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Proposals to enhance supervision over the European Financial Sector; the so-called financial package

On 23 September 2009, the European Commission presented legislative proposals to enhance supervision over the European Financial Sector. The proposals are based on a report by Jacques de Larosièr, the former Managing Director of the International Monetary Fund, and his recommendations, which define a more efficient and integrated supervisory framework that would operate on a cross-border, European level. The new supervision architecture focuses on future sustainable reinforcement of financial stability throughout the entire EU, harmonising rules and creating coherent supervisory practice and enforcement, identifying systemic risks in early stage, enhancing cooperation in extraordinary circumstances and resolving disputes, if any, between supervisory authorities.

The proposals presented by the Commission, significantly alter and modify the existing supervisory mechanisms.

There are 3 European advisory committees currently operating in the financial sector. The financial package, if approved, shall result in the transforming of these committees in new sector supervisory bodies. The Committee of European Banking Supervisors (CEBS) shall be replaced by the European Banking Authority (EBA), the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) shall change in the European Insurance and Occupational Pensions Authority (EIOPA) and the Committee of European Securities Regulators (CESR) shall be renamed as the European Securities and Markets Authority (ESMA). These European Supervisory Authorities - ESAs will take over all of the functions of committees, and in addition have certain extra competences. They shall then work in tandem with national financial supervisors.

Furthermore, 2 quite new bodies of financial supervision shall be established: the European Systemic Risk Board (ESRB) and the European System of Financial Supervisors (ESFS). The ESRB will be responsible for macro-prudential oversight of the financial system within the Community while the ESFS will be in charge of micro-prudential supervision. The ESRB shall monitor and assess risks jeopardizing stability of the financial system as a whole, ensure timely warning mechanisms against systemic risks that might otherwise grow, and, if necessary, issue recommendations for measures to be taken by the relevant authorities. The ESFS, composed of a network of national supervisors cooperating with ESAs, shall be responsible for supervising individual financial institutions. It also shall be entrusted with certain executive powers such as drafting “technical standards”, resolving potential disputes between national supervisory authorities or fostering harmonised rules and coherent supervisory practice and enforcement in all EU Member States.

At the end of October the European Commission adopted additional legislative proposals, which lay down in detail the scope for the Authorities to exercise their powers.

The draft bills on the macro-financial aspects of the reform package should be adopted without any major problems. However, some Member States have concerns with the stricter micro-financial supervision. The Council of the finance ministers compromised at its meeting held on 2 December 2009 and agreed to restrict some of ESAs powers as compared to the original Commission’s proposal.  The European Parliament should deal with the drafts in the first quarter of 2010. The new authorities should start operating at the end of 2010.

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