BRUSSELS - The European Commission has proposed a communication on financial supervision in Europe that outlines a set of ambitious reforms to the architecture of financial services committees, including the creation of a new European Systemic Risk Council (ESRC) and European System of Financial Supervisors (ESFS), composed of three new European supervisory authorities, for the banking, securities and insurance sectors.
The EC is keen to implement the new framework in 2010. Legislation to embody the proposals will follow in the autumn but the Commission has invited all interested parties to submit their reactions to the communication before July 15.
"Better supervision of cross-border financial markets is crucial for ethical and economic reasons," says EC president José Manuel Barroso. "The Commission is making proposals today to help restore confidence, guard against future crises, and protect growth and jobs. The new system will help the EU and its member states to tackle problems with cross-border firms and the build-up of overall systemic risk. I now urge EU leaders at the June European Council to endorse the timetabled steps we are setting out today. I would like the new architecture up and running during 2010."
"Financial supervision in Europe has not kept track with market integration. The crisis has shown that the current system is not sufficiently responsive and not appropriate for a single financial services market," says internal market and services commissioner Charlie McCreevy. "This new system will combine the expertise of all those responsible for safeguarding financial stability, with strong European bodies to co-ordinate their work. With this initiative, the Commission is responding to the weaknesses identified during the crisis as well as to the G-20 call to take action to build a stronger, more globally consistent, regulatory and supervisory system for financial services."
The proposed ESRC would monitor and assess risks to the stability of the financial system as a whole - in essence, macro-prudential supervision that will provide early warning of systemic risks and, where necessary, recommendations for action to deal with them. The creation of the ESRC would address one of the fundamental weaknesses highlighted by this crisis, which is the exposure of the financial system to interconnected, complex and cross-sectoral systemic risks.
The ESFS will act as supervisor of individual financial institutions - a micro-prudential supervisor - and will consist of a robust network of national financial supervisors working in tandem with the new European supervisory authorities created by the transformation of existing committees for the banking securities, insurance and occupational pensions sectors. The ESFS would combine nationally based supervision of firms with specific tasks at the European level in an effort to foster harmonised rules, and coherent supervisory practice and enforcement. This network would aim to enhance trust between national supervisors by ensuring host supervisors have an appropriate say in setting financial stability and investor protection policies so that cross-border risks can be addressed more effectively.
The Commission has stressed that the implementation of these arrangements will be monitored, and their effectiveness carefully assessed. To this end, a full review will be scheduled to take place no later than three years after the entry into force of both pillars of the proposed European financial supervisory framework (and no later than 2013). The outcome of this review will determine whether additional steps are needed to strengthen the ESRC and the ESFS.