by Roel Beetsma (University of Amsterdam, CEPR, CESifo) and Sylvester Eijffinger (Tilburg University, CEPR, CESifo)
Although the current credit crisis has (so far) only had a limited impact on the European financial sector, there is still a need to restructure European financial sector supervision. Currently, the responsibility for financial supervision is at the national level. However, with the growing amount of cross-border activity and cross-border mergers of financial institutions this will gradually become an unworkable situation. Who is responsible for the activities of a foreign affiliate of an international financial conglomerate? Should we hold the mother or the daughter company responsible for the daughter’s actions? Which country’s authority should supervise the affiliate? It is rather surprising, and unfortunate, that the current crisis has not led to a serious discussion about the level at which financial supervision should be conducted in Europe. National supervisors will not be too inclined to start such a discussion, as they fear losing responsibilities. In this regard, the European Council, the European Commission as well as the ECB need to take the initiative.
Our proposal is to give the final responsibility for the supervision of the entire financial sector in Europe to a new and independent European Financial Services Authority (EFSA). The EFSA can directly supervise internationally operating companies or companies that operate only at the national level but that are so big that they pose a potential systemic risk. Supervision of smaller, national financial enterprises can be delegated to national supervisory agencies. Hence, these agencies will not disappear, because they are in close contact with national financial firms and as such they have the necessary information for adequate supervision. However, they operate under the umbrella of the EFSA. It is also of crucial importance that the EFSA will be able to impose uniform rules on supervision at the national level. This guarantees a ‘level playing field’ and avoids that national supervisors can put there own companies at an competitive advantage through loose supervision. There exists a serious danger of ‘regulatory competition’ not only at the European, but also at the international level. This has contributed to the lax attitude of the American supervisors. Uniform supervision in the European Union (EU) will, moreover, reduce the costs of information provision and compliance with the rules. Further, with an EFSA, the danger that the national authorities will be played off against each other becomes smaller. The EFSA will have a stronger strategic position vis-à-vis the American supervisors, who are obviously most concerned with their own institutions.
It will be important that the EFSA becomes a separate institution operating independently of the ECB. This reduces the danger that price stability will be sacrificed too easily in order to keep failing companies afloat. We envisage a model similar to the British one, but at the European level. The EFSA needs to operate at the level of the entire EU rather than at the level of the euro-zone. A mixed model with a euro-zone authority and national authorities for the other EU members is bound to fail. In addition, financial institutions from the “old” members of the EU have become active in the recent entrants, while these latter countries are moreover supposed to join the euro-zone one day. It is better to have a big once-and-for-all overall restructuring of the supervisory system. Obviously it is important that the EFSA informs the ECB as the “lender-of-last-resort” in a timely manner when it spots trouble in the financial sector. Incomplete information provision, as in the case of Northern Rock and the British FSA and the Bank of England has to be avoided anytime and at all cost. Separate responsibilities for monetary and financial stability avoids that both tasks get mixed up. Yet, it does not imply that the supervisor and the central bank will not inform each other in a timely and adequate manner.
Presumably, there exists a fear that a European supervisor would imply that the entire EU will pay for the failure of a financial institution in one of its member states. This is not the case. The supervisor is only responsible for supervision and will not be equipped with the means to bail out institutions that are in trouble. The distribution of these costs is a separate and sensitive issue that is the subject of fierce negotiation behind the scenes. It will surely take some time before countries reach an agreement on how this burden should be shared.