Besley, Timothy, and Stephen Coate, 2000, “Centralized versus De-centralized Provision of Local Public Goods: A Political Economy Analysis,” CEPR Discussion Paper No. 2495.
Decressin, Jörg, Hamid Faruqee, and Wim Fonteyne, 2007, Integrating Europe’s Financial Markets, (Washington: International Monetary Fund).
Dell’Ariccia, Giovanni, and Robert Marquez, 2001, “Competition Among Regulators,” IMF Working Paper 01/73 (Washington: International Monetary Fund).
European Central Bank, 2006, Recent Developments on Supervisory Structures in EU and Acceding Countries, available on-line at www.ecb.int/pub/pub/prud/.
European Central Bank, 2008, Monthly Bulletin: 10th Anniversary of the ECB, May, available online at http://www.ecb.eu/pub/html/index.en.html.
Evanoff, Douglas D., and George G. Kaufman, Eds., 2007, International financial instability: global banking and national regulation, World Scientific, New Jersey.
Kremers, Jeroen J.D., Dirk Schoenmaker, and Peter J. Wierts, Eds., 2003, Financial Supervision in Europe, Edward Elgar, Northampton MA.
Garcia, Gillian G. H., and Maria J. Nieto, 2007, “Preserving Financial Stability: A dilemma for the European Union,” Contemporary Economic Policy Vol. 25, No. 3, pp. 444–58.
Gerling, Kerstin, Hans Peter Grüner, Alexandra Kiel, and Elisabeth Schulte, 2005, “Information Acquisition and Decision Making in Committees: a survey,” European Journal of Political Economy, Elsevier, Vol. 21 (3), pp. 563–597, September.
Hardy, Daniel C., and Maria Nieto, 2008, “Cross-Border Coordination of Prudential Supervision and Deposit Guarantees,” IMF Working Paper 08/283 (Washington: International Monetary Fund).
Holthausen, Cornelia, and Thomas Rønde, 2005, “Cooperation in international banking supervision,” Center for Economic Policy Research Discussion Paper Series No. 4990.
Hüpkes, Eva H. G., Marc Quintyn, and Michael Taylor, 2005, “The Accountability of Financial Sector Supervisors: Principles and Practice,” IMF Working Paper 05/51 (Washington: International Monetary Fund).
Masciandaro, Donato, and Marc Quintyn, Eds., 2007, Designing financial supervision institutions: independence, accountability and governance, Edward Elgar, Northampton MA.
Nieto, Maria J., and Garry Schinasi, 2007, “EU Framework for Safeguarding Financial Stability: Towards an Analytical Benchmark for Assessing its Effectiveness,” IMF Working Paper 07/260 (Washington: International Monetary Fund).
Nieto, Maria J., and Juan Peñalosa, 2004, “The European Architecture of Regulation, Supervision and Financial Stability: A Central Bank Perspective,” Journal of International Banking Regulation, 5 (3), 2004, pp. 228–42.
Ruta, Michele, 2003, “The Allocation of Competencies in an International Union: A Positive Analysis,” ECB Working Paper No. 220, Frankfurt am Main, Germany.
Scheller, Hanspeter K., 2006, The European Central Bank: History, Role and Functions, Second Revised Edition, ECB, Frankfurt am Main, Germany.
Trondal, Jarle, 2004, “An institutionalist perspective on EU committee decision making,” in Reinalda, Bob, and Bertjan Verbeek, Eds., Decision making within international organizations, Rutledge, New York.
The author would like to thank, without implication, Martin Cihak, Jörg Decressin, Wim Fonteyne, Kerstin Gerling, Alessandro Giustiniani, and participants at seminars at the IMF, the EU Commission, and the ECB for helpful comments.
Supervision of the insurance sector is more nationally oriented, based on the so-called “solo-plus” principle.
European deposit guarantee schemes do not generally have supervisory role. In some countries, associations of banks de facto supervise themselves to some extent. Self-regulation elements are more common in the nonbank financial sector.
The EFC comprises within its normal composition representatives of EU finance ministries, national central banks, the ECB and the Commission. The FST consists of the EFC extended to include the Chairs of the EU supervisory committees and the ECB’s Banking Supervision Committee.
Art. 3.33 of the ESCB/ECB Statute states that “In accordance with Article 105(5) of this Treaty [establishing the European Community], the Eurosystem should contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system.”
A “race to the bottom” occurs when regulators compete to minimize the regulatory burden in order to attract firms; Dell’Ariccia and Marquez (2001) model regulatory competition in the financial sector.
The issues are extensively discussed in the literature on the supervisory structure in the EU that has already been cited, and for example in Garcia and Nieto (2007), Holthausen and Rønde (2005), and Nieto and Schinasi (2007).
Academic literature suggests that the outcome of decision making by committee may be far from maximizing aggregate welfare, and may depend on such factors as the voting rules, sequence of items on the agenda, timing of communication, and the size of the committee (Gerling, Grüner, Kiel and Schulte, 2005, provide an overview).
For example, some commentators have suggested discussions on reporting definitions, formats and requirements have been characterized by agreements to disagree rather than streamlining or harmonization.
Considerable lobbying goes on at a European level, but here European-wide interest groups predominate. There are grounds for thinking that decisions made under inter-governmental structures are more prone to distortion by lobbying than are decisions made by a union-wide authority (Ruta, 2003).
“Gold Plating” involves adding extra provisions to those contained in harmonizing Directives, which could be motivated by a desire to shift any problems to other jurisdictions, or by favoritism toward domestic firms that are more adapted to the Gold Plating provisions.
The issues are relevant more widely as global financial markets integrate (Evanoff and Kaufman, 2007).
Trondal (2004) provides an interesting analysis of the mixture of intergovernmental, functional, and supranational forces at work in EU committees.
Oates (1972) formalized the intuition that centralization is more desirable, the greater are spill-overs, a result that seems to be robust to the incorporation of more complex political arrangements and policy choices (Besley and Coate, 2000).
Some of the possible coordination problems were manifest in the various crisis simulation exercises that European supervisors and other agencies have conducted. While arrangements for coordination of monetary policies and operations seem to have functioned well in exercises (and during the current crisis), other elements of financial policy were much more difficult to coordinate.
The term “efficiency” will be used here as a shorthand for concerns such as reducing costs of doing business for financial sector firms and their clients, promoting the development of the sector and allowing innovation, and the operation of fair markets that aggregate information effectively. Several European supervisors have both a stability objective and explicit objectives to promote efficient markets, improve business capability and effectiveness, or ensure the financial system’s profitability.
Following some celebrated cases of national favoritism, a directive has been adopted to deal with these “entry” issues, and clarify the powers recognized to supervisory authorities in the context of, for example, a proposed take-over.
Oates (op.cit.) makes the case that cooperation is easier, the more homogenous are the members of the policy union, but this result may be weakened when decisions are made by representatives elected at a union or local level (Besley and Coate, op. cit.).
Member states are individually responsible for maintaining financial stability under the European Treaties.
The Eurosystem and in particular the ECB already have a strong European dimension in the definition and execution of their responsibilities, as enshrined in the EU treaty.
Under directive 2001/24/EC, where a credit institution with branches in other Member States fails, the winding up process is subject to a single bankruptcy proceeding initiated in the Member State where the credit institution has its registered office and governed by the bankruptcy law of that state. The Commission has launched in 2007 a public consultation on this directive to examine whether the Directive fulfils its objectives, whether it could be extended to cross-border banking groups, and how obstacles related to asset transferability within such groups can be addressed.
For example, deposits of a failed bank may need to be transferred to another institution, which will make payouts or acquire the deposits under a purchase and acquire scheme. It may be impractical to use the same recipient bank in all countries where the failed bank had branches.
See Hardy and Nieto (op. cit.).
The ECOFIN already sets the agenda in broad terms, and the European Parliament will from now on monitor their work programs.
Hüpkes, Quintyn, and Taylor (2005) document that supervisors often have multiple objectives with no clear ranking.
The ECB has such a hierarchy of objectives: according to Article 105(1) of the Treaty establishing the European Community, “the primary objective of the European System of Central Banks shall be to maintain price stability … Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2” of the Treaty on European Union, which are a high level of employment and sustainable and non-inflationary growth. See Scheller (2006) for an exposition of the rationale for these provisions.
The International Association of Insurance Supervisors’ Core Principles includes, as essential criteria under Core Principle 2, that “the key objectives of supervision [is to] promote the maintenance of efficient, fair, safe and stable insurance markets for the benefit and protection of policyholders” and “in the event that the law mandates or specifies multiple objectives for insurance supervision, the supervisory authority discloses and explains how each objective will be applied.” For the International Organization of Securities Commissions’ methodology states that “The three core objectives of securities regulation are: The protection of investors; ensuring that markets are fair, efficient and transparent; the reduction of systemic risk. Principle 1 requires that “the arrangements in place demonstrate the ability of the regulatory framework to create and implement a system intended to protect investors, provide fair, efficient and transparent markets, and reduce systemic risk.” Thus, these stability concerns take clear precedence over other possible objectives. The Basel Core Principles for Effective Banking Supervision are less explicit on this point.