Reforming European financial supervision: adapting EU institutions to market structures
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Reforming European financial supervision: adapting EU institutions to market structures Kern Alexander
Published online: 11 June 2011 © ERA 2011
Abstract EU policymakers have created a new European System of Financial Supervision, consisting of three European Supervisory Authorities and a European Systemic Risk Board. This article examines some of the legal and institutional issues, including the ESAs’ authority to develop an EU code of financial regulation and to oversee its implementation by Member States and resolve related disputes. The article argues that the creation of the ESAs and ESRB is a proportional response to the increased integration of EU financial markets and the cross-border nature of systemic risk. The article suggests, however, that the ultimate effectiveness of these supervisory reforms will depend on whether they achieve a balance between crisis prevention supervisory measures and crisis management involving the rescue or resolution of financial firms. A better balance needs to be struck to achieve financial stability objectives. Keywords Regulated Industries and Administrative Law · Financial Institutions and Services · EU Law · Government Policy and Regulation · Law and Economics: General
1 Introduction The growing integration of European financial markets and the financial crisis that began in 2007 have raised important questions concerning the institutional design of
This paper is based on a contribution given by the author at the ERA conference on The reform of EU financial supervision, held in Brussels on 9–10 December 2010. Professor K. Alexander () Faculty of Law, University of Zurich, Rämistr. 74/22, 8001 Zurich, Switzerland e-mail: [email protected]
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European financial supervision.1 Over 50 large financial institutions have significant cross-border operations in EU states, while wholesale capital markets are increasingly inter-connected across EU states through electronic exchanges and trading platforms, clearing houses and the over-the-counter (OTC) derivatives market. Over the last 10 years, EU financial legislation has grown dramatically in its scope of application to many areas of market activity.2 The implementation and enforcement of this legislation has been left ultimately to the discretion and authority of Member State supervisors based on the principle of home country control and mutual recognition. Although the home country control regime facilitated trade and investment in financial services across EU states, the adoption of the euro and the institutional consolidation of the Lamfalussy process led to calls for further consolidation of supervisory practices at the EU level. Moreover, the recent financial crisis demonstrated major weaknesses in the EU supervisory framework and the need to have a robust macro-prudential supervisory regime across the EU that reinforces micro-prudential supervision by Member States. To address these weaknesses, the European Commission proposed four Regulations3 in September 2009 that aimed to restructure substant
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