The EU needs a strong financial supervision system with binding powers and the most appropriate solution would be a 'twin peaks' model – with one authority to supervise the banking and insurance sectors and another for securities and consumer protection, writes French Socialist MEP Pervenche Berés in a July blog post for the Hellenic Foundation for European & Foreign Policy (ELIAMEP).
The following commentary was authored by French Socialist MEP Pervenche Berés for ELIAMEP.
''The supervisory package currently under consideration and based on the conclusions of the de Larosière group constitutes an important step ahead. However, further steps will be needed for the future structure of EU supervision if we want to avoid crises in future by enhancing financial stability and investor protection to ensure that the financial markets are geared towards long-term investment.
To me, a key lesson to be drawn from the financial crisis is that national financial supervision was unable to oversee increasingly globalised markets.
Globalisation without the appropriate regulation and supervision created incentives favouring financial markets over the real economy, and short-term profits over long-term investment, driven by shareholder value and excluding the social partners and end-users such as SMEs and consumers.
This gave way to weak, opaque and inherently unstable balance sheets of large financial institutions which were ever more under pressure to find larger profits.
To overcome this situation, a strong European financial supervision system with binding powers is needed, notably for cross-border institutions. Moreover, the future supervisory framework should aim not only at guaranteeing financial stability, but also at protecting the investor.
Therefore, in the context of the current supervisory package, I have been calling for the new European Securities Market Authority (ESMA) to be given the task of registering financial innovation products as prototypes, to authorise their selling on the market, to monitor them and to ban them if necessary.
This could be a first step towards a 'twin peaks' model of supervision, which I believe to be the most appropriate solution for the future. It would consist of a single authority for the supervision of the banking and insurance sector, operating under the auspices of the European Central Bank (ECB), and another one for securities and consumer protection.
In this framework, the ECB would be in charge of macro-prudential supervision and of co-supervising the large cross-border financial institutions. The crisis showed that micro-supervision is not sufficient considering the aggregation of risks stemming from all parts of the economy and the financial markets. Therefore the role of the ECB in such a future framework would be of utmost importance.
In parallel, national supervisors need to be reinforced in their capacity to do their job at national level and in confidence with the EU authorities.
Furthermore, it is of crucial importance to find coordinated solutions to crisis resolution by cross-border institutions in the EU. In this regard, I welcome the Commission's communication on EU crisis resolution. This requires a high level of harmonisation of national resolution mechanisms and of insolvency rules in order to ensure that the system works properly. It also supposes setting up key principles for burden-sharing among member states.
The idea of establishing a European resolution fund should be welcomed in this regard and should be linked to a living wills exercise for all institutions across Europe. I also believe that the new EU supervisory architecture should engage in harmonising and developing the practice of stress tests.
If financial markets are to be designed at the service of the real economy, it is necessary to ensure the effectiveness of incentives towards the long-term horizon and that the costs in case of crisis are borne by shareholders and creditors, and not by taxpayers, while ensuring financial stability and the continuity of services to users.
This requires taking all stakeholders on board and not to be caught in a 'tête à tête' between regulators and the industry which necessarily end up in a biased and short-sighted approach. Supervision is not just about an abstract architecture, it needs to open-up to new profiles and to broaden its scope such as to monitor issues such as corporate governance and remunerations.''