Saturday, 18 October 2008

EU: Monetary policy X Cross-border financial supervision

The European Community includes an internal market characterized by the abolition, as between member states, of obstacles to the free movement of goods, persons, services and capital. In addition to Article 3(1)(c) of the Treaty establishing the European Community (TEC), the free movement of capital and payments in the European Community is confirmed and detailed in Articles 56 to 60 TEC.

The member states have created a single area for capital movements, but retained 27 jurisdictions supervising financial institutions.

Having painted themselves into a corner, what have the EU (EC) member states done to make the paint dry a little faster?

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When intergovernmental EU cooperation is mentioned, fairly many know that the member states have kept foreign, security and defence policy matters as their reserved turf, but economic and monetary union (EMU) is another area where the European Parliament is resolutely sidelined.

This has not prevented the EP from trying to form its opinions and to stimulate debate. One example is the report by Kern Alexander , John Eatwell, Avinash Persaud and Robert Reoch: Financial Supervision and Crisis Management in the EU (Report to the European Parliament Committee on Economic and Monetary Affairs; published 2008):

http://www.europarl.europa.eu/activities/committees/studies/download.do?file=19191#search=%20Financial%20supervision%20

The report states that financial regulation and crisis management have not kept pace with the changes of the financial markets, and it calls for a new approach to the content and structure of
regulation, supervision and crisis management.


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Since Article 105(5) TEC puts the ‘competent’, i.e. national authorities in charge of prudential supervision of (global and European) credit institutions and the stability of the financial system, the gap between the real world and the treaty has to be filled somehow.

As always, intergovernmental or interinstitutional voluntary cooperation and various soft law approaches are words to look out for in a context like this.

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The Council (ECOFIN) agreed on so called Financial Markets Stability Roadmaps 9 October 2007 and 4 December 2007. They were updated 15 May 2008 (Council document 9056/1/08 REV 1):

http://www.eu2008.si/en/News_and_Documents/download_docs/May/0514_Svet_ECOFIN/030financial_stability_roadmaps.pdf

The roadmaps concerned: Enhancing the Lamfalussy framework, incl. financial supervision; Financial Stability Arrangements; Actions taken in response to the financial turmoil.


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One example of an approach based on voluntary cooperation and soft law is the upgraded Memorandum of Understanding on Co-operation between the Financial Supervisory Authorities, Central Banks and Finance Ministries of the European Union on Cross-Border Financial Stability (published 20 June 2008):

http://www.ecb.europa.eu/pub/pdf/other/mou-financialstability2008en.pdf

The memorandum updates a 2005 MoU, and it is based on the realisation that financial integration increases the scope for cross-border and cross-sector contagion and thus the likelihood of a systemic crisis affecting more than one member state. Financial stability is, therefore, a common concern for all member states and the EU as a whole, and must be safeguarded on the basis of close cooperation among all parties.

The objective of the MoU is ensure cooperation in financial crises between financial supervisory authorities, central banks and finance ministries through appropriate procedures for sharing of information and assessments, in order to facilitate the pursuance of their respective policy functions and to preserve stability of the financial system of individual member states and of the EU as a whole.

Sharing of information, views and assessments are typical catchwords of such non-binding cooperation, as is the emphasis on ‘their respective … functions’. The memorandum does not create any legal commitment for any of the parties to intervene in favour of anyone affected by a financial crisis. Parties with common concerns are invited to conclude more detailed voluntary specific cooperation agreements.

The parties commit themselves to open, full, constructive and timely cooperation; and to prepare and search for jointly acceptable solutions (read: consensus), and they commit themselves to common principles in the management of systemic or serious crises. A coordinating role is foreseen for the home country supervisory authority.

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The European Parliament debated improved financial supervision in the context of the Lamfalussy follow-up on 9 October 2008:

http://www.europarl.europa.eu/sides/getDoc.do?type=TA&language=EN&reference=P6-TA-2008-0476

The resolution contains a wealth of references of value to the serious student.

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Declaration on a concerted action plan of the euro area countries 12 October 2008 (Council document 14239/08) contained the results of the first Eurozone summit:

http://register.consilium.europa.eu/pdf/en/08/st14/st14239.en08.pdf

Financial supervision was mentioned in point 10, page 5:

Given the exceptional market circumstances, we urge national supervisors, in accordance with
the spirit of Basel 2 rules, to implement prudential rules also with a view to stabilising the financial system.

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The latest authoritative guidelines that we have are the Presidency Conclusions of the European Council 15 to 16 October 2008 (Council document 14368/08):

http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/103441.pdf

The principles adopted at the first Eurozone summit were given broad support by the October European Council.

A financial crisis cell will be established, meaning an informal warning, information-exchange and evaluation mechanism (point 6, page 3).

The European Council stresses the need to strengthen the supervision of the European financial sector, particularly cross-border groups, and to implement urgently the Ecofin Council's roadmap, with a view to improving the coordination of supervision at European level. In this context the European Council welcomes the setting up of a high-level group by the Commission. To begin with, the European Council invites national supervisors to meet at least once a month, to exchange information.

The European Council supports the speeding up of work to strengthen the rules on stability, including work on the Capital Requirements Directive (point 8, page 3).


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EurActiv has followed financial supervision matters closely. Here are two news items:

EurActiv 10 October 2008: Parliament calls for overhaul of financial supervision

EurActiv 15 October 2008: EU leaders set for scramble on financial supervision

Perhaps the best way to conclude this overview of cross-border financial supervision is contained in the headline of the following news report:

EurActiv 17 October 2008: Summit: Minor progress on banking supervision

http://www.euractiv.com/en/financial-services/summit-minor-progress-banking-supervision/article-176456

Integrated supervision for integrated financial markets is still a long way off.


Ralf Grahn