a Memorandum of Understanding (MoU) on co-operation in financial crisis situations, which set out principles and procedures for sharing information, views, and assessments, in order to facilitate the pursuit of national mandates and preserve the overall stability of the national financial systems and of the European financial system more broadly. This MoU was replaced in June 2008, by an MoU on cross-border financial stability which provides for further detailed procedures and structures for crisis management, including (1) common principles, including on the sharing of a potential fiscal burden between EU countries; (2) rules regarding the coordination of home-country authorities; (3) the creation of cross-border stability groups, composed of the authorities of various EU countries with a view to enhance preparedness in normal times and facilitate the resolution of a cross-border crisis; (4) a template for Voluntary Specific Cooperation Agreements among authorities, and (5) a template for a Systemic Assessment Framework, offering a common methodology to assess the systemic implications of a crisis.<sup>15</sup> In addition to the MoU, EU-wide cooperation for safeguarding financial stability was based on a number of EU committees. These include: (1) the Financial Stability Table of the Economic and Financial Committee, which meets at least twice a year (spring and autumn) in order to prepare a financial stability assessment for the ECOFIN; (2) the Financial Services Committee, comprising finance ministries‘ representatives, which also provides advice to the ECOFIN; (3) the Banking Supervision Committee of the ESCB, which monitors financial sector developments from a financial stability perspective and promotes cooperation between national central banks, supervisory authorities and the ECB; and (4) the Level 3 Committees (CEBS, CESR and CEIOPS), which also regularly offer an assessment of the risks to financial stability in the EU.

Over time, the European arrangements for safeguarding financial stability have been based on the guiding principle that a decentralized institutional setting mostly based on the exercise of national responsibilities would be able to prevent and manage crises affecting the single financial market. The national authorities of home - and host-country authorities would cooperate in the management of a crisis on the basis of Community legislation and non-binding agreements such as Memorandum of Understanding. However, also due to the potential impact on national fiscal responsibilities, national authorities would preserve full responsibility and discretion in the actions to take to manage a crisis situation.<sup>16</sup> Unfortunately, and as a direct result of the principles and initiatives just described, the pre-crisis EU institutional architecture for safeguarding financial stability (including crisis management and resolution) evolved into an institutional framework with three characteristics revealed by the crisis to be weaknesses if not flaws: _decentralization, segmentation, and overreliance on voluntary cooperation_ .<sup>17</sup>

- First, financial stability functions were _decentralized_ and based in large part on the exercise of national responsibilities by banking supervisors, central banks, treasuries, and deposit insurance schemes—despite the significant integration of European finance.

- Second, pre-crisis financial stability functions were _segmented_ across sectors and Member States.  For example, supervision of banking groups and financial conglomerates

> 15 The 2008 MoU is available at www.ecb.europa.eu.

> 16 See Schinasi and Teixeira, 2006.

> 17 See Schinasi and Teixeira (2006).

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