17 September 2002

ECB: Solans speech on financial integration, stability, and supervision

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Speech by Eugenio Domingo Solans, Member of the Governing Council and of the Executive Board of the European Central Bank, delivered at the conference organised by the Association of Foreign Bank Representatives in Germany, Frankfurt am Main, 17 September 2002.

Excerpt

“The introduction of the euro as the single currency of twelve European Union countries, the establishment of the single monetary policy of the euro area (…) have been key factors which have led to a more integrated financial system in Europe” Mr Solans said.”Financial integration and deregulation are blurring the distinction between the traditional sectors of financial activity: banking, securities and insurance.”

“The existence of a common set of rules is a precondition for free and fair competition, as recognised and accommodated by Community legislation. But there remain fields in which inconsistencies between national legislation hamper the full integration of the financial system.

“The relatively limited number of cross-border deals in Europe is not only due to a lack of legal harmonisation. The attitude of some national authorities, inclined to treat domestic mergers or acquisitions more favourably than similar cross-border operations for nationalistic reasons, also explains the relatively low number of such deals in Europe.

Supervision

“It is crystal clear that the competent authorities for banking supervision are the national ones. Accordingly, the national authorities should decide the optimal organisation of supervisory tasks, taking into account their particular circumstances and national traditions.

“My personal view on this issue is that the best model is to entrust the national central bank (NCB) with supervisory responsibilities at both the macro and micro level (…), and prudential supervision related to the soundness of individual banks. I also think that NCBs should somehow be involved in the work of committees dealing with banking regulation, because there is a close synergy between central banking and supervision and regulation.

“There are good reasons why NCBs should be entrusted with the national competence for banking supervision or, at least, be involved in it to a great extent.

“Some countries have decided to set up an independent single authority responsible for the supervision of all financial institutions and markets, following the example of the Financial Services Authority (FSA) set up in the United Kingdom in 1997.

“Nevertheless, to put all the supervisory activities of heterogeneous institutions under the same roof seems to be going too far. Not only do supervisors master specific technicalities and use different tools in their respective areas, but also the missions assigned and even the emphasis put on the principles to be followed by supervisors are different and not always fully compatible. Moreover, the existence of a single supervisor for different financial activities does not prevent the existence of problems of co-ordination among the different areas of supervision which, by the way, would become less noticeable to the general public under a common roof.

“The trend towards conglomeration and cross-sector competition (…) would really point towards a need for a fundamental engagement of the NCBs in prudential supervision What is undeniable is the fact that thus far experience, not only in Europe but also in the United States, indicates that central banks are carrying out supervisory tasks effectively, whereas little experience has been gained with the application of the single agency model.

“There is little doubt that the introduction of the euro, the single monetary policy, the existence of a single payment area and the growing process of European financial and banking integration are good reasons for an enhanced common European approach to prudential supervision and financial stability.

“The contribution of the Eurosystem to prudential supervision would result in more extensive exchanges of relevant information and greater convergence of supervisory practices within the euro area through the exchange of best practices.

“It would reduce the burden of supervision on pan-European credit institutions. It would enable macro-prudential concerns to be addressed at the European level in a simple and effective manner, allowing the supervisory network within the Eurosystem to be exploited, with improved monitoring of risks to financial stability in the euro area and closer co-ordination with central banking functions exercised at the Eurosystem level.

Full speech

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