Communication from the Commission - European financial supervision {SEC(2009) 715} {SEC(2009) 716}
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 
COM(2009) 252 final 

COMMUNICATION FROM THE COMMISSION 

European financial supervision 

{SEC(2009) 715} 
{SEC(2009) 716} 

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COMMUNICATION FROM THE COMMISSION 

European financial supervision 

Text with EEA relevance 

1. 

INTRODUCTION 

Experience of the financial crisis has exposed important failures in financial supervision, both 
in  particular  cases  and  in  relation  to  the  financial  system  as  a  whole.  Current  supervisory 
arrangements proved incapable of preventing, managing and resolving the crisis. Nationally-
based  supervisory  models  have  lagged  behind  the  integrated  and  interconnected  reality  of 
today's  European  financial  markets,  in  which  many  financial  firms  operate  across  borders. 
The  crisis  exposed  serious  failings  in  the  cooperation,  coordination,  consistency  and  trust 
between national supervisors. 

The  Commission  has  been  closely  involved  in  coordinating  the  substantial  interventions  by 
Member  States  to  restore  confidence  in  financial  institutions  through  guarantee  schemes, 
injection of additional capital and measures to relieve balance sheets of impaired assets, while 
ensuring that beneficiary institutions take the necessary steps to return to viability. This effort 
should be complemented by steps to address the failures in supervision revealed by the crisis. 

In November 2008, the Commission mandated a High Level Group chaired by Mr Jacques de 
Larosière  to  propose  recommendations  to  the  Commission  on  how  to  strengthen  European 
supervisory arrangements to better protect its citizens and rebuild trust in the financial system. 
As one of the two largest financial markets in the world, the EU also has a clear responsibility 
to promote global financial stability and security – a role that it can only perform if it has a 
strong supervisory and regulatory framework itself.  

The final report presented by the de Larosière Group on 25 February 2009 set out a balanced 
and pragmatic vision for a new system of European financial supervision. At the core of this 
vision are proposals to strengthen cooperation and coordination between national supervisors 
including  through  the  creation  of  new  European  Supervisory  Authorities,  and,  for  the  first 
time, a European level body charged with overseeing risk in the financial system as a whole. 

In  the  Communication  "Driving  European  Recovery"  of  4  March  20091,  the  Commission 
welcomed  and  supported  the  main  thrust  of  these  recommendations2.  Building  on  the 
recommendations  of  the  de  Larosière  report,  the  Communication  set  out  an  action  plan  for 
reforming  the  way  financial  markets  are  regulated  and  supervised.  The  Commission  has 
already  taken  a  series  of  measures  to  implement  the  regulatory  reform,  including  important 
initiatives  on  alternative 
including  hedge  funds,  and  executive 
remuneration. Further measures on capital requirements for banks will follow in June. 

investment  funds, 

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Commission  Communication  of  4  March  2009  to  the  Spring  European  Council,  "Driving  European 
Recovery" - COM(2009) 114. 
See the report of the High-Level Group on Financial Supervision in the EU published on 25 February 
2009. The Group was chaired by Mr Jacques de Larosière.  

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Given  the  urgent  need  for  parallel  action  on  supervision,  the  Commission  proposed  an 
accelerated timetable for delivering on the reform of EU financial supervision. Discussions in 
the  European  Council,  the  Council  and  the  European  Parliament,  as  well  as  a  public 
consultation,  have  demonstrated  a  broad  consensus  about  the  need  for  reform  and  the 
objectives to be achieved in line with the de Larosière report and the Commission's proposals 
for its follow-up.  

This Communication is a key milestone and sets out the basic architecture for a new European 
financial  supervisory  framework.  The  Commission  invites  the  European  Council  to  endorse 
this architecture, as set out in the conclusions. It is envisaged that the legislative changes to 
give effect  to  the  framework  for EU  supervision set out in this document will follow in the 
autumn of this year, after further consultation of stakeholders, and should be adopted in time 
for the renewed supervisory framework to be up and running during 2010.  

The  Commission  welcomes  reactions  from  stakeholders  to  this  Communication  by  15  July 
2009 at the latest. 

2. 

A NEW SUPERVISORY FRAMEWORK FOR THE EU 

As announced in the Communication of 4 March 2009, the Commission will propose that an 
enhanced European financial supervisory framework should be composed of two new pillars 
(see the figure in the Annex):  

–  a  European  Systemic  Risk  Council  (ESRC)  which  will  monitor  and  assess  potential 
threats  to  financial  stability  that  arise  from  macro-economic  developments  and  from 
developments within the financial system as a whole ("macro-prudential supervision"). To 
this  end,  the  ESRC  would  provide  an  early  warning  of  system-wide  risks  that  may  be 
building  up  and,  where  necessary,  issue  recommendations  for  action  to  deal  with  these 
risks.  The  creation  of  the  ESRC  will  address  one  of  the  fundamental  weaknesses 
highlighted  by  the  crisis,  which  is  the  vulnerability  of  the  financial  system  to 
interconnected, complex, sectoral and cross-sectoral systemic risks; and 

–  a European System of Financial Supervisors (ESFS) consisting of a robust network of 
national  financial  supervisors  working  in  tandem  with  new  European  Supervisory 
Authorities to safeguard financial soundness at the level of individual financial firms and 
protect  consumers  of  financial  services  ("micro-prudential  supervision").  The  new 
European  network  will  be  built  on  shared  and  mutually  reinforcing  responsibilities, 
combining nationally based supervision of firms with centralisation of specific tasks at the 
European  level  so  as  to  foster  harmonised  rules  as  well  as  coherent  supervisory  practice 
and enforcement. This network should be based on the principles of partnership, flexibility 
and subsidiarity. It would aim to enhance trust between national supervisors by ensuring, 
inter  alia,  that  host  supervisors  have  an  appropriate  say  in  setting  policies  relating  to 
financial  stability  and  consumer  protection,  thereby  allowing  cross-border  risks  to  be 
addressed more effectively. 

Implementing  both  pillars  of  the  new  supervisory  system  is  essential:  to  achieve  valuable 
synergies; to mutually reinforce the impact on financial stability; to ensure a fully connected 
macro-micro  supervisory  framework.  It  would  be  inefficient  to  reinforce  EU  financial 
services  regulation,  while  preserving  a  supervisory  system  that  has  showed  multiple 
deficiencies in this crisis. In parallel, differences in the national transposition of Community 
law  stemming  from  exceptions,  derogations,  additions  or  ambiguities  in  current  directives 

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must  be  identified  and  removed,  so  that  one  harmonised  core  set  of  standards  (a  single 
rulebook)  can  be  defined  and  applied  throughout  the  EU  by  all  supervisors.  This  process 
could  be  strengthened  by  introducing  more  directly  applicable  rules  at  the  EU  level,  where 
possible.  

The  new  European  financial  supervisory  framework  must  be  fully  accountable  to  political 
authorities  in  the  EU.  It  must  develop  a  common  supervisory  culture;  be  sensitive  to  the 
interests of all Member States – and the need for a balanced, strengthened confidence building 
relationship  between  home  and  host  authorities.  It  must  be  a  system  that  is  based  on  high 
supervisory standards, applied equivalently, fairly and consistently to all market actors, while 
respecting the independence of supervisors to carry out their work.  

With  this  initiative,  the  EU  is  not  just  responding  to  its  calls  in  the  G20  framework  for 
international action to build a stronger, more globally consistent, regulatory and supervisory 
system  for  the  future  financial  sector3,  but  also  setting  out  a  modern  and  comprehensive 
regional framework, whose principles should be taken up at international level. 

3. 

EUROPEAN SYSTEMIC RISK COUNCIL (ESRC) 

3.1. 

The case for reform of macro-prudential supervision 

The  weaknesses  of  the  present  arrangements  for  macro-prudential  supervision  have  had 
dramatic  consequences  across  the  global  financial  system.  Many  of  the  imbalances  that 
accumulated  in  the  global  financial  system  before  the  crisis  can  be  attributed  to  excessive 
credit  expansion  and  surging  asset  price  inflation,  amid  a  generalised  under-pricing  of 
financial  risk  in  a  period  of  sustained  non-inflationary  economic  growth.  Against  this 
background,  the  G20  has  decided  to  reinforce  the  global  arrangements  for  safeguarding 
financial  stability  at  the  global  level,  with  the  newly  established  Financial  Stability  Board 
(FSB)4 expected to collaborate closely with the International Monetary Fund (IMF) to provide 
early warnings of macro-prudential risks at the global level. Meanwhile, the US Government 
plans to put in place a powerful body with responsibility for macro-prudential supervision of 
its domestic financial system. 

Similarly, the EU needs a specific body responsible for macro-prudential supervision across 
the  EU  financial  system,  which  would  identify  risks  to  financial  stability  and,  where 
necessary, issue risk warnings and/or recommendations for action to address such risks. The 
present  EU  arrangements  place  too  little  emphasis  on  the  macro-prudential  side.  Macro-
prudential analysis is fragmented, executed by different authorities at different levels with no 
mechanism  to  ensure  that  macro-prudential  risk  warnings  and/or  recommendations  are 
followed  up  and  translated  into  action.  In  the  run-up  to  this  crisis,  interconnected  complex 
market risks were not properly analysed, nor were the consequences drawn for regulatory and 
supervisory policy. These fragmented arrangements must change because the economic costs 
of failure in macro-prudential supervision, as this crisis has shown, can be heavy. 

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See the London Summit Statement of 2 April 2009. 
The successor to the Financial Stability Forum (FSF). 

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3.2. 

Role and responsibilities of the ESRC 

The  Commission  will  propose  that  the  ESRC  should  be  established  as  a  new  independent 
body,  responsible  for  safeguarding  financial  stability  by  conducting  macro-prudential 
supervision at the European level. In order to perform this role, the ESRC should: 

Role of ESRC 

–  collect and analyse all information relevant for monitoring and assessing potential threats 
to  financial  stability  that  arise  from  macro-economic  developments  and  developments 
within the financial system as a whole; 

–  identify and prioritise such risks; 

–  issue risk warnings where risks appear to be significant; 

–  where necessary give recommendations on the measures to be taken in reaction to the risks 

identified; 

–  monitor the required follow-up to warnings and recommendations, and 

–  liaise effectively with the IMF, the FSB and third country counterparts. 

The main task of the ESRC would be assessments of stability across the EU financial system 
in  the  context  of  macro-economic  developments  and  general  trends  in  financial  markets.  If 
significant  stability  risks  are  foreseen,  the  ESRC  would  provide  early  warnings  and,  where 
appropriate, issue recommendations for remedial action. The warnings and recommendations 
issued by the ESRC could be of a general nature or could concern individual Member States 
and  there  would  be  a  specified  timeline  for  the  relevant  policy  response.  These  warnings 
and/or recommendations would be channelled through the ECOFIN Council and/or the new 
European  Supervisory  Authorities.  The  ESRC  would  also  be  responsible  for  monitoring 
compliance with its recommendations, based on reports from the addressees. 

The  ESRC  would  not  have  any  legally  binding  powers.  However,  the  ESRC  would  be 
expected  to  exert  major  influence  on  the  addressees  of  warnings/recommendations  through 
the  high  quality  of  its  analysis  and  the  participation  in  its  work  of  all  EU  central  bank 
governors  and  supervisors  and  the  Commission.  The  addressees  of  warnings  and 
recommendations  would  therefore  be  expected  to  act  on  them  unless  inaction  could  be 
adequately  justified.  In  short,  the  follow-up  to  warnings  and  recommendations  would  be 
ensured by an "act or explain" mechanism. 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. 

The  ESRC  would  be  fully  accountable  to  the  Council  and  the  European  Parliament. 
Accountability  would  take  the  form  of  regular  (i.e.,  at  least  bi-annual)  reporting  to  these 
institutions.  More  frequent  reporting  would  be  likely  in  the  event  of  widespread  financial 
distress,  although  it  should  be  noted  that  the  ESRC  would  not  have  any  direct  crisis 
management responsibilities. 

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3.3. 

Composition and functioning of the ESRC 

Central  banks  should  have  a  leading  role  in  macro-prudential  supervision.  The  main 
responsibilities of central banks relate to the maintenance of monetary and financial stability. 
Indeed, the analysis necessary for carrying out macro-prudential tasks can partly be based on 
the  economic  and  monetary  analyses  undertaken  by  central  banks  for  the  formulation  of 
monetary  policy,  although  additional  information  and  analysis  of  vulnerabilities  in  the 
financial system would also be required. Furthermore, central banks have a crucial financial 
safety  net  function  through  their  role  as  lenders  of  last  resort.  As  safeguarding  financial 
stability  is  a  fundamental  responsibility  of  central  banks,  the  Commission  will  propose  that 
the  ESRC  would  include  the  central  bank  governors  of  the  27  Member  States  and  the 
President  of  the  ECB.  Participation  in  the  ESRC  will  not  prejudice  any  existing  financial 
stability responsibilities. 

The  participation  of  micro-prudential  supervisors  in  the  work  of  the  ESRC  is  also 
indispensable.  The  interconnectedness  of  financial  institutions  and  markets  clearly  implies 
that the monitoring and assessment of potential systemic risks should be based on a broad set 
of  relevant  macro-economic  and  micro-financial  data  and  indicators.  Micro-prudential 
supervisors have detailed knowledge of developments in financial markets and in major firms 
and will have critical information to assess stability risks. For these reasons, the chairpersons 
of the three European Supervisory Authorities of the ESFS as well as senior representatives of 
the  national  supervisory  authorities  should  be  involved.  To  ensure  that  the  ESRC  can  work 
efficiently,  the  membership  of  supervisors  in  the  ESRC  would  be  limited  to  the  three 
chairpersons 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).  The  representative  accompanying  the  central  bank  governor 
could vary from meeting to meeting, depending on the issues to be discussed by the ESRC, in 
particular in those Member States where there are several supervisory authorities.  

A member of the Commission would also have membership in the ESRC, notably because of 
the Commission's Treaty-based responsibilities for macro-economic surveillance. It regularly 
monitors  and  analyses  macroeconomic  developments  and  policies  and  identifies  macro-
financial  risks.  It  has  both  the  necessary  country-specific  expertise  and  an  EU-wide 
perspective and so would be well placed to contribute to the work of the ESRC.  

Participation  of  Finance  Ministries  in  the  ESRC  could  be  perceived  as  blurring  its  role  in 
providing  independent  technical  analysis  of  macro-prudential  risks.  However,  as  budgetary 
and/or  taxation  policies  can  contribute  to  or  mitigate  financial-stability  risks,  the  Economic 
and  Financial  Committee  (EFC)  chairperson  would  represent  the  finance  ministries  by 
participating  as  an  observer  in  ESRC  meetings.  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.  

Meetings of the ESRC would be held at least quarterly, with more frequent meetings held in 
times of stress in the financial system. 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  the  President  of  the 
ECB, national central bank governors, the chairmen of the European Supervisory Authorities 
and the Commission member. Votes would not be weighted and decisions would be taken by 
a simple majority.  

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In line with the recommendation made in the de Larosière report, the chairperson of the ESRC 
should be the ECB President (in which case, the chairperson of the ESRC being independent, 
the ECB Vice-President should also be a member). As the chairperson comes from a central 
bank  within  the  Eurosystem,  it  would  seem  appropriate  that  a  vice-chairperson  should  be 
elected from among those Member States outside of the euro area.  

A small steering committee – consisting of the ESRC chairperson and vice-chairperson, five 
additional  central  bank  members  of  the  ESRC,  the  chairpersons  of  the  new  European 
Supervisory Authorities and the Commission member - should be established to prepare and 
ensure  efficient  ESRC  meetings.  In  addition,  an  advisory  technical  committee  should  be 
established to support the ESRC, including preparing detailed technical analysis of financial 
stability issues. In performing its duties, it would seem advisable that the ESRC should also 
seek the advice of private-sector stakeholders, including consumer representatives. The ECB 
will  provide  the  Secretariat  to  the  ESRC  as  well  as  analytical,  administrative  and  logistic 
support. 

The ESRC would closely collaborate with the IMF, the FSB and third country counterparts in 
the context of an early warning system at the global level, for example by drawing attention to 
potential risks in the global financial system outside of the EU. In this way, the ESRC would 
be expected to increase the influence of the EU in any global risk warning system. 

Composition of the European Systemic Risk Council (ESRC) 

Members: 

–  Chairperson: President of the ECB; 

–  Vice-Chairperson (elected by ESRC members); 

–  Governors of the 27 national central banks; 

–  Vice-President of the ECB; 

–  Chairpersons of the three European Supervisory Authorities;  

–  Member of the European Commission. 

Observers: 

–  A  representative  of  the  national  supervisory  authorities,  accompanying  the  central  bank 

Governor in a 1+1 formula; 

–  Chairperson of the EFC. 

3.4. 

Legal basis for the ESRC 

Only  with  arrangements  in  place  that  properly  acknowledge  the  interdependence  between 
micro-  and  macro-prudential  risks  can  all  stakeholders,  e.g.  financial  institutions,  investors 
and consumers, have sufficient confidence to engage in cross-border financial activities. Too 
often in the past, the focus of prudential supervision has been exclusively at the micro-level, 
with supervisors assessing the balance sheets of individual financial institutions without due 
consideration  for  interactions  between  institutions  and  between  institutions  and  the  broader 

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financial system. Providing this broader perspective is the responsibility of macro-prudential 
supervisors.  These  supervisors  shall  monitor  and  assess  potential  financial-stability  risks 
arising from developments that can impact on a sectoral level or at the level of the financial 
system as a whole. By addressing such risks, the ESRC would be an essential building block 
for an integrated EU supervisory structure necessary to promote timely and consistent policy 
responses among the Member States thus preventing diverging approaches and so improve the 
functioning of the Internal Market. In addition, as an integral part of the legal and institutional 
framework, the ESRC will facilitate the consistent, coherent and effective implementation and 
application of Community rules for cross-border financial services.  

Having considered a range of possible options, the Commission considers it appropriate that 
the ESRC should be established on the basis of Article 95 of the EC Treaty as a body without 
legal  personality.  This  legal  basis  would  allow  the  ESRC  to  have  the  core  features  outlined 
above  and  to  have  a  mandate  covering  the  whole  financial  sector  without  exceptions, 
including insurance. Moreover, it would allow the ESRC, together with the ESFS, to form a 
common innovative framework for financial supervision, while maintaining a clear distinction 
of responsibilities between the ESRC and the other institutions. This choice of legal base does 
not prevent the conferring of responsibilities on the ECB in respect of tasks in respect of the 
ESRC by means of an act adopted on the basis of Article 105(6) of the EC Treaty. 

4. 

EUROPEAN SYSTEM OF FINANCIAL SUPERVISORS (ESFS) 

4.1. 

The case for micro-prudential reforms 

On micro-prudential supervision, the EU has reached the limits of what can be done with the 
present  status  of  the  Committees  of  European  Supervisors5  (Level  3  Committees)  -  which 
remain  advisory  bodies  to  the  Commission.  In  spite  of  a  number  of  improvements  to  these 
Committees, 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  cooperation  and  information  exchange  between 
national supervisory authorities; where joint action by national authorities requires a tour de 
force  to  take  account  of  the  patchwork  of  regulatory  and  supervisory  requirements;  where 
national solutions are most often the only feasible option in responding to European problems, 
where different interpretations of the same legal text abound. The new ESFS will be designed 
to  overcome  these  deficiencies  and  provide  a  system  that  is  in  line  with  the  objective  of  a 
stable and single EU financial market for financial services – linking national supervisors into 
a strong Community network.  

4.2. 

Role and responsibilities of the ESFS 

The  ESFS  should  become  therefore  an  operational  European  network  with  shared  and 
mutually  reinforcing  responsibilities.  At  the  EU-level,  the  three  existing  Committees  of 
Supervisors  would  be  replaced  by  three  new  European  Supervisory  Authorities,  i.e.,  a 
European  Banking  Authority  (EBA),  a  European  Insurance  and  Occupational  Pensions 
Authority (EIOPA), and a European Securities Authority (ESA), which would each have legal 
personality. These new European Supervisory Authorities will take on all the missions of the 

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Committee  of  European  Banking  Supervisors  (CEBS),  Committee  of  European  Insurance  and 
Occupational  Pensions  Committee  (CEIOPS)  and  the  Committee  of  European  Securities  Regulators 
(CESR), also often known as the "Lamfalussy level 3 Committees". 

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current  Committees  of  Supervisors6,  but  in  addition  have  increased  responsibilities,  defined 
legal  powers  and  greater  authority  (see  below).  They  would  also  contribute  to  the 
development  of  a  single  set  of  harmonised  rules,  improve  the  supervision  of  cross-border 
institutions by developing common supervisory requirements and approaches and help settle 
possible disputes between national supervisors.  

The focal point for day to day supervision would remain at the national level, with national 
supervisors remaining responsible for the supervision of individual entities, for example with 
respect  to  capital  adequacy.  This  reflects,  for  the  time  being,  that  the  financial  means  for 
rescuing financial institutions remains at the Member State level and with national tax payers, 
as  the  current  crisis  has  demonstrated.  For  cross-border  institutions,  the  colleges  of 
supervisors which are being set up7 will be the lynchpin of the supervisory system and should 
play  an  important  role  in  ensuring  a  balanced  flow  of  information  between  home  and  host 
authorities.  The  European  Supervisory  Authorities  should  participate  in  meetings  of  the 
colleges  of  supervisors,  as  observers,  so  as  to  contribute  to  the  emergence  of  a  common 
supervisory  culture  and  consistent  supervisory  practices.  Set  up  in  this  way,  the  ESFS  will 
combine the advantages of an overarching European framework for financial supervision with 
the expertise of local supervisory bodies that are closest to the institutions operating in their 
jurisdictions. 

In  order  for  the  ESFS  to  work  effectively,  flanking  measures  and  changes  to  the  sectoral 
legislation will be needed to ensure a more harmonised set of financial regulations. The goal 
will be to bring about more harmonisation in the rules that have to be applied by supervisors 
as well as greater consistency in the national powers and sanctions available to them. On the 
latter, the Commission will come forward with proposals in the autumn.  

To achieve its objectives, the new European Supervisory Authorities will need to be equipped 
to fulfil the following functions: 

(1) 

Ensure a single set of harmonised rules 

The Authorities will:  

–  develop binding technical standards in specific areas and on the basis of criteria which will 
be  specified  in  Community  legislation  (e.g.  supervisory  standards  for  colleges  of 
supervisors  and  technical  standards  for  internal  model  validation).  Such  standards  shall 
apply within a fixed period of time, provided the Commission endorses by non-opposition, 
and 

–  draw up interpretative guidelines, which the competent national authorities would apply in 
taking  individual  decisions,  notably  as  regards  the  licensing  and  supervision  of  financial 
institutions. 

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e.g., giving technical advice to the European Commission. 
Regarding the major financial groups in the EU, colleges already exist or are being set up in 2009. 

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(2) 

Ensure consistent application of EU rules 

Even with a single set of harmonised rules, the application of these rules may, in occasional 
cases,  lead  to  differences  of  opinion  on  the  application  of  Community  legislation.  The 
European  Supervisory  Authorities  should  therefore  have,  in  cases  clearly  specified  in 
Community legislation, the means to ensure coherent application of Community legislation.  

–  Disagreement between national supervisors 

In  the  case  of  diverging  opinions  between  national  supervisory  authorities,  the  European 
Supervisory  Authorities  should  facilitate  a  dialogue  and  assist  the  supervisors in  reaching  a 
joint  agreement.  If,  after  a  phase of  conciliation,  the  latter  have  not  been  able  to  reach  an 
agreement, the European Supervisory Authorities should, through a decision, settle the matter. 
However,  this  would  clearly  be  a  last  resort  option  as  in  most  cases  the  respective  national 
authorities should be able to come to an agreement in the preceding conciliation procedure.  

–  Manifest breach of Community Law 

A  mechanism  should  also  be  put  in  place to  address  behaviour  by  a  national  supervisory 
authority  which  is  considered  to  be  manifestly  diverging  from  the  existing  Community 
legislation.  The  European  Supervisory  Authorities,  on  their  own  initiative  or  upon  request 
from one or more national supervisors or from the Commission, would investigate the issue 
and,  if  necessary,  adopt  a  recommendation  for  action  addressed  to  the  relevant  national 
supervisor.  

Within  the  general  duty  of  compliance  with  Community  legislation  the  national  authority 
would be called to comply with the recommendation within a fixed period of time. On the rare 
occasion that the situation would pertain, the European Supervisory Authorities would inform 
the Commission of the particular case. The Commission could, shortly after the adoption of 
the  European  Supervisory  Authorities'  recommendation,  take  a  decision,  requiring  the 
national supervisory authority to either take specific action or to refrain from action in order 
to ensure full compliance with the acquis communautaire in the area of financial services.  

In  order  to  overcome  inaction  in  relation  to  the  implementation  of  Community  law  or 
delaying of action by national supervisors or in case of need for urgent action, the European 
Supervisory  Authorities  could  also  be  empowered  to  adopt  decisions  directly  applicable  to 
financial  institutions  in  relation  to  requirements  stemming  from  EU  Regulations  relating  to 
the prudential supervision of financial institutions and markets as well as the stability of the 
financial system. These decisions would be without prejudice to the initiation of infringement 
proceedings by the Commission against Member States.  

(3) 

Ensure a common supervisory culture and consistent supervisory practices 

The  new  European  Supervisory  Authorities  will  build  a  common  European  supervisory 
culture  and  consistent  supervisory  practices,  for  example  by  developing  common  training 
programmes and participating in meetings of the colleges of supervisors as an observer. They 
could  also  promote  the  use  of  delegation  of  tasks  and  responsibilities  from  one  national 
supervisory authority to the other. 

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(4) 

Full supervisory powers for some specific entities 

The European Supervisory Authorities shall be given the responsibility for the authorisation 
and  supervision  of  certain  entities  with  pan-European  reach,  e.g.,  credit  rating  agencies  and 
EU central counterparty clearing houses. These responsibilities could include such powers as 
those  of  investigation,  on-site  inspections  and  supervisory  decisions.  These  responsibilities 
would  be  defined  in  sectoral  legislation  (e.g.,  the  Regulation  on  Credit  Rating  Agencies). 
Apart  from  reinforcing  the  effectiveness  of  supervision,  this  could  enhance  efficiency  by 
creating  a  'one-stop  shop'  for  these  supervised  institutions.  The  European  Supervisory 
Authorities  could  also  be  involved  in  the  prudential  assessment  of  European  mergers  and 
acquisitions throughout the financial sector8. 

(5) 

Ensure a coordinated response in crisis situations 

The  European  Supervisory  Authorities  should  have  a  strong  coordinating  role  in  crisis 
situations:  they  should  facilitate  cooperation  and  exchange  of  information  between  the 
competent authorities, act as mediator when 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. As for the latter, the introduction of a European mandate by mid-2009 will 
allow  national  authorities  to  consider  financial  stability  concerns  in  other  Member  States 
when  exercising  their  duties.  In  this  respect  progress  on  burden  sharing  and  resolution 
mechanisms is critical to reinforcing trust between national authorities and strengthening the 
functioning  of  the  ESFS,  work  which  must  advance  as  soon  as  possible.  In  specific  crisis 
situations,  the  European  Supervisory  Authorities  could  have  the  power  to  adopt  some 
emergency decisions (e.g. on short-selling) - the scope of these emergency procedures should 
be defined in Community legislation. 

(6) 

Collect micro-prudential information 

The  European  Supervisory  Authorities  should  be  responsible  for  the  aggregation  of  all 
relevant  micro-prudential  information  emanating  from  national  supervisors.  To  this  end  a 
central European database should be established and managed by the European Supervisory 
Authorities.  The  information  would  be  available  for  the  relevant  authorities  in  colleges  of 
supervisors and may be forwarded in aggregated and/or anonymous format to the ESRC (see 
section 5). To this end, existing sectoral legislation may need to be amended. 

(7) 

Undertake an international role 

Without prejudice to the institutional competences of the European Institutions, the European 
Supervisory  Authorities  could  be  given  a  certain  role  as  regards  international  activities, 
including technical arrangements with international organisations and with the administrations 
of  third  countries  at  its  level.  The  European  Supervisory  Authorities  could  also  assist  the 
Commission  in  preparing  equivalence  decisions  pertaining  to  supervisory  regimes  in  third 
countries. 

8 

The  Commission  would  remain  exclusively  competent  to  apply  the  EU  State  aid  rules  and,  for 
Community dimension mergers, to assess the competition aspects of such transaction in line with the 
EC Merger Regulation. 

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(8) 

Safeguards 

The framework for the exercise of the above competences will be specified exhaustively and 
in precise detail in the relevant sectoral legislation. The conferring of these competences will 
be  in  full  conformity  with  Articles  226  and  228  of  the  Treaty.  Without  prejudice  to  the 
application of Community law, and recognising the potential liabilities that may be involved 
for Member States, decisions under the above mechanisms shall not directly impinge on the 
fiscal  responsibilities  of  the  Member  States.  Moreover,  any  decision  by  the  European 
Supervisory  Authorities  or  the  Commission  must  be  subject  to  review  by  the  Community 
Courts. 

4.3. 

Composition and operational structure of the ESFS 

The  network  approach  to  supervision  described  above,  with  the  new  European  Supervisory 
Authorities working in tandem with the national financial supervisors, is proposed in line with 
the de Larosière report, as opposed to solutions such as full centralisation of supervision at the 
EU level, on which there is no consensus. However, given the urgency to improve the quality 
and coherence of supervision in Europe, the Commission considers it necessary to accelerate 
the preparatory work proposed by the de Larosière Group, so that the strengthened framework 
will be up and running in 2010. 

The Commission recognises that there is a vigorous – and so far inconclusive - debate within 
many  countries  in  the  world  on  the  most  appropriate  supervisory  structure,  with  options 
including: (i) one single supervisor for all sectors, (ii) separate supervisors for prudential and 
conduct-of-business  supervision  for  all  financial  institutions  combined  (the  so-called  "twin 
peaks" model), and (iii) a sectoral approach (i.e., separate supervisors for banking, insurance 
companies and securities activities). However, in the Commission's view, at this point in time 
it is preferable to maintain the latter approach at European level, building upon the existing 
structures given that there is no persuasive evidence to suggest that other structures would be 
more efficient for the specific competences which are proposed for the European Supervisory 
Authorities. These competences are not mainly composed of direct supervision, and therefore 
the  arguments  and  evidence  adduced  in  national  debates  on  supervisory  structure  cannot 
necessarily  be  applied  to  them.  For  these  reasons,  the  Commission will propose  to build on 
the existing structure and, when necessary, allow it to evolve over time, with a review after a 
fixed number of years.  

the 

Within the proposed structure, cross-sectoral cooperation will however be fundamental so as 
to reflect the relevant market trends and realities. To the extent that the degree of convergence 
three  European  Supervisory  Authorities  and  a 
between  sectors  will  continue, 
representative of the Commission would increasingly need to evaluate the respective sectoral 
regimes  to  identify  common  principles  and  understanding  possible  differences.  An 
overarching  steering  committee  should  therefore  be  formally  introduced  in  the  structure  to 
ensure mutual understanding, cooperation and consistent supervisory approaches between the 
three  new  European  Supervisory  Authorities  in  addressing  cross-sectoral  challenges, 
including  financial  conglomerates,  and  ensuring  a  level  playing  field.  In  addition,  each 
European Supervisory Authority should have the possibility to participate in meetings of the 
other European Supervisory Authorities as an observer. 

Each  new  Authority  would  have  a  Board  of  Supervisors  comprised  of  the  highest-level 
representatives  from  the  appropriate  national  supervisory  authorities  and  chaired  by  the 
chairperson  of  the  respective  European  Supervisory  Authority.  Representatives  from  the 

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Commission,  the  ESRC  and  the  relevant  supervisory  authorities  from  EFTA-EEA  countries 
should take part in the Board of Supervisors as observers. However, they would not be able to 
attend  any  discussions  pertaining  to  individual  institutions.  In  line  with  current  practice,  a 
Management Board should also be set up to deal with general operational issues (budget etc.) 
and would include the Commission. The chairpersons and secretary generals of the European 
Supervisory  Authorities  should  be  full-time  independent  professionals.  The  chairperson  will 
be nominated after an open competition. Appointment would be confirmed by the European 
Parliament and should be valid for a period of 5 years.  

Composition of the European System of Financial Supervisors 

I. 

Steering Committee: 

–  Representatives of the three European Supervisory Authorities and the Commission. 

II. 
Three  European  Supervisory  Authorities  [the  European  Banking  Authority 
(EBA), the European Insurance and Occupational Pensions Authority (EIOPA), and the 
European Securities Authority (ESA)]: 

Board of Supervisors of each European Supervisory Authority: 

–  Chairperson of the European Supervisory Authorities, and 

–  Chairpersons from the appropriate national supervisory authorities. 

Observers: 

–  A Commission representative; 

–  A representative of the ESRC, and 

–  A  representative  from  the  appropriate  national  supervisory  authority  of  each  EFTA-EEA 

country. 

Management Board of each European Supervisory Authority: 

–  Representatives from the appropriate national supervisory authorities and the Commission. 

III.  National supervisory authorities 

The  Board  of  Supervisors  should  meet  on  a  regular  basis,  with  additional  meetings  held  in 
times of stress. The European Supervisory Authorities’ decisions on technical rules would be 
taken,  through  the  board  structure,  by  qualified  majority  based  on  the  Treaty  weighting  for 
Member States. Separate arrangements should be considered for dealing with other functions 
of  the  European  Supervisory  Authorities.  For  example,  decisions  on  the  application  of 
existing laws should be taken by simple majority on the basis of "one person, one vote". 

The  European  Supervisory  Authorities  would  each  have  their  own  budget,  subject  to 
discharge by the European Parliament. Their resources could stem from the EU budget as well 
other sources such as contributions by the national authorities. Any budgets would have to be 
commensurate  with 
independence.  The  European 
Supervisory  Authorities  should  liaise  in  a  structured  way  with  all  relevant  stakeholders, 
including consumers. 

their  responsibilities,  and  ensure 

Ensuring  the  independence  of  these  European  Supervisory  Authorities  will  be  crucial.  They 
would  need  the  highest  degree  of  independence  vis-à-vis  national  authorities  other  than 

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supervisors and vis-à-vis the European Institutions, which should not interfere in the decisions 
of  the  European  Supervisory  Authorities.  The  European  Supervisory  Authorities  would 
however be fully accountable to the Council, the European Parliament and the Commission. 
Transparency  would  be  a  key  instrument  to  make  this  work  and  the  European  Supervisory 
Authorities  would  have  to  report  formally  to  the  European  Institutions  on  a  frequent  basis 
(e.g., at least bi-annually). 

4.4. 

Legal basis for the ESFS  

The legal basis for establishing the European Supervisory Authorities should be the provision 
of the EC Treaty which constitutes the specific legal basis for the policy they will be called 
upon to implement. 

The  financial  and  economic  crisis  has  created  risks  to  the  stability  of  the  internal  market. 
Restoring and maintaining a stable and reliable financial system is an absolute prerequisite to 
preserving  trust  and  coherence  in  the  internal  market,  hence  to  preserve  and  improve  the 
conditions  for  the  establishment  of  a  fully  integrated  and  functioning  internal  market  in  the 
field  of  financial  services.  Moreover,  deeper  and  more  integrated  financial  markets  offer 
better  opportunities  for  financing  and  risk  diversification,  and  thus  help  to  improve  the 
capacity of the economies to absorb shocks. Financial integration and stability are therefore 
mutually reinforcing. 

The  establishment  of  the  ESFS,  and  the  three  European  Supervisory  Authorities,  will  be 
accompanied by the development of a single rule book which will ensure uniform application 
of rules in the EU and thus contribute to the functioning of the internal market. The task of the 
European  Supervisory  Authorities  will  be  to  assist  the  national  authorities  in  the  consistent 
interpretation and application of the Community rules.  

The  Court  of  Justice  has  acknowledged9  that  Article  95  of  the  EC  Treaty  relating  to  the 
adoption  of  measures  for  the  approximation  of  legislation  for  the  establishment  and 
functioning  of  the  internal  market  provides  an  appropriate  legal  basis  for  setting  up  a 
"Community  body  responsible  for  contributing  to  the  implementation  of  a  process  of 
harmonisation",  when  the  tasks  conferred  on  such  a  body  are  closely  linked  to  the  subject-
matter of the acts approximating the national legislations. 

The tasks to be conferred on the European Supervisory Authorities being thus closely linked 
to the measures put in place as a response to the financial crisis and to those announced in the 
Communication on "Driving European recovery", they can, thus, in line with the Court's case 
law, be established on the basis of Article 95 of the EC Treaty. 

5. 

COOPERATION BETWEEN THE ESFS AND THE ESRC 

The proposed framework for EU supervision can only work if the ESRC and ESFS cooperate 
efficiently.  Indeed,  the  objective  of  the  reform  is  to  ensure  a  smoother  interaction  of 
supervision at the macro-prudential and micro-prudential levels. In fulfilling its role as macro-
prudential  supervisor,  the  ESRC  would  need  a  timely  flow  of  harmonised  micro-level  data, 
while  micro-prudential  supervision  by  national  authorities  would  benefit  from  the  ESRC’s 
insights into the macro-prudential environment. Binding cooperation and information sharing 

9 

See CJCE, C-217/04, pt. 44. 

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procedures between the "micro" and the "macro" levels would be of fundamental importance, 
if the pitfalls from the past are to be avoided. 

In order to identify and prioritise risks to the stability of the EU financial system, the ESRC 
would  need  to:  (i)  receive  relevant  micro-prudential  data  -  notably  on  large  and  complex 
cross-border groups- from the ESFS, and (ii) have the possibility to launch ad-hoc surveys on 
specific  issues  requiring  direct  input  from  national  supervisors  and/or  the  market  operators. 
The  Commission  will  propose  that  the  necessary  information  would  be  passed  to  the 
European Supervisory Authorities by the national supervisory authorities in application of the 
rules  establishing  the  new  European  Supervisory  Authorities.  The  powers  to  receive  all 
information relevant for financial stability could be attributed to the ESRC by a combination 
of the legal instrument establishing the ESRC and the legal instruments establishing the new 
European  Supervisory  Authorities.  Meanwhile,  the  Regulations  establishing  the  new 
European  Supervisory  Authorities  would  require  them  to  periodically  (e.g.,  on  a  monthly 
basis) provide the ESRC with aggregated and relevant anonymous disaggregated data on all 
financial  institutions  and  markets,  but  notably  on  large  and  complex  cross-border  groups. 
Given  the  sensitivity  of  the  data  and  information,  ensuring  necessary  confidentiality  in  the 
cooperation between the ESRC and the ESFS would be crucial and adequate legal safeguards 
should  be  in  place.  In  addition,  for  the  colleges  to  receive  up-to-date  information  on  the 
macro-prudential  environment  in  which  individual  institutions  operate,  the  participation  of 
ESRC representatives as observers could be envisaged.  

6. 

CONCLUSION 

The Commission invites the European Council to: 

–  endorse  the  creation  of  a  new  European  Systemic  Risk  Council  (ESRC),  chaired  by  the 
ECB President and including governors of national central banks, the chairpersons of the 
three European Supervisory Authorities and a member of the European Commission. There 
should  also  be  close  involvement  of  national  supervisory  authorities  and  the  chair  of  the 
Economic and Financial Committee in the work of the ESRC; 

–  agree  that  the  ESRC  will  be  charged  with  continuously  assessing  the  stability  of  the 
financial  system  as  a  whole  and  be  given  the  necessary  authority  to  issue  timely 
warnings/recommendations for remedial action and to monitor responses; 

–  agree  on  the  establishment  of  a  new  European  System  of  Financial  Supervisors  (ESFS) 
composed of 3 new European Supervisory Authorities working in a network with national 
supervisory  authorities  to  develop  common  supervisory  approaches  to  the  supervision  of 
all  financial  firms,  to  protect  consumers  of  financial  services  and  to  contribute  to  the 
development  of  a  single  set  of  harmonized  rules.  Inter  alia,  the  ESFS  should  draw  up 
technical standards, help ensure the consistent application of Community law and resolve 
disputes between supervisors;  

–  underline the importance of a truly integrated approach to European financial supervision: 
the need for strong interaction between the ESRC and the ESFS including the exchange of 
micro-prudential information relevant for macro-prudential analysis; the willingness of the 
relevant  parties  to  act  upon  risk  warnings  and/or  recommendations;  and  the  need  for  the 
ESRC to act as an interface with international institutions notably the FSB and IMF; 

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–  welcome the Commission's intention to bring forward, as soon as possible, the legislative 
changes  to  put  in  place  the  new  framework  for  EU  supervision,  on  the  basis  of  the 
orientations  set  out  in  this  Communication  and  after  further  consultation  of  stakeholders, 
so that the necessary measures are adopted in time for the renewed framework to be up and 
running during 2010; 

–  in  addition,  support  the  acceleration  of  work  to  build  a  comprehensive  cross  border 
framework  to  strengthen  the  European  Union's  financial  crisis  management/resolution 
systems, including guarantee schemes and burden sharing.  

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Annex:  

A new European Framework for Safeguarding Financial Stability 

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