The European System of Financial Supervision (ESFS) was created as a decentralised, multi-layered system of micro- and macro-prudential authorities in order to ensure consistent and coherent financial supervision in the EU. This supervisory system is currently undergoing major changes further to the introduction of a Banking Union.
Articles 26 and 114 of the Treaty on the Functioning of the European Union (TFEU); Article 290 TFEU (delegated acts); Article 291 TFEU (implementing acts); Article 127(6) TFEU.
In 2009 the de Larosière report recommended the creation of a European System of Financial Supervision (ESFS) as a decentralised network. This ultimately resulted in the creation of a system of micro- and macro-prudential supervision consisting of European and national supervisors. The micro-prudential pillar at European level is formed by the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA), which work together in the Joint Committee of the European Supervisory Authorities (ESAs). Macro-prudential oversight is performed by the European Systemic Risk Board (ESRB). The respective Member States’ competent national supervisory authorities are also part of the ESFS. The objectives of the ESFS include developing a common supervisory culture and facilitating a single European financial market. The ESFS’s founding regulations are currently being revised. As part of a legislative initiative procedure, on 11 March 2014 Parliament adopted a resolution on the ESFS review, making detailed recommendations to the Commission. The Banking Union will also change the shape of the European supervisory framework.
In the European Union micro-prudential supervision, i.e. the supervision of individual institutions, is characterised by a multi-layered system of authorities. The various layers can be separated according to the area of sectoral supervision and regulation (banking, insurance and securities markets) and the level of supervision and regulation (European and national). In order to ensure consistency and coherence between the different layers, various coordination bodies and instruments have been created. In addition, coordination of the institutions at international level has to be ensured.
At European level, the ESAs are responsible for micro-prudential supervision, whereas day-to-day supervision is conducted at national level. The EBA, the EIOPA, and the ESMA are EU bodies with their own legal personality, which are represented by their respective chairpersons; they are independent and act only in the interests of the Union as a whole.
The EBA’s seat is in London. Its scope includes credit institutions, financial conglomerates, investment firms and payment institutions. A multitude of tasks are conferred on the EBA by its founding regulation. They include: ensuring sound, effective and consistent regulation and supervision; contributing to the stability and effectiveness of the financial system; preventing regulatory arbitrage; ensuring an equal level of supervision; consumer protection; strengthening international supervisory coordination; and appropriate regulation of supervision of credit institutions. The EBA contributes to the development of the single rulebook by drafting technical regulatory standards and implementing technical standards, which are adopted by the Commission (as delegated or implementing acts). It issues guidelines and recommendations and has certain powers in relation to breaches of EU law by national supervisory authorities. The EBA’s governing bodies are the Board of Supervisors (the main decision-making body, which consists of the Chairperson, the head of the competent supervisory authority in each Member State, and one representative each from the Commission, the ECB, the ESRB and the other two ESAs), the Management Board, a Chairperson, an Executive Director and the Board of Appeal.
The EIOPA’s seat is in Frankfurt am Main. Its set-up is similar to that of the EBA, but it is primarily targeted on insurance undertakings.
The ESMA is located in Paris. Its set-up is similar to the other ESAs, but it is primarily targeted at securities markets and their participating institutions. In the EU the ESMA has sole responsibility for the registration and supervision of credit rating agencies.
The Joint Committee is responsible for overall and cross-sectoral coordination, with the aim of ensuring cross-sectoral supervisory consistency. As outlined in the ESAs’ regulations, this includes the following areas: financial conglomerates; accounting and auditing; micro-prudential analyses of cross-sectoral developments, risks and vulnerabilities for financial stability, retail investment products; measures to combat money laundering; information exchange between ESRB and ESAs; and the development of relations between these institutions. The Joint Committee is responsible for the settlement of cross-sectoral disputes between ESFS Authorities.
The Joint Committee is composed of the Chairpersons of the ESAs (and of possible subcommittees) and chaired by one ESA Chairperson for a rotating 12-month term. The Chairperson of the Joint Committee is the Vice-Chair of the ESRB. The Joint Committee must meet at least twice a year. The secretariat is provided by staff of the ESAs.
According to the various legislative measures in the financial services field, each Member State designates its own competent authority or authorities. These competent national supervisory authorities form part of the ESFS.
Macro-prudential oversight is carried out at European level by the European Systematic Risk Board (ESRB), established in Frankfurt am Main. Its objective is to prevent and mitigate systemic financial stability risk in the European Union in the light of macro-economic developments. The founding regulations confer various tasks upon, and provide instruments to, the ESRB, including: the collection and analysis of relevant information; identifying and prioritising risks; issuing warnings and recommendations and monitoring their follow-up; issuing a confidential warning and providing an assessment to the Council when the ESRB determines that an emergency situation may arise; cooperating with other parties of ESFS; coordinating its actions with international financial organisations such as the IMF and the Financial Stability Board (FSB); and carrying out tasks specified in other EU legislation. The European Central Bank (ECB) provides the secretariat for the ESRB, and the President of the ECB is also the Chair of the ESRB.
The various entities within the ESFS also coordinate at international level with various institutions.
The financial crisis showed that simple coordination of financial supervision via the ESFS was not sufficient to prevent fragmentation of the European financial market. In order to overcome this obstacle, in mid-2012 the Commission proposed a Banking Union, which would adopt a more integrated approach and complement the single currency area and the single market. This framework comprised a Single Supervisory Mechanism (SSM), a Single Resolution Mechanism (SRM), and a common deposit guarantee scheme, supplemented by the development of a single supervisory rulebook and a single supervisory handbook. In the meantime, the SSM and SRM have been established.
The objective of the SSM is to ensure consistent, coherent supervision of credit institutions in order to prevent regulatory arbitrage and fragmentation of the financial services market in the Union. The participating Member States consist of all the euro area Member States plus those non-euro area Member States which decide to join. The SSM is composed of the ECB and the competent national authorities, which cooperate and exchange information. The ECB is responsible for the effective and consistent functioning of the mechanism. As of November 2014, the SSM Regulation confers specific tasks relating to the prudential supervision of credit institutions in the participating Member States on the ECB. They include authorising credit institutions, ensuring compliance with prudential and other regulatory requirements, and carrying out supervisory reviews. Besides these micro-prudential tasks, the ECB also has macro-prudential tasks and tools at its disposal, for example in relation to capital buffers. For this purpose the governance structure of the ECB has been adapted through the establishment of a Supervisory Board.
In order to ensure consistent supervision, the ECB cooperates closely with the other authorities forming the ESFS, in particular with the EBA.
Regulation (EU) No 806/2014 establishes the Single Resolution Mechanism (SRM) and Single Bank Resolution Fund (SRF). The SRM provides tools and instruments for the recovery and resolution of credit institutions and certain investment firms in the euro area and in other participating Member States. The Resolution Board (based in Brussels) is the decision-making body. The SRF serves as a financial backstop. Some aspects of the SRF, such as the transfer and mutualisation of national contributions, are covered by an intergovernmental agreement. The provisions relating to the SRM should be distinguished from the Bank Recovery and Resolution Directive (2014/59/EU), which ensures harmonised national recovery and resolution mechanisms in all EU Member States.
DGSs are closely linked to the recovery and resolution procedure of credit institutions and provide an important safeguard for financial stability. After the initial DGS Directive of 1994 received a ‘quick fix’ in 2008 (increase in amount covered), a recast was proposed in 2010 and adopted in 2014. In the event of the non-payment of due deposits, up to EUR 100 000 of covered deposits are protected. Other major improvements include risk-based contributions, shortened repayment deadlines (from 20 to 7 working days), and voluntary lending between DGSs in different Member States. The Banking Union framework includes a ‘common’ DGS, but discussions are ongoing as to whether such a DGS is necessary, and, if so, how it should be designed (guarantee, insurance, reinsurance, etc.).
In order to ensure a level playing field, a single rulebook must be developed. A single supervisory handbook will ensure consistent supervision and is to be developed by the relevant competent authorities, i.e. national supervisors, the EBA and the ECB. Initiatives for structural bank reforms which are currently under discussion (e.g. the Liikanen report) may also have an impact on the supervisory framework. Several Member States, including France and Germany, have already adopted legislative measures in this area. The Commission published its proposal for a regulation on structural measures improving the resilience of EU credit institutions in January 2014.
The European Parliament, in its role as co-legislator, played an important part in setting up the founding legislation for the ESFS, and also plays a major role in negotiations concerning legislation under the various pillars of the Banking Union. It has a role as regards delegated acts (including regulatory technical standards) and implementing acts (including implementing technical standards) adopted by the Commission. It has extensive information rights, e.g. receiving the annual work programme, the multiannual work programme and the annual reports of the ESAs. The chairpersons of the ESAs and the executive directors have to be confirmed by Parliament. In addition, Parliament may request opinions from the ESAs. Parliament also votes to decide whether to grant discharge for the budget of the various authorities each year. Parliament and the ECB have, furthermore, concluded an interinstitutional agreement in order to ensure that accountability and oversight regarding the exercise of the tasks conferred on the ECB within the SSM framework.
For its components, see COM MEMO/13/679, point 1.2.