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.
***
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)
***
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).
***
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).
***
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”.
***
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
Showing posts with label banking supervision. Show all posts
Showing posts with label banking supervision. Show all posts
Friday, 17 October 2008
Thursday, 16 October 2008
EU: Monetary policy V Lisbon Treaty and European level supervision?
Have the objectives of the European System of Central Banks changed during the treaty reform process?
Are the basic tasks different?
Has prudential supervision of banks kept pace with reality?
We compare Article 127 of the Treaty on the Functioning of the European Union (TFEU) with the current treaty and the previous stages of the treaty reform process since 2001.
***
Lisbon Treaty comparison
Substantially, the objectives of the European System of Central Banks (ESCB) and the European Central Bank (ECB) have remained unchanged from the current Treaty establishing the European Community (TEC), via the draft Constitution and the Constitutional Treaty, to the Treaty on the Functioning of the European Union (TFEU) (paragraph 1).
Price stability is the primary objective, from Article 105(1) TEC until Article 127(1) TFEU. The complementary objectives of supporting the economic policies of the Community/Union are essentially unchanged, as are the open market principles for action.
The treaty reform process has done nothing to change the important basic tasks of the ECB: to take full responsibility for monetary policy, to conduct foreign exchange operations, to hold foreign reserves and to improve payment systems (paragraph 2).
Mandatory consultation is retained. The European Central Bank still has to be consulted by the European Community (European Union) or by a member state on draft legislation relating to monetary policy (paragraph 4).
Actually the TFEU wording is more like the TEC text than the Constitutional Treaty, because the IGC 2007 drafters often saved ink when confronted with non-essential amendments (introduced by the European Convention or directly) in the Constitutional Treaty.
This far, things were fairly straightforward, but let us turn to banking supervision.
Despite global markets and European banks, national authorities are still responsible for the prudential supervision of credit institutions and the stability of the financial system ─ however fictitious their real mastery ─ and the contributory role of the ESCB has not changed one iota during the reform process (paragraph 5).
The European Convention proposed that at least some limited aspects ─ specific tasks ─ could be conferred on the ECB by the ordinary legislative procedure, but the IGC 2004 resolutely took away even the need for the European Parliament’s assent, and the governments agreed to immobilise themselves by reinstating the requirement of unanimity in the Council for such legislation (paragraph 6).
More often than not, unanimous legislation means no legislation. (Without qualified majority voting there would be no single market.) But even in the unlikely event of meaningful legislation of small ‘slices’ of responsibility, insurance undertakings are excluded from the scope of such future legislation.
[Reality may be staring everyone in the eye, but national administrations refuse to let it disturb their customary bureaucratic circles. This is a Europe based on governments and their straitjacket rules of intergovernmental international relations, not a union of citizens, fit to work primarily in the interest of citizens. Instead of hundreds of intricately self-incapacitating pages, a democratic European Union would need a readable Constitution of perhaps twenty pages.]
Back to comparing the text versions: The wording of paragraph 6 changed somewhat along the way; the Lisbon Treaty employs the terms ‘regulations in accordance with a special legislative procedure’.
Ralf Grahn
Are the basic tasks different?
Has prudential supervision of banks kept pace with reality?
We compare Article 127 of the Treaty on the Functioning of the European Union (TFEU) with the current treaty and the previous stages of the treaty reform process since 2001.
***
Lisbon Treaty comparison
Substantially, the objectives of the European System of Central Banks (ESCB) and the European Central Bank (ECB) have remained unchanged from the current Treaty establishing the European Community (TEC), via the draft Constitution and the Constitutional Treaty, to the Treaty on the Functioning of the European Union (TFEU) (paragraph 1).
Price stability is the primary objective, from Article 105(1) TEC until Article 127(1) TFEU. The complementary objectives of supporting the economic policies of the Community/Union are essentially unchanged, as are the open market principles for action.
The treaty reform process has done nothing to change the important basic tasks of the ECB: to take full responsibility for monetary policy, to conduct foreign exchange operations, to hold foreign reserves and to improve payment systems (paragraph 2).
Mandatory consultation is retained. The European Central Bank still has to be consulted by the European Community (European Union) or by a member state on draft legislation relating to monetary policy (paragraph 4).
Actually the TFEU wording is more like the TEC text than the Constitutional Treaty, because the IGC 2007 drafters often saved ink when confronted with non-essential amendments (introduced by the European Convention or directly) in the Constitutional Treaty.
This far, things were fairly straightforward, but let us turn to banking supervision.
Despite global markets and European banks, national authorities are still responsible for the prudential supervision of credit institutions and the stability of the financial system ─ however fictitious their real mastery ─ and the contributory role of the ESCB has not changed one iota during the reform process (paragraph 5).
The European Convention proposed that at least some limited aspects ─ specific tasks ─ could be conferred on the ECB by the ordinary legislative procedure, but the IGC 2004 resolutely took away even the need for the European Parliament’s assent, and the governments agreed to immobilise themselves by reinstating the requirement of unanimity in the Council for such legislation (paragraph 6).
More often than not, unanimous legislation means no legislation. (Without qualified majority voting there would be no single market.) But even in the unlikely event of meaningful legislation of small ‘slices’ of responsibility, insurance undertakings are excluded from the scope of such future legislation.
[Reality may be staring everyone in the eye, but national administrations refuse to let it disturb their customary bureaucratic circles. This is a Europe based on governments and their straitjacket rules of intergovernmental international relations, not a union of citizens, fit to work primarily in the interest of citizens. Instead of hundreds of intricately self-incapacitating pages, a democratic European Union would need a readable Constitution of perhaps twenty pages.]
Back to comparing the text versions: The wording of paragraph 6 changed somewhat along the way; the Lisbon Treaty employs the terms ‘regulations in accordance with a special legislative procedure’.
Ralf Grahn
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