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European financial supervision
The European Union has drawn important lessons from the events during the credit crisis and, effective 1 January 2011, it has reformed the financial supervision framework. The reform entails the establishment of a European System of Financial Supervision.
European System of Financial Supervision
The European System of Financial Supervision (ESFS) consists of:
- the European Systemic Risk Board (ESRB), which is responsible for the macro-prudential supervision of the financial system within the EU;
- three European Supervisory Authorities (ESAs), one responsible for micro-prudential supervision in the banking sector, one responsible for micro-prudential supervision in the securities sector, and one responsible for micro-prudential supervision in the pensions and insurance sector;
- the Joint Committee of the European Supervisory Authorities (Joint Committee), a cross-sectoral network in which the three sectoral supervisory authorities ensure cross-sectoral consistency within European supervision, and
- the national supervisory authorities, which retain responsibility for supervision in the individual Member States.
In addition, Colleges of Supervisors are being established for all cross-border financial institutions.
The objective of the ESFS is to ensure that the rules applicable to the financial sector are adequately implemented to preserve financial stability and to ensure confidence in the financial system as a whole and sufficient protection for the customers of financial services.
European Systemic Risk Board (ESRB)
The ESRB is responsible for the macro-prudential supervision of the financial system within the EU and has three main tasks:
- determining, collecting and analysing all the information necessary for identifying, prioritising and assessing all risks to financial stability within the EU;
- issuing warnings in respect of systemic risks, in appropriate cases accompanied by recommendations for remedial action and/or changes to EU regulation, and
- monitoring the follow-up to warnings and recommendations using an “act or explain” mechanism.
The ESRB obtains supervisory information from the European Supervisory Authorities, if and when relevant for the performance of its tasks. Conversely, the ESRB provides the European Supervisory Authorities with information about the identified risks relevant to the performance of their tasks.
Warnings or recommendations issued by the ESRB may be of either a general or a specific nature and may be addressed to the EU as a whole, to individual Member States, to the European Supervisory Authorities or to the national supervisory authorities. On a case-by-case basis and after having consulted the Council, the ESRB may decide to make a warning or a recommendation public. When sending a warning or recommendation to the addressee, the ESRB must simultaneously, with due observance of strict confidentiality rules, send that warning or recommendation to the Council and the European Commission.
The Council and the European Supervisory Authorities play an important part in monitoring compliance with the recommendations. Addressees of recommendations should explain to the ESRB, the Council and the European Supervisory Authorities how they have acted on the recommendations or provide adequate justification in case of inaction (“act or explain” mechanism).
The ESRB consists of a General Board, a Steering Committee, a Secretariat, an Advisory Scientific Committee and an Advisory Technical Committee. The Steering Committee assists in the decision-making process within the General Board. The Secretariat is responsible for the day-to-day business of the ESRB. The Advisory Scientific Committee and the Advisory Technical Committee provide advice to the ESRB.
European Supervisory Authorities
The existing committees of European supervisory authorities have been transformed into European authorities with legal personality (European Supervisory Authorities – ESAs). The Committee of European Banking Supervisors (CEBS) has been transformed into the European Banking Authority (EBA), the Committee of European Securities Regulators (CESR) into the European Securities and Markets Authority (ESMA) and the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) into the European Insurance and Occupational Pensions Authority (EIOPA).
The ESAs have the following main tasks:
- to contribute to the establishment of high-quality common regulatory and supervisory standards and practices;
- to contribute to the consistent application of EU regulation, in particular by contributing to a common supervisory culture and preventing regulatory arbitrage;
- to mediate and settle disagreements between EU supervisory authorities on the application of EU regulations.
To this end, the ESAs have power to set binding technical standards. After endorsement by the European Commission, these standards have direct application and need not be implemented in national legislation. In addition, the ESAs have power to take binding decisions in the event of disagreements between EU supervisory authorities.
The so-termed Omnibus Directive determines the areas where the ESAs are empowered to set binding technical standards or to settle disagreements with binding effect. To this end, the Directive refers to articles in the existing European sectoral Directives, such as the Capital Requirements Directive and the Solvency II Directive.
In the event of an emergency situation declared by the ESRB and the Council, the ESAs have power to give instructions to a national supervisory authority. In such cases, the ESAs only bypass a national supervisory authority if the latter fails to apply the instruction to the institution concerned and if European regulation is not applied correctly. However, under no circumstances may an ESA instruction have consequences for a Member State’s national budget.
In addition to binding standards, the ESAs publish guidelines and recommendations for the national supervisory authorities. The ESAs also issue expert opinions to the European Parliament, the Council and the European Commission. The ESAs are responsible for the collection of micro-prudential information for the performance of their tasks. This information will be shared with the national supervisory authorities concerned and with the ESRB, where relevant for the performance of the ESRB’s tasks.
The ESAs also have tasks in the areas of consumer protection and supervision of financial activities. For instance, they collect and analyse consumer trends, review and coordinate financial literacy initiatives and develop training standards for the sector. The ESAs may also issue warnings in the event that a financial activity poses a serious threat to financial stability. The ESAs may temporarily prohibit or restrict certain financial activities that threaten the orderly functioning and integrity of the financial markets or financial stability.
In order to ensure cross-sectoral consistency in supervisory practice and to foster cooperation among the ESAs, a Joint Committee of the European Supervisory Authorities (Joint Committee) has been established. In addition, the ESAs will establish a Committee on financial innovation, bringing together all relevant national supervisory authorities. The Committee is to achieve a coordinated approach to new or innovative financial activities and to provide advice to the European Parliament, the Council and the European Commission.
- Clearing & Settlement Systems
- Clearing institutions
- Investment firms
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