As a further consequence of the financial crisis, the European Commission presented its plans for restructuring the Financial Supervision within the EU on 27th May. Compared to the modest Directive on Regulating Hedge Funds and the toothless recommendation for manager salaries, the current proposal is definitely far-reaching. The proposed reform of the European Financial Supervision contains in particular the creation of a European Council for system risks (European Systemic Risk Council, ESRC) and a new European system for financial supervision (European System of Financial Supervisors, ESFS).
Commission president José Manuel Barroso emphasised during the press conference that the time had come “to break with the past”. The financial crisis had dramatically exposed the weak points of the current European Financial Supervision. The existing supervision regulations could neither prevent nor control the crisis. Commissioner Joaquín Almunia, who is responsible for Economic & Financial Affairs, added that although the financial sector had been a decisive factor for the rapidly growing economic growth since the nineties, it had been exactly this financial sector, which currently almost paralysed the (world) economy. The Commission proposal, which is mainly based on the Larosière Report, will aid the European Commission in preventing future crises and to restore trust in the financial markets. In contrast to the Larosière recommendations, Barroso want to install the new supervisory bodies as early as 2010.

The recommended supervisory system is divided into macro-supervision (ESCR) and micro-supervision (ESFS). It will be the responsibility of the European Systemic Risk Council (ESCR) to warn the European Commission and national authorities against undesirable economic developments, which could lead to potential crises. The task of the ESCR is not only restricted to observing and assessing developments in the financial markets, but also to make appropriate recommendations on containing risks with regard to system-wide threats. When it comes to reviewing the follow-ups, which should be carried out as a reaction to the recommendations, the ESCR, however, is lacking any form of legal competence. The ESCR would regard the principle of “comply or explain” as the only option to impose sanctions. In the case that Member States or individual authorities would not comply with these recommendations, the ESCR would publish the latter in order to increase pressure. The European Systemic Risk Council would be made up of the ECB President (Chairman), the Vice President of the ECB, the governors of the 27 national central banks, the chairpersons of the three European supervisory authorities and one representative of the European Commission. National supervisors and finance ministers would act as observers.

The European System of Financial Supervisors (ESFS), which is only responsible for supervising individual financial institutes, consists of a group of national financial supervisors including the three new European supervisory authorities for banks (European Banking Authority, EBA), for securities (European Securities Authority, ESA), as well as for the insurance industry and for occupational pensions (European Insurance and Occupational Pensions Authority EIOPA) respectively. The three new supervisors at European level will be equipped with clearly defined legal competences and greater authorities. These European authorities shall, among others, be responsible for a consistent application of those EU regulations, which ensure a coordinated approach in situations of crisis, which collect information in case of supervision at micro level and which act as mediator in matters of dispute. The new European supervisory authorities shall be granted sole responsibility concerning certain institutions acting on a Europe-wide basis, such as rating agencies.

The reception of the Commission proposal varied from Member State to Member State. France regards the reform plans as not far-reaching enough whilst at the same time Great Britain categorically refuses to transfer competences from national authorities to the new European supervisory bodies. It is now up to the European Council to decide on the Commission proposals at the June Conference. Legislation to implement these proposals will presumably follow in autumn.

Further information:

Press release of the Commission

Consultation on the Commission Communication

Communication of the Commission on European Financial Supervision