06 March 2006

ELEC calls for European System of Financial Supervisors

The European League for Economic Cooperation released a report on Financial Supervision in Europe concluding that Supervisory structures should adapt to market developments and not the other way round. Due to these market trends, it is increasingly difficult to organise financial supervision and crisis management on a predominantly national basis. ELEC therefore calls for a European System of Financial Supervisors.

The authors conclude that there is a need for a decentralised European System of Financial Supervisors combining the European framework with the expertise of local supervisory bodies. Pan-European banks would then be supervised in accordance with a mandate defined by the European System and executed by a national lead supervisor, with the assistance of other host supervisors for on-site inspections.

The trend towards centralisation of key management functions reinforces the role of the home country supervisor as consolidating supervisor, which is already acknowledged in the recently adopted Capital Requirements Directive for banks and should also be established for the insurance sector.

The integration of EU financial markets gives rise to increasing cross-border penetration of interbank markets and payment systems, which are important channels for cross-border contagion. The increasing presence of banks and insurers from other EU countries undermines the capacity of host authorities to manage effectively the stability of their financial system.

“During the next five years”, the report states “we expect further discussions on the desirability and workings of a putative European System of Financial Supervisors. Then we expect another five years to implement a new System.”

The Cahier also includes two comments on the main paper. Marianne Kager, Chief Economist at Bank Austria elaborates on the jurisdictional implications of the effective exercise of supervision by a lead institution. Graham Bishop, independent analyst of European financial affairs, dwells on the links between centralised supervision and the harmonisation of deposit guarantee schemes.

Press release
Report

© ELEC