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. As part of a legislative initiative procedure, Parliament adopted a resolution on the ESFS review on 11 March 2014, making detailed recommendations to the Commission. The introduction of the Banking Union also changed the shape of the European supervisory framework.
In the EU 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 sectoral area (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 entities 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 agencies 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.
Legal basis: Regulation (EU) No 1093/2010 establishing a European Supervisory Authority (European Banking Authority) as amended by subsequent legislation.
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.
Legal basis: Regulation (EU) No 1094/2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority) as amended by subsequent legislation.
The EIOPA’s seat is in Frankfurt am Main. Its set-up is similar to that of the EBA, but it is primarily concerned with insurance undertakings and institutions for occupational retirement provision (IORPs).
Legal basis: Regulation (EU) No 1095/2010 establishing a European Supervisory Authority (European Securities and Markets Authority) as amended by subsequent legislation.
The ESMA is located in Paris. Its set-up is similar to the other two ESAs, but its scope covers securities markets and participants (exchanges, traders, funds, etc.). In the EU the ESMA has sole responsibility for the registration and supervision of credit-rating agencies and trade repositories. It is in charge of recognising third-country central counterparties (CCPs).
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 and are represented in the ESAs.
Regulation (EU) No 1092/2010 on European Union macro-prudential oversight of the financial system and establishing a European Systemic Risk Board and Council Regulation (EU) No 1096/2010 conferring specific tasks upon the European Central Bank concerning the functioning of the European Systemic Risk Board.
Macro-prudential oversight is carried out at European level by the European Systemic 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 confidential warnings and providing an assessment to the Council when the ESRB determines that an emergency situation may arise; cooperating with other parties to the 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 comprises a Single Supervisory Mechanism (SSM, established), a Single Resolution Mechanism (SRM, established), and a common deposit guarantee scheme (proposed in the form of a European Deposit Insurance Scheme (EDIS)), supplemented by the development of a single supervisory handbook.
The objective of the SSM is to ensure consistent and coherent supervision of credit institutions in order to prevent regulatory arbitrage and fragmentation of the financial services market in the Union. The SSM consists of all euro area Member States plus any 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 (SRB, 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 apply the Bank Recovery and Resolution Directive (2014/59/EU), which ensures harmonised national recovery and resolution mechanisms in all EU Member States within the SSM.
DGSs are closely linked to the recovery and resolution procedure of credit institutions and provide an important safeguard for financial stability. After the first DGS Directive from 1994 received a ‘quick fix’ in 2008 (increase in amount covered), a recast was adopted in 2014. In the event of the non-payment of due deposits, up to EUR 100 000 of covered deposits are protected. Other improvements relate to risk-based contributions, shortened repayment deadlines (7 rather than 20 working days), and voluntary cross-border lending between DGSs. The Banking Union framework included a ‘common’ DGS. In the meantime, the Commission has proposed an EDIS.
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. The proposal for a regulation on structural measures improving the resilience of EU credit institutions was published in January 2014 and is currently being negotiated between Parliament and Council.
Parliament as co-legislator played an important part in setting up the founding legislation for the ESFS, and also plays a major role in negotiating 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 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.