## FINANCIAL SECTOR ASSESSMENT PROGRAM — ISSUES IN TRANSPARENCY AND ACCOUNTABILITY (TECHNICAL NOTE, MARCH 2013)

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---

### Overview
- Addresses transparency and accountability issues arising from:
  - the prospective introduction of the Single Supervisory Mechanism (SSM), and
  - experience since establishment of the European Supervisory Authorities (ESAs) in 2011.
- IMF Code of Good Practices on Transparency in Monetary and Financial Policies identifies four broad transparency areas:
  - The roles, responsibilities, and objectives of the institutions involved.
  - The processes for formulating and reporting policy decisions.
  - The public availability of information concerning the institutions.
  - Accountability arrangements and assurances of the integrity of the institutions and their personnel.
- Rationale for a selective, forward-looking approach:
  - Current EU supranational practices are generally high and often define best practice.
  - A snapshot assessment would quickly become obsolete given adoption of the banking union and reviews of the ESAs.
- Recommended measures when the ECB assumes supervisory responsibilities:
  - the ECB should begin to publish timely minutes of meetings to decide on monetary policy settings;
  - the ECB should begin to publish more medium-term detail on its macroeconomic projections and alternative scenarios;
  - the Supervisory Board of the SSM should develop and publish a set of guidelines that it will follow in formulating policy recommendations;
  - the Supervisory Board should also publish minutes of its policy meetings;
  - the ECB should consider establishing an external panel of experts to provide an independent oversight of the SSM. The panel should publish regular reports as well as provide direct feedback to the Supervisory Board;
  - the ECB should clarify and make transparent the working relationships between the macroprudential and microprudential areas of its mandate, and its relationship with the ESRB.
- Recommended measures to enhance ESA transparency and accountability:
  - reassess ESA mandates to reduce overlaps with other ESAs, the ESRB and the ECB;
  - enhance ESA accountability and autonomy by strengthening management decision-making responsibility and introducing more Europe-wide representation on Boards of Supervisors;
  - modify ESA funding arrangements to give greater responsibility and autonomy in staff and budget management.

### Transparency and Accountability Issues for ECB Monetary and Financial Policies
- Current strengths:
  - ECB mandate is set out clearly in EU legislation.
  - Considerable information provided on governance, decision-making structures, monetary policy reports (quarterly), published research, speeches, financial position, data and operations, and a high quality internet website.
  - High ethical standards and external approval procedures for ECB Council members.
- Emerging strains and reputational risks:
  - Public perception of the ECB’s policy objectives and monetary policy communications have come under strain over the financial crisis.
  - Measures to address fragmentation of monetary transmission and sovereign debt crises have led to concerns that the ECB is pursuing multiple objectives, potentially at expense of the price stability objective.
  - Uncertainty and reputational risks will increase as the ECB hosts the SSM, since the Supervisory Board will formulate supervision policy but final policy decisions will be made by the ECB Governing Council, which also decides monetary policy.
  - A complete separation of monetary and supervisory policy formulation is not possible when both reside under one final decision-making body.
- Policy implications:
  - Small increases in risk premia at euro area level could have cumulative large costs, implying a need to enhance transparency and ensure high standards for supervisory policy formulation.

### Monetary Policy
- Key requirement:
  - Greater transparency about trade-offs in policy decisions and the uncertainties in evaluating those trade-offs.
- Two specific measures proposed:
  - Publish timely minutes of Council meetings on monetary policy decisions.
    - Rationale: Minutes would present the array of views, reflect uncertainties and differences in assessments, demonstrate independence of monetary policy from supervisory considerations, and facilitate clearer communication of how consensus was reached.
    - Legal note: Article 10.4 of the ESCB Statute provides that “The proceedings of the meetings shall be confidential. The Governing Council may decide to make the outcome of its deliberations public.” The Governing Council therefore has the authority to publish minutes of meetings.
  - Publish more explicit ECB projections for key variables, including alternative scenarios and medium-term detail.
    - Benefits: Clarify intertemporal trade-offs, consistencies of different policy concerns, and consequences of alternative policy choices; help present the range of views and risk assessments.
    - Downsides noted: Risk that observers mistake projections for unconditional forecasts; point forecasts can give misleading impressions of accuracy. Experience from other central banks suggests these concerns may be overblown.
    - Presentation caveat: Projections should be simple, focused on central issues, and not present a false sense of precision.

### Prudential Supervision in the Banking Union
- Need for a comprehensive transparency and accountability framework for the SSM:
  - The IMF Code on Transparency is a starting point; the ECB should draw on European best practices.
- Accountability constraints:
  - ECB supervision will be subject to limited accountability to an independent or outside authority beyond reporting obligations to the European Parliament and the Eurogroup.
  - ECOFIN measures agreed in December 2012 (Commission proposals 13683/12) clarify reporting obligations but do not overcome the limited accountability inherent in the Governing Council’s decision-making autonomy.
- Recommended measures to enhance transparency and accountability:
  - The ECB could make regular presentations dedicated to supervisory matters to the European Parliament and occasionally to national parliaments.
  - The SSM Supervisory Board should set out and publish principles and types of indicators/information it will generally use in formulating policy recommendations (analogous to monetary policy rules and serving as benchmarks for policy evaluation). These guidelines should be based on the supervisory rulebook developed by the EBA but could be more specific to ECB needs.
  - The ECB should publish regular reports on supervisory work, at minimum regular (perhaps semi-annual) reports on the evolution of risks and vulnerabilities in the supervised financial system and actions taken to monitor and address them.
  - The SSM could consider publishing minutes of Supervisory Board meetings, subject to confidentiality restrictions (the Bank of England’s Financial Policy Committee minutes are cited as an example).
  - The ECB could establish an independent panel of external experts to provide periodic reviews of SSM performance and practices; experts should be independent of the ECB and participating national supervisors and could include former supervisors, ex-bankers, and academics. The panel could publish independent reports and provide feedback, especially useful in early SSM phases.
- Macroprudential and microprudential interaction:
  - The ECB must clarify organizational and operational links between macroprudential (financial stability) and microprudential (supervisory) functions, and agree clear distinctions in macroprudential responsibilities between the ECB and the ESRB, given overlapping instruments and the ESRB’s EU-wide mandate.

### Governance and Accountability Issues for the European Supervisory Authorities
- Background:
  - Three ESAs established in 2011: European Banking Authority (EBA), European Securities and Markets Authority (ESMA), and European Insurance and Occupational Pensions Authority (EIOPA). The European Systemic Risk Board (ESRB) was also established.
- Governance challenges:
  - As supranational institutions, the ESAs’ mandates and governance arrangements differ from national regulators, affecting accountability arrangements.
  - While ESAs have achieved much since establishment, some design and operational aspects inhibit transparency and effective accountability.

### Mandates, scope, and operational challenges
- Mandate characterization:
  - The mandates of the ESAs are described as "broad and imprecise, making transparency and accountability difficult."
- ESA responsibilities:
  - sectoral regulation;
  - promoting convergence in supervision;
  - promotion of market and financial product transparency;
  - consumer protection;
  - providing advice to other EU institutions.
- Specific mandate overlaps and roles:
  - The EBA has financial stability roles in its mandate.
  - ESMA has direct supervision responsibilities.
  - The breadth and imprecision of mandates create overlaps between the ESAs and "potentially between the EBA and the proposed SSM."
- Coordination mechanism:
  - "The Joint Committee bringing together the ESAs and the ESRB provides a very useful venue for coordinating activities and minimizing overlaps."
- Trade-offs and resource constraints:
  - "Having multiple objectives inevitably requires trade-offs to be made between them when they conflict."
  - "With limited budgets, difficult choices have to be made in prioritizing objectives."
  - Although ESAs are "generally quite transparent about stating their work programs and decisions, it is very difficult for them to be clear about how decisions were reached and what trade-offs were involved."

### Review and mandate sharpening (2013 review)
- Opportunity:
  - "The planned review of the ESAs in 2013 offers an opportunity to sharpen the focus of their mandates, facilitating greater transparency and accountability."
- Recommended reassessments:
  - "The mandate of the EBA in particular should be reassessed with a view to reducing overlaps with the ESRB and ECB with respect to financial stability assessment, including stress testing (see accompanying note on stress testing)."
  - For other ESAs, "especially as they move into more supervisory roles, it will be important to ensure that their powers vis-à-vis national level supervisors are clear, and that their respective responsibilities are well delineated."
  - ESAs must "be able to act as truly supranational agencies, with direct and easy access to information and data from entities that they supervise, rather than having to work through national authorities."

### Governance structure and accountability
- Current governance:
  - Each ESA has a Board of Supervisors made up of representatives from EU member state institutions (responsible for policy decisions) and a management board responsible for operation.
- Accountability concerns:
  - ESAs have "formal accountability towards the Commission and the European Parliament and Council, but it is less clear that there is good effective accountability."
  - Difficulty arises because "it is difficult to make a large group like the Boards of Supervisors accountable in any very meaningful sense," particularly when participants are "representatives of their respective institutions rather than participants in their own right."

### Proposed governance reforms and decision-making
- Board composition and voting:
  - "Modifying the composition of ESA Boards of Supervisors, as well as voting arrangements, should also be considered to strengthen the supranational orientation of decision-making."
  - Minimum change proposed: "the ESA’s chair should have a vote on an ex officio basis."
  - Consider adding "some voting members nominated on a European rather than national basis, and have these members appointed for a relatively lengthy period so as to maximize their autonomy."
  - Expected benefits: prevent coalitions that block action or favor some countries over others.
- Role of ESA staff:
  - ESA staff could be "given responsibility for preparing proposed decisions on issues coming before the Boards, in order to help focus discussion on a European perspective."
- Transparency of deliberations:
  - Published minutes of the ESAs "might be more explicit regarding differences of view between participants, as well as between ESA staff and the Board of supervisors."
- Management board responsibilities and delegation principle:
  - Increase responsibility and accountability of management boards to overcome domination of national interests and facilitate more rapid decision-making.
  - Delegation guidance:
    - Areas requiring high consensus: "it may be sensible for the Board of Supervisors to retain responsibility."
    - Areas like supervision, where an agreed set of rules is to be applied and speedy action is needed: "it may be more appropriate for the management board to have full responsibility and be accountable to the Board of Supervisors."
  - Expected outcome: "effective accountability of the institutions would be more clearly focused on a small set of decision makers and executives" and institutions would have a "higher degree of autonomy in practice."

### Funding and resource management
- Funding constraints and transparency:
  - Although financial arrangements are "not normally a transparency issue," for the ESAs "their budgetary positions and scope to manage their resources are so constrained that their ability to carry out important parts of their mandates is compromised."
  - This situation "amounts to a lack of transparency."
  - External budget and staffing constraints are "transferring decisions on policy priorities to the Commission from the ESAs in a non-transparent manner, inconsistent with the original mandates given to the institutions."
- Recommended funding reform:
  - "The ESAs need to be given significantly greater responsibility for managing their own resources and budgets, with appropriate accountability required by the management of the ESAs."

*Prepared by Scott Roger (EUO), IMF Monetary and Capital Markets Department, March 2013.*

### 2013. The views expressed in this document are those of the staff team and do not necessarily reflect

### FINANCIAL SECTOR ASSESSMENT PROGRAM — ISSUES IN TRANSPARENCY AND ACCOUNTABILITY (TECHNICAL NOTE, MARCH 2013)

### Overview
- The note addresses transparency and accountability issues arising from:
  - the prospective introduction of the Single Supervisory Mechanism (SSM), and
  - experience since establishment of the European Supervisory Authorities (ESAs) in 2011.
- The IMF Code of Good Practices on Transparency in Monetary and Financial Policies identifies four broad transparency areas:
  - The roles, responsibilities, and objectives of the institutions involved.
  - The processes for formulating and reporting policy decisions.
  - The public availability of information concerning the institutions.
  - Accountability arrangements and assurances of the integrity of the institutions and their personnel.
- Rationale for a selective, forward-looking approach:
  - Current EU supranational practices are generally high and often define best practice.
  - A snapshot assessment would quickly become obsolete given adoption of the banking union and reviews of the ESAs.
- Recommended measures to promote credibility when the ECB assumes supervisory responsibilities:
  - the ECB should begin to publish timely minutes of meetings to decide on monetary policy settings;
  - the ECB should begin to publish more medium-term detail on its macroeconomic projections and alternative scenarios;
  - the Supervisory Board of the SSM should develop and publish a set of guidelines that it will follow in formulating policy recommendations;
  - the Supervisory Board should also publish minutes of its policy meetings;
  - the ECB should consider establishing an external panel of experts to provide an independent oversight of the SSM. The panel should publish regular reports as well as provide direct feedback to the Supervisory Board;
  - the ECB should clarify and make transparent the working relationships between the macroprudential and microprudential areas of its mandate, and its relationship with the ESRB.
- Recommended measures to enhance ESA transparency and accountability:
  - reassess ESA mandates to reduce overlaps with other ESAs, the ESRB and the ECB;
  - enhance ESA accountability and autonomy by strengthening management decision-making responsibility and introducing more Europe-wide representation on Boards of Supervisors;
  - modify ESA funding arrangements to give greater responsibility and autonomy in staff and budget management.

### Transparency and Accountability Issues for ECB Monetary and Financial Policies
- Current strengths:
  - ECB mandate is set out clearly in EU legislation.
  - Considerable information provided on governance, decision-making structures, monetary policy reports (quarterly), published research, speeches, financial position, data and operations, and a high quality internet website.
  - High ethical standards and external approval procedures for ECB Council members.
- Emerging strains and reputational risks:
  - Public perception of the ECB’s policy objectives and monetary policy communications have come under strain over the financial crisis.
  - Measures to address fragmentation of monetary transmission and sovereign debt crises have led to concerns that the ECB is pursuing multiple objectives, potentially at expense of the price stability objective.
  - Uncertainty and reputational risks will increase as the ECB hosts the SSM, since the Supervisory Board will formulate supervision policy but final policy decisions will be made by the ECB Governing Council, which also decides monetary policy.
  - A complete separation of monetary and supervisory policy formulation is not possible when both reside under one final decision-making body.
- Policy implications:
  - Small increases in risk premia at euro area level could have cumulative large costs, implying a need to enhance transparency and ensure high standards for supervisory policy formulation.

### Monetary Policy
- Key requirement:
  - Greater transparency about trade-offs in policy decisions and the uncertainties in evaluating those trade-offs.
- Two specific measures proposed:
  - Publish timely minutes of Council meetings on monetary policy decisions.
    - Rationale: Minutes would present the array of views, reflect uncertainties and differences in assessments, demonstrate independence of monetary policy from supervisory considerations, and facilitate clearer communication of how consensus was reached.
    - Legal note: Article 10.4 of the ESCB Statute provides that “The proceedings of the meetings shall be confidential. The Governing Council may decide to make the outcome of its deliberations public.” The Governing Council therefore has the authority to publish minutes of meetings.
  - Publish more explicit ECB projections for key variables, including alternative scenarios and medium-term detail.
    - Benefits: Clarify intertemporal trade-offs, consistencies of different policy concerns, and consequences of alternative policy choices; help present the range of views and risk assessments.
    - Downsides noted: Risk that observers mistake projections for unconditional forecasts; point forecasts can give misleading impressions of accuracy. Experience from other central banks suggests these concerns may be overblown.
    - Presentation caveat: Projections should be simple, focused on central issues, and not present a false sense of precision.

### Prudential Supervision in the Banking Union
- Need for a comprehensive transparency and accountability framework for the SSM:
  - The IMF Code on Transparency is a starting point; the ECB should draw on European best practices.
- Accountability constraints:
  - ECB supervision will be subject to limited accountability to an independent or outside authority beyond reporting obligations to the European Parliament and the Eurogroup.
  - ECOFIN measures agreed in December 2012 (Commission proposals 13683/12) clarify reporting obligations but do not overcome the limited accountability inherent in the Governing Council’s decision-making autonomy.
- Recommended measures to enhance transparency and accountability:
  - The ECB could make regular presentations dedicated to supervisory matters to the European Parliament and occasionally to national parliaments.
  - The SSM Supervisory Board should set out and publish principles and types of indicators/information it will generally use in formulating policy recommendations (analogous to monetary policy rules and serving as benchmarks for policy evaluation). These guidelines should be based on the supervisory rulebook developed by the EBA but could be more specific to ECB needs.
  - The ECB should publish regular reports on supervisory work, at minimum regular (perhaps semi-annual) reports on the evolution of risks and vulnerabilities in the supervised financial system and actions taken to monitor and address them.
  - The SSM could consider publishing minutes of Supervisory Board meetings, subject to confidentiality restrictions (the Bank of England’s Financial Policy Committee minutes are cited as an example).
  - The ECB could establish an independent panel of external experts to provide periodic reviews of SSM performance and practices; experts should be independent of the ECB and participating national supervisors and could include former supervisors, ex-bankers, and academics. The panel could publish independent reports and provide feedback, especially useful in early SSM phases.
- Macroprudential and microprudential interaction:
  - The ECB must clarify organizational and operational links between macroprudential (financial stability) and microprudential (supervisory) functions, and agree clear distinctions in macroprudential responsibilities between the ECB and the ESRB, given overlapping instruments and the ESRB’s EU-wide mandate.

### Governance and Accountability Issues for the European Supervisory Authorities
- Background:
  - Three ESAs established in 2011: European Banking Authority (EBA), European Securities and Markets Authority (ESMA), and European Insurance and Occupational Pensions Authority (EIOPA). The European Systemic Risk Board (ESRB) was also established.
- Governance challenges:
  - As supranational institutions, the ESAs’ mandates and governance arrangements differ from national regulators, affecting accountability arrangements.
  - While ESAs have achieved much since establishment, some design and operational aspects inhibit transparency and effective accountability.
- Areas signaled for reform (to be considered in the comprehensive 2013 review of the ESAs):
  - Reassess mandates to reduce overlaps with other ESAs, the ESRB, and the ECB.
  - Strengthen decision-making responsibility of ESA management and introduce more Europe-wide representation on Boards of Supervisors to enhance effective accountability and autonomy.
  - Modify ESA funding arrangements to give them greater responsibility and autonomy in staff and budget management to enhance policy transparency and efficiency.

*Prepared by Scott Roger (EUO), IMF Monetary and Capital Markets Department, March 2013.*

### 20.       The mandates of the ESAs are broad and imprecise, making transparency and

### _cr1365 - 20.       The mandates of the ESAs are broad and imprecise, making transparency and

### Mandates, scope, and operational challenges
- The mandates of the ESAs are described as "broad and imprecise, making transparency and accountability difficult."
- Each ESA has responsibilities in:
  - sectoral regulation;
  - promoting convergence in supervision;
  - promotion of market and financial product transparency;
  - consumer protection;
  - providing advice to other EU institutions.
- Specific mandate overlaps and roles:
  - The EBA has financial stability roles in its mandate.
  - ESMA has direct supervision responsibilities.
  - The breadth and imprecision of mandates create overlaps between the ESAs and "potentially between the EBA and the proposed SSM."
- Coordination mechanism:
  - "The Joint Committee bringing together the ESAs and the ESRB provides a very useful venue for coordinating activities and minimizing overlaps."
- Trade-offs and resource constraints:
  - "Having multiple objectives inevitably requires trade-offs to be made between them when they conflict."
  - "With limited budgets, difficult choices have to be made in prioritizing objectives."
  - Although ESAs are "generally quite transparent about stating their work programs and decisions, it is very difficult for them to be clear about how decisions were reached and what trade-offs were involved." 11

### Review and mandate sharpening (2013 review)
- "The planned review of the ESAs in 2013 offers an opportunity to sharpen the focus of their mandates, facilitating greater transparency and accountability."
- Recommended reassessments and clarifications:
  - "The mandate of the EBA in particular should be reassessed with a view to reducing overlaps with the ESRB and ECB with respect to financial stability assessment, including stress testing (see accompanying note on stress testing)."
  - For other ESAs, "especially as they move into more supervisory roles, it will be important to ensure that their powers vis-à-vis national level supervisors are clear, and that their respective responsibilities are well delineated."
  - ESAs must "be able to act as truly supranational agencies, with direct and easy access to information and data from entities that they supervise, rather than having to work through national authorities."

### Governance structure and accountability
- Current governance:
  - Each ESA has a Board of Supervisors made up of representatives from EU member state institutions (responsible for policy decisions) and a management board responsible for operation.
- Accountability concerns:
  - ESAs have "formal accountability towards the Commission and the European Parliament and Council, but it is less clear that there is good effective accountability."
  - Difficulty arises because "it is difficult to make a large group like the Boards of Supervisors accountable in any very meaningful sense," particularly when participants are "representatives of their respective institutions rather than participants in their own right." 12

### Proposed governance reforms and decision-making
- Board composition and voting:
  - "Modifying the composition of ESA Boards of Supervisors, as well as voting arrangements, should also be considered to strengthen the supranational orientation of decision-making."
  - Minimum change proposed: "the ESA’s chair should have a vote on an ex officio basis."
  - Consideration for "adding some voting members nominated on a European rather than national basis, and have these members appointed for a relatively lengthy period so as to maximize their autonomy."
  - Expected benefits: prevent coalitions that block action or favor some countries over others.
- Role of ESA staff:
  - ESA staff could be "given responsibility for preparing proposed decisions on issues coming before the Boards, in order to help focus discussion on a European perspective."
- Transparency of deliberations:
  - Published minutes of the ESAs "might be more explicit regarding differences of view between participants, as well as between ESA staff and the Board of supervisors."
- Management board responsibilities:
  - Governance reforms should "increase the responsibility and accountability of management boards" to overcome domination of national interests and facilitate more rapid decision-making.
  - Delegation principle:
    - Areas requiring high consensus: "it may be sensible for the Board of Supervisors to retain responsibility."
    - Areas like supervision, where an agreed set of rules is to be applied and speedy action is needed: "it may be more appropriate for the management board to have full responsibility and be accountable to the Board of Supervisors."
  - Expected outcome: "effective accountability of the institutions would be more clearly focused on a small set of decision makers and executives" and institutions would have a "higher degree of autonomy in practice."

### Funding and resource management
- Funding constraints and transparency:
  - Although financial arrangements are "not normally a transparency issue," for the ESAs "their budgetary positions and scope to manage their resources are so constrained that their ability to carry out important parts of their mandates is compromised."
  - This situation "amounts to a lack of transparency."
  - External budget and staffing constraints are "transferring decisions on policy priorities to the Commission from the ESAs in a non-transparent manner, inconsistent with the original mandates given to the institutions."
- Recommended funding reform:
  - "The ESAs need to be given significantly greater responsibility for managing their own resources and budgets, with appropriate accountability required by the management of the ESAs."

*Source: _cr1365 - 20. The mandates of the ESAs are broad and imprecise, making transparency and*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr1365.pdf_