Financial supervision in Europe: time for a European system?

8 May 2006

Anton van Rossum, International President, European League for Economic Cooperation (ELEC), opened the dialogue by emphasising his organisation’s support for more European financial integration and an efficient European monetary system. ELEC’s current concern was that the speed of financial integration was “outpacing” progress in financial supervision and lacked a ‘European’ dimension.

Dirk Schoenmaker, Professor of Finance, Banking & Insurance at the Vrije Universiteit Amsterdam and Deputy Director of Financial Market Policy at the Ministry of Finance in the Netherlands then presented the conclusions of the ELEC report on Financial supervision in Europe: do we need a new architecture?

The paper argues that it is the markets that determine the level of financial integration and dictate cross-border activity, so they must be supported by an efficient and robust financial system in order to boost European growth.

The existing financial architecture

Professor Schoenmaker said there had been such a rapid expansion of cross-border financial services groups, including financial conglomerates, banks and insurance companies, that national agencies no longer had the capacity to adequately supervise their activities.

The banking sector has seen steady growth over the last five years, particularly in the European market, while the insurance business has always been more ‘international’. Both conduct considerable cross-border business. There has also been a trend towards centralising key management functions, including risk-management.

As a result, said Professor Schoenmaker, companies have had to adopt a more systematic approach to managing financial risks and capital movements across borders. While this has been a positive development, it has thrown up two problems: firms are using different, often incompatible models; and the increase in cross-border activity is undermining the host country’s capacity to manage its own financial stability.

Given this background, he argued, it is clear that the European banking and insurance sectors need integrated, EU-wide supervision.

A central supervisory framework

Professor Schoenmaker proposed a European framework formed by melding banking and insurance supervisors into a “European system of financial supervisors”. This would be composed of national supervisors working in tandem with a central body such as a European Financial Authority.

He envisaged a Governing Council to oversee this, with national supervisors given a mandate to supervise national small and medium-sized banks and insurers, and a consolidated supervisor with an EU-wide mandate to supervise the work of pan-European financial groups.

He briefly outlined the benefits:

� It would ensure uniform application of regulations, covering all sizes of firms, thus ensuring “competitive neutrality”;

� Having a uniform framework would avoid national ‘discretions’;

� Having the power to overrule national supervisors would ensure they operated according to an EU-wide mandate.

Professor Schoenmaker concluded by stressing that all supervisory structures had to adapt to market development, and cater for the emergence of European financial groups and centralised risk-management. This would both allow supervision of the European financial market and stimulate economic growth.

Doing what is “politically feasible”

Irmfried Schwimann, Head of Unit for Financial Services in the Directorate-General for the Internal Market and Services, European Commission, praised ELEC’s paper for confronting the challenge of an accelerating financial industry. However, she was disappointed that it failed to mention the moves the EU is already making to supervise the European financial industry.

The Commission is currently working to overcome the current segmentation of supervisory practices, stemming from the national supervisory systems.  Unfortunately, said Ms Schwimann, most EU Member States have little appetite for making the current system more homogeneous as they prefer the status quo, even though it makes cross-border intervention impossible. However, she argued that the most pressing issues to tackle are crisis-management and alleviating the cross-border problems facing companies.

Ms Schwimann finished by reassuring the audience that the Commission would not be taking a slow “Darwinian” evolutionary approach to financial integration, as it wanted to see immediate progress while being realistic about what was political feasible.

Marianne Kager, Chief Economist at the Bank Austria Creditanstalt, stressed the enormous increase in European banks’ cross-border activities and their “internationalisation” over the last five years, with many of their assets now in foreign hands.

She then outlined various issues that need to be addressed before a general supervisory body can be set up. She pointed out that national supervisory authorities have different competences, many of which cannot be devolved to a pan-European supervisor. If the EU were given a mandate to take over national supervisory competences, this would have to be written in the European Treaty. She also questioned the feasibility of harmonising national supervisory rules, since regulators would still be bound to act according to their national rules.

Ms Kager argued it was important to harmonise banks’ legal frameworks and liquidity requirements across Europe. However, she also foresaw difficulties in getting Member States to agree to give up some political responsibilities.

She said the integration process should begin by harmonising the legislative framework of supervisory rules. This would involve determining which national rules need maximum harmonisation, which require minimum harmonisation, and in which cases it would be possible to recognise the primacy of the host country’s legislation.

“Being prepared” in the financial sector

Graham Bishop, the Principal of, agreed that given the fast pace of changes in the financial field, a central risk-management system was overdue. He said that like boy scouts, the Union had to “be prepared” for bank crises, particularly those involving deposit guarantee schemes. As an example he cited the Swedish bank crisis, when Sweden lost growth corresponding to a quarter of its GDP. He warned that while the European Central Bank (ECB) could provide liquidity in some crises, it might not always have adequate resources.

Mr Bishop raised the question of whether bank deposit guarantee schemes were purely national schemes or whether politicians should be prepared to step in to protect depositors if a subsidiary in another country failed. He also wondered whether government moves to support a failing bank might constitute illegal state aid.

Freddy Van den Spiegel, Chief Economist and Director for Public Affairs, Fortis Bank, noted that many banks cited in ELEC’s report belonged to the European Financial Services Roundtable, which already supported the idea of a supervisory regime. He shared other speakers’ concerns about the lack of urgency among politicians to create a supervisory regime, as they only stepped in when a crisis occurred.

Given that 12 countries in Europe share a common currency, financial integration, including the single euro payments area (SEPA), is helping to drive the ‘European’ process. National supervisors must go beyond their remit to protect national depositors, as financial services are now fully pan-European.

Mr Van den Spiegel suggested a “college” of supervisors to exchange information and take decisions across borders, headed by a chair with the power to mediate and take decisions if the college did not agree.

He was also critical of the financial services sector’s double lack of vision: about the need for a European financial architecture and the issue of what mechanism the financial sector should use to deal with potential risks.