A New Financial Supervisory Framework for Europe

On 2 September 2010 a provisional agreement was reached between the EU Council, the European Parliament and the European Commission on the new financial supervisory framework for Europe. The framework, the first cross border framework of this kind, will be essential to financial stability and the management of future crises. This is a significant step towards a pan-European regulation of financial markets.

The framework stems from proposals made last year by a group created by the Commission and led by Jacques de Larosière, the former governor of France's Central Bank, to reform financial supervision in order to help prevent another recession.

The reform package, described by Commissioner Michel Barnier as "a crucial milestone", will consist of four legal instruments by way of example: regulation setting up a macro prudential framework for financial stability oversight, a regulation setting up three regulatory separate European regulatory institutions, and two "omnibus" regulations covering a range of matters. The first omnibus regulation includes developing proposals for technical standards, resolving disagreement between national supervisors, contributing to ensuring consistent application of technical Community rules and a coordination role in emergency situations. The second omnibus regulation will cover technical decisions.

The macro prudential oversight of the financial system will involve the creation of a new European Systemic Risk Board (ESRB). The micro prudential supervision will include three European supervisory authorities (ESAs) covering Securities and Markets, Banking and Insurance and Pensions.

Key Aspects

Macro prudential supervision will be centred upon the ESRB which will monitor and assess risk to financial stability as a whole. During the first five years, the Board will be chaired by the President of the European Central Bank (ECB) and thereafter a review will take place. More generally, the Board will be composed of senior representatives from central banks of Member States, and technical experts.

The micro prudential legislation sets up a new architecture for Europe's financial supervision system. The framework will be comprised of three supervisory authorities in different cities: the European Securities and Markets Authority (ESMA) in Paris which will grow out of the CESR secretariat, the European Banking Authority (EBA) in London which will grow out of the CEBS secretariat and the European Insurance and...