The European system of financial supervision

The European system of financial supervision
In May 2009, the European Commission proposed a series of reforms to create a new institutional framework for financial supervision in the EU. The new European System of Financial Supervision (ESFS) came into effect on 1 January 2011. The ESFS encompasses both macro-prudential and micro-prudential supervision. Since 4 November 2014, the European Central Bank (ECB) has a central role within this system of banking supervision. The ECB does that in cooperation with national supervisors. As of 1 January 2016 the Single Resolution Mechanism applies for the restructuring of banks that run into serious difficulties. The European Commission presented new proposals for a European Deposit Insurance System (EDIS) in November 2015.

Background to the ESFS

The financial crisis in 2007 and 2008 revealed serious weaknesses in the structure and practical application of the mechanisms for supervising national financial institutions and the financial system as a whole. The risk management exercised by many financial institutions was also found to be weak in certain areas. Many of these institutions operate internationally, and the existing supervisory mechanisms – operating as they do on national lines – proved ill-equipped to oversee Europe’s integrated and interlinked financial markets. In May 2009, the European Commission consequently proposed a series of reforms to create a new institutional supervisory framework. The new system, the ESFS, came into effect in January 2011.

The reforms of rules and regulations for the financial sector are aimed at safeguarding financial stability, restoring confidence in the financial system as a whole, and providing users of financial services with sufficient protection.

Actors in the ESFS

The European System of Financial Supervision comprises the following institutions:

A. European Systemic Risk Board (ESRB), for macro-prudential supervision;
B. three European sectoral supervisors (ESAs: European Supervisory Authorities) for micro-prudential supervision:

  • EBA (European Banking Authority) for banks;
  • EIOPA (European Insurance and Occupational Pensions Authority) for insurance undertakings and occupational pension providers;
  • ESMA (European Securities and Markets Authority) for securities institutions and markets;

C. Joint Committee of the European Supervisory Authorities (JCESA) for micro-prudential supervision;
D. all national supervisory authorities for the banking, insurance and occupational pension sectors for micro-prudential supervision of securities institutions and markets.

Macroprudential supervision

The European Systemic Risk Board (ESRB) oversees the stability of the financial system as a whole by exercising macro-prudential supervision, and is required to issue timely warnings of any weaknesses in the financial markets. The ESRB works with international organisations that seek to promote monetary and financial stability and harmonise banking supervision, such as the International Monetary Fund (IMF), the Financial Stability Board (FSB), and the Basel Committee on Banking Supervision.

Micro-prudential supervision

The three sectoral European supervisory authorities, the Joint Committee of European Supervisory Authorities, and the national competent authorities all supervise individual institutions. Their activities are known as micro-prudential supervision.

Legislation regulating the ESFS

The ESFS brings together financial supervisory authorities operating at both national and EU levels. Supervision for larger banks is now concentrated at the ECB, whereas for smaller banks this is still the national level. However, the national competent authorities are now managed at a more European level than before.

More about the legislation regulation the ESFS.

Start of European Banking Union

The European Banking Union has gradually come into force since 2012. This means that  the supervision of banks is now concentrated at the European level, a single resolution mechanism has been established, and the financial services industry is now subject to more common rules. The European Commission intends to create a European deposit guarantee scheme as well, and has introduced a proposal in November 2015.

The Single Supervisory Mechanism (SSM) Regulation came into force in November 2013, and one year later the ECB effectively assumed its new supervisory responsibilities. The ECB has been given the specific task of identifying risks threatening the viability of banks. Within the Single Supervisory Mechanism, the ECB is directly responsible for supervising the significant banks (i.e. banks with a balance sheet total of at least EUR 30 billion) in the banking union. In addition the ECB supervises the activities of national supervisors with regard to the less significant banks. All banks are subject to the EBA’s single rulebook that applies to the whole of the internal market (Eurozone and non-Eurozone).

In connection with the transfer to the ECB of responsibility for supervising the above banks, the Regulation establishing the European Banking Authority (EBA) has also been amended. The fact that the ECB now supervises credit institutions in certain member states may not hamper the single market in financial services in any way. This is why the EBA retains all its current powers and tasks: it must continue developing and consistently applying the single rulebook for financial services in all member states, and continue strengthening supervisory practices throughout the European Union.”