01.10.2012 Page 1 European Financial Supervisory System - PowerPoint Presentation

1. 01.10.2012Page 1European Financial Supervisory System International and European Financial Law – Lecture 2Prof. Dr. iur. Kern Alexander

2. 01.10.2012Page 2L1 International Law in Financial MarketsL2 European Financial Supervisory SystemL3 EU Capital MarketsL4 Market Abuse, Insider Dealing and Market ManipulationL5 EU Banking LawL6 EU Monetary LawL7 MiFIDL8 The Organization of Clearing and Settlement in Securities TradingL9 International Monetary LawL10 UK and Swiss Financial Regulation ReformL11 Wholesale Capital MarketsL12 Rebuilding International Financial and European Law

3. Lessons from the crisisSystemic risk arises from institutions and market structuresPower of financial contagion in liberalised EU & global financial markets Policy analysisMarket-based financial regulatory models do not adequately monitor and control systemic risks Cross-border macro-prudential supervision & regulation requiredPolicy implementationOutdated Home country supervision exacerbated externalities Redesigned EU institutional structures to monitor and control effectively cross-border externalities 01.10.2012Page 3

4. Principles of EU Institutional DesignSupra-nationalism v. inter-governmentalism Institutional balance (Meroni) – separation of powers v. interest representation EU constitutional law principles – legality, due process, proportionality, equal treatment & legitimate expectations EU administrative law – technocratic autonomy based on supra-national regime that depends for its democratic legitimacy on national structures of hierarchical government. Governance - the phenomenon of ‘governance without government’ Commission’s White Paper on governance 01.10.2012Page 4

5. Changing market structures and global financial firmsRisk management & financial innovation: Technical developments in data analysis capability, in statistical theory and in the theory of finance have transformed risk management, pricing, and the range of financial products.Global financial firms: risk management, strategy, Treasury function and audit centralised at group levelFinancial regulation and crisis management have not kept pace with these changes. 01.10.2012Page 5

6. Modern financial regulation has evolved to an interactive risk-based processInternational Basel II (III) - (I) devise a process to measure financial risk, and (II) devise corporate governance structure to meet home/host regulatory approval EuropeHome country control, mutual recognition, minimum standards – However, a trend towards interactive regulation (ie., MIFID) Solvency II – risk-based process based on modelsRegulation has become a source of innovationand competitive advantage01.10.2012Page 6

7. EU financial legislation & policy – some historyPre-1986 – unsuccessful efforts to approximate and make equivalent financial law and regulation across EU states1985 White paper and 1986 Single European Act Home country control, mutual recognition based on minimum standards – the EC passport EU legislation is a tool for liberalisation with little oversight of member state regulatory practicesLisbon Council Decision (post 2001)– FSAP & Lamfalussy: Harmonisation of laws and coordinated regulatory practices based on market-based models (McCreevy era)01.10.2012Page 7

8. EU FSAP – critique pre-crisisLevel playing field and competition concerns Greater consistency between directives, flexible legislation that adapts to markets, linguistic issues for implementation, EU regulations v. directives, avoid unintended consequences and not undermined by subsequently adopted national laws (Lord Woolf, June 2005).Greater uniformity needed in application and implementation of EC financial law 01.10.2012Page 8

9. The EU Lamfalussy structure01.10.2012Page 9EBC¹CommissionParliamentEIOPC¹ESC¹FCC¹Enforcement CommissionCouncilCEIOPS³CESR³L1L2L3L4CEBS²EBC = European Banking CommitteeEIOPC = European Insurance and Occupational Pensions Committee ESC = European Securities CommitteeFCC = Financial Conglomerates CommitteeCEIOPS = Committee of European Insurance and Occupational Pensions SupervisorsCESR = Committee of European Securities Regulators¹ Finance ministries ² Supervisors and Central Banks³ SupervisorsLegislationImplementing detailsConvergence

10. Critique of the Lamfalussy system (2007-09)Patchy progress by L3 committees in promoting consistent implementation of Community legislation/enhancement of convergence in EU supervisory practicesWeak link (IMF 2007): no clear framework with respect to the oversight of the cross-border operations of financial groups in EU Refinements – eg MoUs, CEBS/BSC Joint Task Force on Crisis Management; strengthening of L3 committeesVan den Burg and Daianu report – EP 200801.10.2012Page 10

11. Van den Burg and Daianu report – EP 2008Strengthen and clarify status of Lamfalussy 3 Level 3 committees. Promote supervisory convergence and level playing field3 Level 3 committees should be able to take decisions based on QMV and adopt common rulebook Oversee supervisory colleges and interface with international bodies EU supervisory system with legal competence to monitor cross-border banks and link micro & macro supervisionCommission to propose regulations by late 200901.10.2012Page 11

12. The future EU financial architecture: linking micro-prudential and macro-prudential supervisionFrom De Larosière Report to the EU Commission proposed Regulations.On the micro-prudential side: the European System of Financial Supervisors (ESFS). It will consist in the current Level 3 Committees of supervisors, which will be transformed into new European Supervisory Authorities (ESAs) responsible for banking, insurance and securities respectively.On the macroprudential side, a European Systemic Risk Board (ESRB) will be established. It will be composed of EU central bank governors, including the ECB President, the chairpersons of the ESAs, a representative the European Commission, as well as representatives of national supervisory authorities and the Chair of the EFC (the latter two categories without voting rights). 01.10.2012Page 12

13. European System of Financial Supervision01.10.2012Page 13European Systemic Risk Board (ESRB)[Chair elected by ESRB Board]Members of ECB/ESCB General Council (with alternatives where necessary+Chairs ofEBA, EIOPA & ESMA+EuropeanCommissionInformation on micro-prudential developmentEarly risk warningEuropean Supervisory Authorities (ESAs)European BankingAuthority (EBA)EuropeanInsuranceOccupationalPension Authority(EIOPA)EuropeanSecurities & Markets Authority (ESMA)National BankingSupervisorsNational InsuranceSupervisorsNational SecuritiesSupervisorsMacro-prudential supervisionMicro-prudential supervision

14. ESFSEuropean Systemic Risk Board (ESRB)European Banking Authority (EBA) European Securities and Markets Authority (ESMA) European Insurance, Occupational and Pensions Authority (EIOPA)The Joint Committee of the European Supervisory Authorities (Joint Committee)The competent authorities in the Member States01.10.2012Page 14

15. Legal basisArticle 114 as the legal basis for the establishment of bodies that are vested with responsibilities for contributing to the harmonisation process and facilitating uniform implementation by MSs (Case C-66/04, C-217/04)Actually and objectively apparent from the legal act creating the body in question that its purpose is to improve the conditions for the establishment and functioning of the internal marketTasks conferred on such a body must be closely linked to the subject-matter of the relevant harmonizing legislation01.10.2012Page 15

16. The ESFS: subsidiarity and proportionality “[T]he objective of this Regulation, namely an effective macro-prudential oversight of the Union financial system, cannot be sufficiently achieved by the Member States because of the integration of the European financial markets, and can therefore be better achieved at Union level, the Union may adopt measures in accordance with the principle of subsidiarity,” . . . [and] “in accordance with the principle of proportionality,”. . . “this Regulation does not go beyond what is necessary to achieve that objective.” (ESRB Regulation, rec 20)Justified in cost-benefit terms? Subsidiarity as a basis for managing relations between ESFS/ESRB/ESAs and MS systemic risk oversight bodies & supervisors01.10.2012Page 16

17. ESAs (I)Chairperson (strategic leadership and reports to EP and other stakeholders) has ‘proven supervisory experience’Board of Supervisors (Chairperson presides)Management Board (Chair presides)Executive Director (oversee all aspects of daily management, shape admin processes and prepare work programme and budgets and supports Chair)01.10.2012Page 17

18. ESAs (II)Ensuring that a single set of harmonised rules and consistent supervisory practices are applied by national supervisors;Ensuring a common supervisory culture and consistent supervisory practices; Collecting micro-prudential information; Ensuring consistent application of EU rules, and resolving disputes in cases such as the manifest breach of EU law or ESA standards and disagreement between national supervisors or within a college of supervisors01.10.2012Page 18

19. The ESFS: subsidiarity and proportionality “[T]he objective of this Regulation, namely an effective macro-prudential oversight of the Union financial system, cannot be sufficiently achieved by the Member States because of the integration of the European financial markets, and can therefore be better achieved at Union level, the Union may adopt measures in accordance with the principle of subsidiarity,” . . . [and] “in accordance with the principle of proportionality,”. . . “this Regulation does not go beyond what is necessary to achieve that objective.” (ESRB Regulation, rec 20)Justified in cost-benefit terms?Subsidiarity as a basis for managing relations between ESFS/ESRB/ESAs and MS systemic risk oversight bodies & supervisors01.10.2012Page 19

20. Harmonised code and technical standardsnorm generation (I)ESAs devise code & standards in areas specified by directives (delegation)No general mandate to devise code/standardsLevel 1 – Directives/Regulations provide Principles Level 2 – Delegated acts may involve Council/EP Level 3 – ESAs deliberate and adopt code/standards by QMV, and then Commission decides to endorse and can amend or substitute new code rules & standards. Council/EP may object, resulting in a review whereby the Commission may decide against ESAs. Only ESAs and Commission adopt acts for technical implementation 01.10.2012Page 20

21. Harmonised code and technical standardsnorm generation (II)Level 4 – Decentralised implementation & enforcement by MSsESA regulatory technical standards will be legally binding Direct application as law in all EU states01.10.2012Page 21

22. ESA code/standards – the effects EU regulatory rulebook addressed to national supervisors and displaces national rulebooksApplies directly to banks/firms/individualsCan be invoked to regulate relationships between firms – ie., make some contracts illegal and provide a basis for injured parties to recover damages in MS courts Technical standards/requirements & risk measurement process delegated to ESAs, and information exchange among supervisors 01.10.2012Page 22

23. Fiscal autonomyESAs not allowed to take any measures under that would require a MS to make fiscal expenditures 01.10.2012Page 23

24. ESAs – the implications?Will ESAs undermine effectiveness of decentralised member state supervision?What is the optimal institutional design for EU regulation/supervision: a single EU supervisor?Do the different polities and regulatory cultures across Europe make harmonised codes, standards and technical guidance impractical in today’s risk-based supervision?01.10.2012Page 24

25. How will harmonised norms work for macro-prudential regulation? Firm levelCounter-cyclical capital & dynamic provisioning linked to points in the business cycleLiquidity requirements – wholesale funding limits Leverage caps – non risk-based limits on credit growth System levelMonetary policy – expand focus to include asset pricesTrade policy and capital controlsAggregate levels of leverage in the system (ie., credit quotas)The role of Lender of Last Resort (its scope of application) 01.10.2012Page 25

26. ConclusionIncreasingly integrated EU financial marketsCentralised governance and risk management of largest 50 or so EU financial institutionsIs the existing home/host/Lamfalussy adequate?ESA powers to generate norms directly to member states What are the implications? A EU single supervisor?Far reaching re-appraisal of the role of EU financial regulation: developing uniform rules, technical standards and guidelines to enhance the implementation of micro-prudential regulation and macro-prudential supervision01.10.2012Page 26

27. The regulator’s task ‘the art of progress is to preserve order amid change, and to preserve change amid order’Alfred North Whitehead01.10.2012Page 27

28. Further readings – EP ReportsAlexander, K. ‘Which future model for Europe?’ (Feb 2010, IPA CRIS)Alexander, J. Eatwell, A. Persaud & R. Reoch, Financial supervision and crisis management in the EU’ (Dec. 2007) http://www.europarl.europa.eu/activities/committees/studies/download.do?language=en&file=26588‘Clearing and Settlement in the EU’ K. Alexander, J. Eatwell, A. Persaud and R. Reoch (Sept. 2009) IPA ECON 2009/001. http://www.europarl.europa.eu/activities/committees/studies/searchPerform.do?page=2&language=EN 01.10.2012Page 28