Friday, 17 October 2008

EU: Monetary policy IX Banking supervision

Only treaty reform could unlock pan-European banking supervision, or even better, cross-sectoral supervision, as we have seen. Short-term, other financial supervision solutions have to be found, within the constraints of the Treaty establishing the European Community (TEC), but likewise under the Lisbon Treaty, i.e. the Treaty on the Functioning of the European Union (TFEU).

Let us look at the evolving discussion.

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Bernhard Speyer & Norbert Walter: Towards a new structure for EU financial supervision (Deutsche Bank, EU Monitor 48, 22 August 2007) took a detailed look at financial supervision in the European Union:

http://www.dbresearch.de/PROD/DBR_INTERNET_DE-PROD/PROD0000000000214976.pdf

Speyer and Walter noted that financial supervision concerns both crisis prevention and crisis management. The present supervisory structures are neither effective nor efficient. In spite of market integration and in contrast to the political commitment to build an integrated financial market, financial supervision in the EU remains a responsibility of individual member states, with the European dimension only being taken into account in the form of intensified cooperation.

After their damning indictment of the existing supervisory structures, Speyer and Walter analysed various options under discussion, before proposing three steps to advance:

1: Empowering the existing Level 3 committees (voting, binding guidelines)

2: Implementation of the lead supervisor regime (real powers and mediation)

3: Establishment of a European System of Financial Supervision (comprising banking, insurance and securities markets supervision under one roof; separate from the ECB)


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Slowly, the political wheels have been turning. In December 2007 the European Council arrived at these interim conclusions, although there was no feeling of any clear and present danger (page 13):

“48. The European Council, in view of the recent developments in the financial markets, emphasises that macroeconomic fundamentals in the EU are strong and that sustained economic growth is expected. Continued monitoring of financial markets and the economy is crucial, as uncertainties remain. The European Council underlines the importance of the themes identified in the work programme adopted by the Council on 9 October 2007 aimed at, alongside the EU's international partners, improving transparency for investors, markets and regulators, improving valuation standards, improving the prudential framework, risk management and supervision in the financial sector as well as reviewing the functioning of markets, including the role of credit rating agencies. The European Council welcomes the significant steps adopted regarding the enhancement of EU arrangements for financial stability and strongly encourages their appropriate follow-up. It will come back to these issues at its spring 2008 meeting on the basis of a progress report.”

Source: European Council, revised Presidency Conclusions 14 December 2007 (Council document 16616/1/07 REV 1).


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The European Council’s follow-up 13 to 14 March 2008 (revised Presidency Conclusions; Council document 7652/1/08 REV 1) devoted two and a half pages to the stability of financial markets. The European Council endorsed the interim report of the Council (ECOFIN) on financial market stability, and it saw the need for action on a number of issues (points 30 ─ 36, pages 16 ─ 18).

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Nout Wellink presented and overview in his 28 April 2008 speech ‘Banking supervision in Europe ─ developments and challenges’, published in the BIS Review 53/2008 (Bank for International Settlements):

http://www.bis.org/review/r080430a.pdf?noframes=1

Wellink, President of the Netherlands Bank and Chairman of the Basel Committee on Banking Supervision, outlined cross-border supervision and the interplay between central banks and supervisors.

Given the legal constraints, in the near term so-called colleges of supervisors should first be established for all major cross-border groups, and in a second step the role of the lead supervisor or consolidated supervisor should be strengthened in order to avoid stalemates.

According to Wellink, the two necessary conditions for effective cooperation between supervisors and central banks – cooperative and open mindsets and adequate information sharing – are most effectively met within “an institutional framework in which the Eurosystem’s responsibilities for monetary policy in the euro area are coupled with extensive supervisory responsibilities of NCB’s in domestic markets and with reinforced cooperation at a euro area-wide level”.

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Since the spring, unsettling financial forecasts have been replaced by financial mayhem in Europe, too. We are going to look at some of the latest political actions and legal acts to improve financial supervision in the European Union.


Ralf Grahn