the stability of the financial system (macro-
prudential supervision).  

Consultations 

The Commission conducted a public written consultation on the de Larosière report between 
10  March  and  10  April  2009.  116  submissions  were  received,  the  great  majority  of  them 
generally supportive of the supervision proposals in the report.  

An  Impact  Assessment  Steering  Group  to  steer  the  preparation  of  this  Impact  Assessment, 
comprising representatives from various DGs, met twice. 

2. 

PROBLEM DEFINITION 

General Problems 

EU  financial  markets  are  increasingly  integrated,  and  dominated  by  pan-European  groups 
whose  risk  management  functions  are  centralised  in  the  groups'  headquarters.  Especially  in 
the EU-12, banking markets are dominated by foreign financial groups.  

Recent  events  have  shown  that  it  is  very  difficult  to  achieve  a  single  financial  market  and 
stability in the financial system, while preserving nationally-based supervision. The crisis has 
brought  into  relief  the  weaknesses  of  the  present  EU  arrangements  which  place  too  much 
emphasis on prevention and management of crises concerning individual firms and too little 
on risks affecting the stability of the financial system as a whole.  

Therefore,  the  current  organisation  of  financial  supervision  in  the  EU  is  characterised  by  a 
general problem of mismatch between the level of European integration of EU financial 
markets and the national organisation of supervisory responsibilities. 

This is magnified given the other General Problems exposed by the financial crisis: 

•  Increased  risks  of  cross-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. 

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•  Risks of uncoordinated policies focussed on national considerations, with negative impact 

on the Single Market 

Affected stakeholders 

Due to its broad impact on the financial sector and the whole economy, financial instability 
affects a very wide 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. 

3. 

ANALYSIS OF SUBSIDIARITY 

On micro-prudential supervision, the EU has reached the limits of what can be done with the 
present advisory EU Committees of Supervisors. The Internal Market needs a mechanism to 
ensure that national supervisors arrive at the best possible decisions for cross-border financial 
groups. An integrated EU financial market, including companies operating on a cross-border 
basis,  cannot  work  properly  if  the  supervision  remains  fragmented  along  national  lines. 
Therefore, transfer of competences to the Community level is necessary.  

On macro-prudential supervision, the weaknesses of the present arrangements clearly played a 
role  in  the  recent  financial  sector  turbulence.  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  and  ensure  follow-up.  Only  Community  action  could 
provide assessment at the EU level and with an EU-wide perspective, and effective responses 
to EU-level systemic risks.  

4. 

OBJECTIVES 

The following General Objectives apply to the reform of the EU supervisory framework: 

(1) 

(2) 

(3) 

(4) 

(5) 

Establish a more effective framework for financial supervision in the EU, adapted to 
the level of financial market integration; 

Enhance  financial  stability  in  the  EU  (and  thereby  contain  potential  risks  to  the  real 
economy and to public finances); 

Safeguard  the  interests  of  consumers,  investors,  other  users  of  financial  services  and 
other relevant stakeholders, notably employees;  

Increase the competitiveness of EU financial markets, and 

Foster integration of EU financial markets supportive of sustainable development. 

The following Specific Objectives have been set in the areas of micro-prudential supervision 
and macro-prudential supervision:  

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Specific Objectives 

Micro-prudential supervision  

Macro-prudential supervision  

(1) 

(2) 

(3) 

(4) 

Balance  home  and  host  supervisor  interests, 
i.e.,  reinforce  processes  and  practices  for 
challenging 
the  decisions  of  national 
supervisors on a cross-border basis; 

Ensure  a  level  playing  field  for  financial 
institutions  operating 
in  various  Member 
States; 

(1) 

(2) 

(3) 

Develop  European  macro-prudential 
assessment; 

risk 

Enhance  effectiveness  of  early  warning 
mechanisms, and 

Allow  for  risk  assessments  to  be  translated 
into action by the relevant authorities. 

Improve 
management on the European scale, and 

prevention 

crisis 

and 

crisis 

Improve  effectiveness  and  cost  efficiency  of 
supervision for supervised companies. 

5. 

POLICY OPTIONS 

5.1.  Micro-prudential supervision  

The  options  for  organising  micro-prudential  supervision  in  the  EU  have  been  considered  in 
two stages: 

Stage 1: Supervisory system 

1. Dynamic status quo: based on the continuation of the current home country model and the 
Lamfalussy framework. 

2.  Step  back:  host  country  model:  granting  to  national  supervisors  full  responsibility  for 
supervision  of  both  domestic  and  foreign-owned  companies  operating  in  a  given  country, 
including both subsidiaries and branches.  

3.  Lead  supervisor  model:  involving  extended  powers  for  the  supervisor  of  the  parent 
company of a cross-border group. In practise this would mean that the home country authority 
of a cross-border group is given full responsibility for EU-wide operations, both branches and 
subsidiaries. This option could be an evolution of the existing supervisory framework.  

4.  De  Larosière  proposal:  European  System  of  Financial  Supervision  (ESFS): 
transforming  the  existing  EU  Committees  of  Supervisors  into  one,  two  or  three  European 
Supervisory  Authorities.  The  new  European  Supervisory  Authority/ies  would  work  in  a 
network  with  the  national  financial  supervisors,  which  remain  competent  for  the  day-to-day 
supervision  of  individual  institutions.  These  Authorities  would  co-ordinate  supervision  of 
cross-border  groups  in  colleges  of  supervisors,  contribute  to  harmonising  detailed  rules,  lay 
down  guidelines  and  have  powers  to  intervene  in  certain  strictly-defined  cases  of 
disagreement between national supervisors. 

5.  A  single  EU-level  supervisor:  involving  giving  all  day-to-day  supervisory  competences 
for  institutions  with  cross-border  activities  at  the  Community  level  in  a  single  supervisor, 
leaving national supervisors responsible for companies with domestic activities only.  

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Stage 2: Institutional structure 

A.  One  body,  i.e.,  the  integrated  approach:  covering  the  whole  financial  sector  (banking, 
insurance and securities markets) and all aspects of financial supervision1 

B.  Two  bodies,  the  approach  by  objective  (often  referred  to  as  "twin  peaks"):  based  on 
separation of tasks between two supervisors: one that performs prudential supervision and the 
other  that  carries  out  conduct-of-business  supervision.2  A  steering  committee  could  co-
ordinate between the two bodies. 

C.  Three  bodies,  i.e.,  the  sectoral  approach:  including  a  banking  supervisor,  an  insurance 
and  pensions  supervisor,  and  a  securities  supervisor3,  in  line  with  the  sectorally-based  EU 
financial  legislation4.  This  model  could  be  complemented  by  an  overarching  steering 
committee. 

D. Four bodies, i.e., the institutional approach: in addition to the three bodies responsible 
for  supervision  of  the  respective  sectors,  a  distinct  fourth  body  could  be  created  for 
supervision of financial conglomerates. 

5.2.  Macro-prudential supervision  

Five  options  have  been  assessed  regarding  the  European  framework  for  macro-prudential 
supervision: 

A.  Dynamic  status  quo:  according  to  this  scenario  macro-prudential  supervision  would  be 
carried  out  through  the  existing  EU  arrangements,  involving  several  institutions  and  bodies 
and lacking a mechanism to ensure proper follow-up to warnings and recommendations. 

B. Building on existing or proposed structures:  

Tasking  the  Economic  and  Financial  Committee  (EFC):  this  body  provides  high-level 
assessments of developments in financial markets and services and advises ECOFIN and the 
European  Commission.  This  option  would  involve  the  EFC  taking  over  the  key  role  in  the 
future framework for macro-prudential supervision.  

Tasking  the  European  System  of  Central  Banks  (ESCB)/The  European  Central  Bank 
(ECB): 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). 

1 

2 
3 
4 

Member  States  with  a  single  supervisory  model  separate  from  central  banks:  DE,  AT,  DK,  HU,  MT, 
PL, UK, SE. Member States with a single supervisory model with a link to (or integrated within) central 
banks: FI, IE, SK, BE, EE.  
This model is adopted only by NL in the EU.  
Member States with a sectoral model: CZ, ES, FR, EL, IT, LT, LU, PT, SI. 
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. 

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Tasking the ESFS: under this option, the new European Authority(ies) as recommended by 
the de Larosière report to strengthen EU micro-prudential supervision, could also be entrusted 
with  the  task  of  macro-prudential  supervision.  They  would  be  supported  by  the  network  of 
national supervisors. 

C. Establishing a new body: the European Systemic Risk Council: this option foresees, in 
line with the recommendations of the de Larosière Group, the establishment of a new body, 
the  European  Systemic  Risk  Council  (ESRC).  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.  Its  main  tasks  would  be  to  detect 
macro-prudential  risks;  to  identify  the  appropriate  measures  to  reduce  these  risks;  and  to 
trigger remedial action by competent authorities via warnings. 

6. 

PRELIMINARY ASSESSMENT OF IMPACTS AND COMPARISON OF OPTIONS 

6.1.  Micro-prudential supervision  

In the first stage the identified options were assessed with regard to effectiveness in fulfilling 
the objectives of the reform (see the Table above). In light of this analysis, options 1 (Status 
quo), 2 (Step back) and 3 (Lead supervisor) were rejected as not fulfilling the vast majority of 
the Specific Objectives.  

Option  4  (ESFS)  and  option  5  (EU  Supervisor)  were  retained  for  further  comparative 
assessment according to the criteria of effectiveness, efficiency, coherence and subsidiarity & 
proportionality. This led to identifying the ESFS as the preferred option for reform of the EU 
financial supervisory system. With respect to effectiveness, it is questionable whether a single 
EU-level  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 of financial institutions in the EU. Nor would it have the legal power to apply rules 
made at national level within the Member States. Within the ESFS, the national supervisors 
would carry out day-to-day supervision. It is a decentralised and evolutionary model, allowing 
if needed for the transfer of additional supervisory responsibilities to the EU level over time. 
Another  key  point  in  favour  of  a  decentralised  solution  such  as  the  ESFS  is  that  at  present 
there  is  no  EU-level  financing  mechanism  for  use  when  intervention  is  needed  to  assist  an 
institution in difficulty. Both options are equally coherent with the other relevant EU policies.  

The  four  options  for  institutional  set-up  were  then  analysed  according  to  the  criteria  of 
effectiveness,  efficiency  and  coherence.  Although  no  one  option  emerged  as  a  clear  leader 
under  this  analysis,  it  was  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 an analysis of the functioning of the 
new structures three years after the entry into being of the ESFS.  

6.2.  Macro-prudential supervision  

The  ESRC  emerges  clearly  as  the  best  solution  for  the  EU  framework  for  macro-prudential 
supervision.  It  would  be  effective  as  centralising  responsibility  for  macro-prudential  risk 
warnings  and  having  a  composition  which  would  enhance  valuable  synergies,  ensure  a 
balanced  representation  of  all  concerned  EU  and  national  institutions  and  authorities,  and 

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contribute  to  the  stability  of  the  financial  system.  Tasking  the  EFC,  due  to  its  political 
dimension, could jeopardise the candour of its analysis. As for tasking the ESFS, the major 
drawback  lies  with  the  substantial  difference  between  the  scope  of  macro-prudential 
supervision  and  that  of  micro-prudential  supervision.  Finally,  as  far  as  the  ECB/ESCB  is 
concerned,  three  main  arguments  can  be  raised  against  that  option:  the  potential  conflict  of 
interest between financial and monetary stability; the reputational risk linked to the conduct of 
macro-prudential supervision; and the excessive concentration of power with reference to the 
oversight of EU financial system. 

As  for  efficiency,  the  ESRC  would  build  on  operational  and  technical  support  from  the 
ECB/ESCB with limited need for additional resources. 

7. 

IMPACT OF THE SELECTED OPTIONS  

The  selected  options  should  fully  achieve  the  objectives  described  in  section  4  by  giving 
effect  to  a  number  of  immediate  changes  to  the  organisation  of  financial  supervision  in  the 
EU. These expected changes are reflected by the Operational Objectives set for the ESFS and 
the  ESRC.  In  general,  by  contributing  to  safeguarding  financial  stability  and  to  a  more 
effective control over the conduct of financial companies, the proposed new framework would 
increase the welfare of most stakeholder groups in the Internal Market: 

Financial  institutions,  including  their  shareholders  and  employees:  by  improving  the 
business environment due to enhanced financial stability and more effective crisis prevention 
in  the  EU;  ensuring  a  level  playing  field  and  reducing  compliance  costs  for  cross-border 
companies;  attracting  investments  to  the  Internal  Market  from  third  countries  thanks  to 
enhanced financial stability; maintaining jobs and creating new jobs in the financial sector. 

Users of financial services, including depositors, investors, pensioners, and non-financial 
companies:  by  increasing  consumer  and  investor  confidence  in  relation  to  the  increased 
reliability of the financial sector; reducing risks of default of individual financial institutions; 
improving  stability  of  pension  funds  and  providing  incentives  for  development  of  cross-
border occupational pension funds; facilitating access to finance by strengthening the single 
capital market in the EU. 

Consumers  and  employees  in  the  wider  economy.  The  successful  identification  and 
prevention by the ESRC of systemic financial crises with the potential to spill over into the 
real  economy  can  have  a  beneficial  effect  in  preventing  or  reducing  macro-economic 
recessions and the associated effects on output consumption and jobs. 

framework 

for  conflict 

Public  authorities,  including  supervisors,  central  banks  and  finance  ministries:  by 
clarifying roles and responsibilities at the national and Community level and establishing an 
indirect  strengthening  of  supervisory 
effective 
independence;  creating  a  framework  linking  micro-prudential  supervision  with  macro-
prudential  supervision;  providing  governments  and  other  concerned  authorities  with 
recommendations  for  actions  needed  to  protect  macro-economic  stability  in  the  EU  and 
individual  Member  States,  and  giving  effectiveness  to  the  analysis  of  macro  prudential 
developments  carried  out  in  the  central  banks;  and  by  diminishing  risks  of  having  to  inject 
public money into the financial system. 

resolution; 

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8. 

MONITORING AND EVALUATION 

To monitor effectively the impact of the EU action in the area of micro- and macro-prudential 
supervisions, specific indicators should be developed to evaluate the performance of the ESFS 
and  the  ESRC.  This  should  be  done  in  the  impact  assessment  of  legislative  proposals 
implementing the supervisory reform. 

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