Another practical example on how to reduce the regulatory burden would be for countries to agree on a common and centralised reporting standard for large cross-border groups. The home-host relationship… The home-host relationship is the underlying theme running through a number of issues in the regulatory debate. Broadly speaking, the home-host relationship is about how we should divide tasks, powers and responsibility between different countries when it comes to supervising, monitoring and, in the worst case, sorting out financial institutions in distress. Formally, the home-host relationship only refers to the division of responsibility between supervisors, which currently is based on the principle of home country control. The home country is the country where the bank is licensed. For a bank, this means that the home country is responsible for supervising the bank and its foreign branches. The home country’s deposit insurance also covers its banks’ foreign branches. In the case of a group, it means that the home country is also responsible for supervising the entire group on a consolidated basis, while the host countries are responsible for their respective subsidiary banks and deposits. At this very moment, the CEBS is drafting the so-called home-host paper giving guidance on how the home-host supervisory relationship should be arranged given existing EU legislation. Even if there are no legally binding rules regarding the relationship between countries in crisis management or crisis resolution, these aspects of regulatory involvement have borrowed the terminology of the supervisory home-host concept.

If we are establishing a central decision-making body anyway, why act through 25 different authorities? Both the first and the second alternatives are half-way compromises trying to please different interests. My own view is that the third alternative, although radical, is the logical solution. There are two main arguments against the idea of a European Financial Supervisor – one relevant and one not very relevant. The not very relevant argument is that the supervisor needs proximity to have knowledge about the markets where the institution operates. First, this is already a problem with the home-host model. Second, this is an organisational problem that can be solved. An EU supervisor would certainly employ staff from all EU countries and have local offices in the national financial centres. For instance, for a regional cross-border banking group, I imagine the supervisory team to be based in the relevant region, perhaps in the same premises as the national FSA, and to consist of staff from that region. The relevant argument against an EU supervisor is that supervisory power ultimately needs to be backed by financial muscle. In the present set-up, the financial muscle derives from the national central bank’s ability to act as a lender of last resort and the government’s ability to raise taxes. The EU lacks such power. However, this problem is hardly unsolvable. For instance, one could think of the EU building up a deposit insurance fund for cross-border banks supervised by the EU supervisor, which would be able to handle all but the largest banking failures.