Policies

Committee on Economic and Monetary Affairs

Position paper adopted by EPP-ED Members of the Committee on Economic and Monetary Affairs on financial services supervision

22 May 2008

1. Regulation and supervision are closely inter-connected; failure of either of them generates massive negative externalities for the entire financial system. The two should therefore be treated as integral parts of the same structure.

2. Improvements to the regulatory framework should be based, in the first place, on existing legislation and legal bases. In the second place soft law measures should be considered as an appropriate tool to address any shortcomings. New legislation should be seen as a last resort only after these other avenues have been explored.

3. The current financial crisis has amply demonstrated the inter-connected nature of global financial markets. Therefore, in conjunction with European arrangements, efforts must be made to establish an efficient regulatory and supervisory framework also at the global level.

4. As regards the European supervisory framework, while the Group acknowledges the success and the inherent strengths of the current regulatory model, there is an urgent need to improve the current system of financial supervision to achieve better supervisory convergence and to develop mechanisms to prevent and resolve cross-border crises. The two priority areas of focus should be the Lamfalussy framework and the prudential supervision of banks.

5. A particular concern with the status quo is the lack of mutual trust between national authorities. As a result, information exchange between them is inadequate, undermining the objective of efficient supervisory co-operation.

6. The Group recognises and supports the progress made in these areas by the ECOFIN Council in its conclusions of 4 December 2007 setting out a Roadmap regarding the review of the Lamfalussy process; the European Council in its conclusions of 13-14 March 2008; and the ECOFIN Council in its Memorandum of Understanding (MoU) agreed upon in the informal meeting of 4 April 2008.

7. The above are taken to constitute an evolutionary approach towards more supervisory convergence and co-operation which the Group also endorses.

8. The Group emphasises, however, that co-operation arrangements cannot rest solely upon intergovernmental co-operation. The Group therefore particularly welcomes the provisions of the Council Roadmap calling for the Commission to review the relevant financial services Directives with a view to

a) ensuring that the provisions underpinning supervisory co-operation and the exchange of information between competent authorities, including national supervisors, financial ministries and central banks, are satisfactory;

b) defining a coherent set of supervisory powers and objectives between national supervisors after undertaking a study identifying appropriate legislative measures in this respect.

9. L3 Committees of Supervisors - Strengthening the role and the accountability of the L3 Committees of Supervisors and the primacy of their decisions in the mandates of national supervisors is called for. A shift from consensus to majority voting for L3 work could provide the necessary stimulus to make progress in converging practices. However, the definition of majority should be seriously examined. In that respect, the Council’s definition, primarily based on demographic weights, may not fairly reflect the expertise of all supervisors involved. Given the highly technical character of L3 decisions, a more adequate solution could be to grant to each supervisor one vote, and to define, for example, the majority as two thirds of the votes. Clarification of the role and status of the Committees is considered necessary. Linked to this, the national supervisors' mandates should take account of the EU dimension of their responsibilities. An effort should also be made to bring the supervisors' mandates closer in line with each other. It is not considered necessary to alter the legal basis of the Committees in the immediate term. The Group welcomes the decisions of the ECOFIN Councils in these respects.

10. Supervision of banking groups - There is general consensus that colleges of supervisors are an appropriate way of dealing with supervision of cross-border groups. Community law should lay down minimum rules for the establishment of colleges of supervisors. These aspects should be included in the Commission's revision of financial market Directives called for in the Ecofin Roadmap (see 8.a)). The role of the colleges should be strengthened and clarified. There is an urgent need to ensure that there is a level playing field for cross-border banks as well as national or regional banks vis-à-vis cross-border institutions. This means ensuring that the supervising colleges' discretionary room of manoeuvre and the ensuing differences in their functioning do not create discrepancies in the competitive situation. It might have to be considered whether there is a need for a European level collegiate body, which could be either the L3 Committee in its entirety or a smaller regrouping, above the group-specific colleges to monitor that they abide by the same standards. The monitoring body would also provide for mediation and decisions of last instance in the case of disagreement within a group-specific college.

The respective responsibilities of home-host supervisors vis-à-vis each other should also be defined clearly. Burden and responsibility sharing as well as information exchange requirements within the colleges should be carefully assessed. While it seems practical for the home supervisor to have the coordinating role the appropriate distribution of powers between home-host supervisors must be analysed further. In any case, the supervisors having the ultimate responsibility for the oversight of financial intermediaries should also have the commensurate supervisory resources at their disposal. Well-functioning information-sharing within the colleges must be ensured. In addition, some degree of information-sharing responsibility towards other authorities, particularly the ECB, should be established. The exact nature, frequency and content of the information-sharing and reporting requirements should be included in the Commission's assessment of the relevant Directives.

11. The supervisory approach should be adapted to the specificities of the business and aspects of it that are regulated. A uniform approach as regards e.g. the current proposals on Solvency II and the CRD is not as a rule commendable.

12. Horizontal links between macro-economic and monetary policy and financial market supervision should be strengthened. Strengthening the ECB's role in this respect should be assessed. Co-operation and information-sharing with L3 Committees and colleges of supervisors with the ECB and other non-eurozone EU central banks should be developed.

13. Crisis management - There is consensus on that cross-border crisis management must be developed with mechanisms for the involvement of the relevant central banks and finance ministries in a case of crisis. In the medium term, finding a workable solution to the lender of last resort question is urged. In addition, due consideration should be given to the question of where the responsibility lies for last resort market-maker function in the case of a liquidity crisis. The Group welcomes the progress that the MoU represents in these respects. Moreover, coordinating deposit guarantee legislation in the EU to make it more compatible is deemed a priority.

14. Future options - Introducing a European regulation in the form of either a single European supervisor for all or a two-tier system where only pan-European groups would fall under the centralised supervisor's competence is not closed-out in the long term. However, in the immediate term neither one of these options is seen as appropriate or feasible.