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### Introduction: structure and purpose of EU supervisory architecture
- Regulatory and supervisory structure known as the Lamfalussy process.
- Structure has prudential elements (ensure system soundness amid increasing cross-border linkages) and elements to promote competition and transparency (support allocative and cost efficiency and incentives for innovation).
- Current structure based largely on coordination of national policies and institutions; most prudential regulation and supervision remain primarily national responsibilities.
- EU-wide regulatory framework "largely reflects a compromise among national authorities" and grants national authorities considerable freedom in setting specific regulations and in implementing EU Directives.
- National supervisors implement the framework, conduct on-going supervision to achieve objectives set out in national legislation, and are answerable to national parliaments.

### Risks and inefficiencies from fragmentation
- Fragmentation can produce:
  - Poor and slow policy-making, with heightened scope for policies that neglect spill-overs or adopt "beggar-thy-neighbor" strategies, especially when dealing with failing institutions because authorities have a fiduciary duty and political imperative to minimize costs to their own country.
  - Failures to internalize externalities and a tendency toward compromises and delays not in the long-term collective interest.
  - A nationally-based system risks becoming ineffectual and unwieldy as financial market integration advances.

### Need for strengthened cross-border supervision and a European mandate
- Strengthening cross-border supervisory mechanisms requires more joint decision making and/or more delegation.
- A European mandate for supervisors could support joint decision making and delegation; it is considered necessary (but far from sufficient) for a fully integrated system.
- Growing recognition of the value of assigning a "European mandate" to financial sector regulators and supervisors, and to associated European structures.
- Progress noted in related elements:
  - Acceptance of the concept of a European mandate or desirability of supervisors taking into account the "European dimension" of their actions.
  - Formal recognition that financial stability is a common concern.
  - A commitment to share the fiscal costs of a financial crisis.
  - Greater readiness to delegate powers to supervisory colleges.
  - Development of mechanisms to ensure Level 3 Lamfalussy committees operate with more of a joint European orientation.
- May 2008 ECOFIN meeting endorsed a recommendation for the possible introduction of EU mandates in national supervisors’ mission statements.

### Impact of the global financial crisis on policy orientation
- Crisis emphasized importance of better cross-border coordination of financial sector policies.
- Strains transmitted rapidly across countries as interlinkages proved strong and complex.
- Failures of major financial institutions with important operations in several countries tested coordination.
- Coordinated policy responses occurred in some areas (e.g., central banks' provision of liquidity), but there were episodes when countries effectively competed through their policies.
- Lesson: supervisors and other authorities responsible for financial sector stability need to take a more holistic, systemic approach domestically and internationally.

### Overview and purpose of proposals to introduce EU mandates in national supervisors’ mission statements
- Paper suggests ways to give national supervisory authorities, connected agencies, and European structures an effective “European mandate.”
- Many suggestions assume political and legal hindrances are overcome; practical difficulties acknowledged.
- Paper structure:
  - Review current supervisory cooperation, allocation of responsibilities, inconsistencies and inefficiencies from lack of a European mandate, and assessment of potential achievements of a European mandate.
  - Discussion of how to formulate a European mandate; balancing it against other mandates; measures to implement or embody it; supporting arrangements needed, notably accountability.

### A system of national supervisors — current arrangements (findings)
- Most regulatory and supervisory activities organized on a national basis:
  - National authorities issue regulations, grant/take away licenses, conduct on-going supervision, and take enforcement action.
  - Supervisory authorities empowered by national parliaments, subject to national accountability, financed from national sources.
  - For banks: home supervisors responsible for consolidated supervision of institutions/groups domiciled in their country; host supervisors oversee stand-alone subsidiaries from other member states.
  - Insurance supervision more nationally oriented, based on the “solo-plus” principle.
- Diversity of organizational models across EU member countries:
  - Different roles assigned to separate supervisory authority, central bank, Ministry of Finance, deposit insurance scheme, and private organizations.
  - Objectives/mandates vary and include (i) financial sector stability; (ii) protection of depositors; (iii) protection of investors and creditors; (iv) fostering the financial sector.
  - Responsibility over prudential, market-conduct, competition, and consumer protection policies is unified to varying degrees.
- Key cooperative elements:
  - Many bilateral and some multilateral MOUs for information exchange and consultation; regional MOUs for banks of regional systemic importance; EU-wide/EMU-wide MOUs on emergency liquidity and crisis management, most recent dating from April 2008.
  - “Colleges” of supervisors for cross-border insurance groups and some banks; pilot-case colleges and established colleges in Benelux and Nordic regions.
  - Lamfalussy process:
    - Level 1: framework legislation setting core principles and defining implementing powers.
    - Level 2: technical implementing measures adopted by the Commission after a vote of the competent regulatory Committee.
    - Level 3: three committees of supervisors (banking, insurance, securities) promote financial sector integration, provide technical advice to the Commission and Level 2 committees, issue guidelines, and review/converge national practices; qualified majority voting used extensively in deciding technical advice.
    - Level 4: the EU Commission enforces timely and correct transposition of EU legislation into national law.
  - EU institutions influence but do not directly supervise; notable directives/regulations mentioned:
    - Capital Requirements Directive (CRD) — fully implemented from January 2008 onward.
    - Market in Financial Instruments Directive (MiFID) — November 2007.
    - Solvency II directive — targeted for 2012.
  - ECB/ESCB roles: ECB does not have direct prudential supervisory responsibilities in the euro zone; central banks involved because of lender-of-last-resort, monetary policy, and payment system oversight. Art. 3.33 of ESCB/ECB Statute cited on contribution to prudential supervision and stability.
  - Multinational institutions and standard setters (Basel Committee, IAIS, IOSCO, BIS, Financial Stability Forum, IMF) influence EU prudential frameworks.
- Evolution accelerated by the global financial crisis:
  - November 2008: “High Level Expert Group on EU financial supervision” established to advise the Commission on strengthening European supervisory arrangements.

### Rationale for current arrangements and identified costs/weaknesses
- Design reflects subsidiarity: responsibilities assigned to lowest effective level; centralization limited.
- Benefits of national arrangements: adaptability to domestic systems, experimentation, mutual recognition enabling cross-border trade in financial services; EU directives set minimum standards to prevent a "race to the bottom."
- Concerns as integration advances:
  - Reliance on consensus and large committees can produce sclerosis and slow decision-making.
  - Committee decisions may be sub-optimal, preserving national practices and hindering integration.
  - Committees may be biased toward established interests, including national supervisory institutions.
  - National implementation complexity enables favoring national interests (e.g., slow information sharing; use of prudential instruments to protect domestic institutions).
  - Costs of decentralization rise as institutions become cross-border; national authorities may be unable individually to effectively supervise cross-border groups.
- Behavioral responses from firms:
  - Firms may avoid entering other EU markets to evade extra regulatory burden, or pursue regulatory arbitrage.
  - Incentives for lobbying and capture of regulators increase.
- Mitigating factors:
  - Repeated-game dynamics and commitment to European institutions encourage cooperation and reputation-building.
  - Intertwined national interests (cross-ownership, cross-border employment) complicate strictly national approaches.
- Conflicts often center on fiscal concerns (cost of rescues, benefits of attracting firms).

### How a European mandate might help — potential benefits
- Expected advantages if an effective European mandate influenced behavior:
  - Stronger operational weight for EU convergence and cooperation at national level; reduced willingness to erect surreptitious nontariff barriers or shift burdens.
  - Enhanced functioning of Level 3 committees and supervisory colleges; more timely decisions focused on common EU good.
  - Facilitation of a more efficient and effective European stability framework:
    - Spill-overs will increase and justify coordinated/centralized policies.
    - National supervision may become cumbersome and risky; supervisory colleges or stability groups could become unwieldy with many member agencies.
    - Delegation and tiering of responsibilities may be necessary; national authorities will agree to delegation only if their interests are properly represented.
    - A European mandate could streamline supervision and reduce regulatory burdens.
- Applicability:
  - Benefits could arise in Level 3 committees, in national supervisory authorities’ normal operations (regulation formulation, licensing, supervision), and in extreme situations (financial crises), though some measures may lose force under severe stress.

### Risks, costs, and cautions regarding a European mandate
- Risk of mandate becoming vacuous: authorities may declare commitment but continue national-prioritized behavior.
- Potential significant costs if poorly designed:
  - More obligations may reduce transparency and accountability, increasing scope for interest group machinations.
  - Direct administrative costs (staff time, travel, coordination meetings, publications) may be significant and distract from core supervisory work.
  - Crisis management complexity may rise if supervisory authorities have European mandates while other involved authorities (notably Ministries of Finance) do not.
  - Excessive focus on European convergence could reduce use of local information, adaptability, stifle innovation and regulatory competition.
- Alternative of delegation to a European supervisory agency:
  - Would introduce complexities and is unlikely in near term; establishment would take years even with political consensus.
  - A European mandate and reliance on lead supervisors could be halfway measures but risk augmenting bureaucratic burden.
  - Arguments favoring national supervisors: proximity provides informational advantages; effective crisis response requires financial powers the EU lacks.

### Formulation and implementation of a European mandate — principles and focal areas (recommendations)
- Core recommendation: center the European mandate on financial sector stability.
  - Extension to other objectives (consumer/investor protection, competition and innovation, combating financial crime/money laundering) would complicate definition and increase conflicts.
  - Avoid explicit obligations toward specific groups that raise liability issues.
  - Initial, focused approach recommended to avoid protecting particular institutions or parties that take commercial risk.
- Trade-offs and scope:
  - Stability implies absence of crises but requires a profitable financial system; balance stability goals against costs of regulation.
  - Within prudential policies, intervention and resolution are most prone to cross-country conflicts and require quick, confidential decision-making.
  - Recommendation to concentrate initially on areas where conflict is less acute.
- Possible model: Australia–New Zealand arrangements (bilateral mutual commitment given close integration), though Europe is more complex.

### Box 1: Mutual Responsibilities of Supervisors in Australia and New Zealand (model elements and lessons)
- Background:
  - 2006 amendments gave national supervisors a mandate to take into account financial stability concerns in the other country.
  - Supervisors should support the other and, whenever reasonably possible, avoid actions that adversely affect the other country’s financial stability and consult before major cross-border-impact actions.
  - Recognized that timely consultation may not always be possible.
- Structural features and differences:
  - New Zealand banking system largely owned by large Australian banks; outsourcing of functions to Australian parents.
  - Institutional/legal differences:
    - Australian Prudential Regulatory Authority explicitly mandated to promote “financial system stability”; Reserve Bank of New Zealand has all supervisory functions.
    - Australia grants depositors preferential status in bank resolution; New Zealand does not offer deposit insurance or special protection for depositors.
  - No dedicated accountability mechanism for mutual responsibilities appears to exist.
- Implications as a model:
  - Provisions useful for enhancing cross-border supervisory cooperation, especially for conservators, administrators, or receivers.
  - Most valuable absent a supranational institution with direct supervisory or resolution powers.
- Lessons for designing a European mandate (summary):
  - Mandate formulation:
    - Center on financial sector stability while recognizing the need for efficiency (limit regulatory burdens, not hinder innovation).
    - One approach: a broad European mandate complemented by specific “dos and don’ts.”
  - Specific “dos and don’ts” (examples):
    - (i) consult and coordinate with European partner authorities before taking action that would significantly affect financial systems in other Member States;
    - (ii) assist, including by providing relevant information, European partner authorities in their efforts to maintain and promote financial sector soundness and efficiency;
    - (iii) avoid taking actions that hinder integration of European financial markets;
    - (iv) avoid taking actions likely to unilaterally shift costs associated with financial sector regulation and supervision to other Member States;
    - (v) minimize potential harmful economic impacts at the lowest EU-wide cost when managing and resolving financial crises.
  - Which authorities to cover:
    - At a minimum: financial supervisory authorities and relevant central banks.
    - Consider also: financial institution conservators, administrators or receivers; Level 3 Lamfalussy committees; deposit insurance schemes (subject to diversity and complications).
  - How to embody and implement the mandate:
    - Legal options:
      - National legislation: very strong legal basis but lengthy and risks national idiosyncratic modifications.
      - EU Directive: could help avoid inconsistencies.
      - EU Regulation: leaves less scope for national discretion but depends on treaty interpretation.
    - Supervisory practice and institutional measures (examples):
      - Inclusion of the European mandate in authorities’ mission statements.
      - An EU-wide MOU.
      - Appointment of a high-level officer in each authority responsible for promoting European integration and cooperation.
      - Inclusion on each authority’s Board of a member with responsibility for promoting European integration and cooperation.
      - Commitment that major decisions be preceded by a “European Impact Study,” with possible publication and review, subject to override for urgent action.
      - Requiring authorities to pool resources for common projects and/or have financial institutions contribute to a common pool.
      - Systems for sharing information and agreeing procedures so deposit insurance schemes can honor claims uniformly; minimum standards for payout procedures and conditions.
      - Introducing language on the European mandate into Level 3 committees’ rules and statutes.
  - Balancing conflicting mandates:
    - Conflicts between a European mandate and other national mandates (fiscal considerations, national champions, consumer protection) are possible and may be acute during resolution of problem institutions.
    - Practical approach: accept a hierarchy of mandates:
      - Preferably: national authorities first fulfill a European mandate for financial stability, then soundness and efficiency of national financial systems, then other mandates (investor or consumer protection).
    - European mandate should have precedence over non-prudential objectives (e.g., minimizing quasi-fiscal costs or promoting national financial industry).
    - Opportunity to rationalize and harmonize other aspects of supervisory mandates.
  - Accountability:
    - Strong accountability mechanisms necessary to prevent the mandate becoming vacuous.
    - Possible measures:
      - Enhance Level 3 committees' accountability towards EU institutions through regular reporting and greater transparency (e.g., publication of voting records, non-technical summaries).
      - Require national supervisory authorities to explain to national parliaments the European mandate and actions taken to fulfill it.
      - Allow European Parliament the right to request information and explanations (avoid routine reporting that could overwhelm it).
      - EU Commission periodic reports on countries’ efforts; potential use of Commission’s enforcement powers.
      - Peer review by Level 3 committees as a collegial alternative.
      - Public reporting by authorities on efforts to fulfill the European mandate and inviting public debate on “European Impact Studies”; private sector bodies and external researchers could highlight non-cooperative behavior.
- Conclusions from the Box:
  - A European mandate could produce more timely and cooperative decisions promoting the common EU good, give operational priority to EU cooperation at national level, and provide accountability for increasing cross-border responsibilities.
  - Mandate could build trust and enable supervisors to delegate increasingly to one another in an integrating market without a single European supervisory institution with resolution powers.
  - Risks include mandate becoming vacuous or generating confusion over responsibilities and powers; avoiding these dangers requires concrete action on formulation, scope, legal basis, implementation, mandate balancing, and accountability.

### APPENDIX I: Recent EU initiatives on a European mandate for supervisors (key milestones and elements)
- ECOFIN conclusions — October 9, 2007:
  - Recognized financial stability as a common concern requiring close cooperation.
  - Invited ECOFIN to prepare an extended MOU by June 2008 detailing common principles on cross-border crisis management, a common analytical framework, timely sharing of assessments, and practical guidelines.
  - Invited the Commission to consider including in national supervisors’ mandates a task to cooperate within the EU and take into account financial stability concerns of all member states.
  - Invited the Commission to improve interoperability of deposit insurance schemes and clarify implications of sharing financial burdens.
- ECOFIN conclusions — December 4, 2007:
  - Addressed supervisory cooperation and Lamfalussy process issues.
  - Invited member states to report to the Commission on use of discretion to avoid “Gold Plating.”
  - Proposed Commission review of differences in supervisory powers and sanctioning powers across national supervisors.
  - Suggested introduction of qualified majority voting in Level 3 committees where necessary.
  - Suggested that those who do not comply with Level 3 committee decisions provide a public explanation.
  - Underlined importance of including in national supervisors’ mandates the task “to cooperate within the EU and to work towards European supervisory convergence and to take into account the financial stability of all member states.”
- IIMG final report — recommendations:
  - Role and mandate of Level 3 committees:
    - Provide a clear EU mandate, complemented by an annual work program, to be endorsed by the European Parliament, the Council and the European Commission, and a sufficient legal basis covering their activities.
    - Serve as platform for coordination of supervision and regulation, facilitating supervisory tools and methods and strengthening trust between national supervisors.
    - When providing technical advice to the Commission, be permitted to use qualified majority voting for a limited number of highly technical tasks.
    - Other decisions on supervisory convergence to be taken by consensus with implementation ensured by a strong "comply or explain" mechanism.
  - National-level requirements:
    - Include a clear requirement to cooperate at EU level and support EU convergence process in mission statements of national regulatory and supervisory authorities.
  - Transparency and enforcement:
    - Parliament, supervisors and private sector should surface complaints and cases of incorrect implementation of EU rules.
    - Transparency of national transposition and implementation could curb regulatory additions and enhance convergence through peer pressure.
    - Commission should play principal role in improving enforcement of agreed legislation.
- ECOFIN meeting and roadmaps — May 14, 2008:
  - Introduction of a “European dimension” into mandates of national supervisory authorities; Member States invited to ensure, by mid-2009, that mandates allow taking EU dimension into account.
  - Commission to introduce these objectives into EU legislation; example amendments to the Capital Adequacy Directive:
    - Clauses that supervisors should have regard to impact of their decisions on stability of financial system in all Member States.
    - Home supervisors should alert host supervisors as soon as they become aware of an emergency situation.
    - Consolidating supervisors should establish colleges of supervisors.
  - Assessment by the Financial Services Committee of application of the European dimension in national mandates, based on Level 3 committee reports.
  - Strengthening role of colleges of supervisors and extending them to all cross-border financial groups; Level 3 committees to provide guidelines for colleges.
  - Commission to assess extensions of the “winding up directive” to facilitate winding up of cross-border banking groups, taking into account interests of all stakeholders.
- New MOU on cross-border financial crisis situations — June 2008:
  - Recognized financial stability and managing cross-border crises as common concerns.
  - Accepted need for a common analytic framework and timely sharing of information.
  - Introduced framework for cooperation agreements on crisis management for cross-border institutions; envisaged “Cross-Border Stability Groups” expanding colleges of supervisors to include Ministries of Finance and other agencies involved in resolving crises.
  - Agreement that collective crisis costs should be minimized and distribution equitable and balanced.
  - Commitment to share information as soon as an authority becomes aware of a potentially serious threat to financial stability.
- High Level Expert Group on EU financial supervision — November 2008:
  - Established and chaired by Jacques de Larosière.
  - Mandate: make recommendations to the Commission on strengthening European supervisory arrangements covering all financial sectors; objectives include establishing a more efficient, integrated and sustainable European system of supervision and reinforcing cooperation among European supervisors and international counterparts.

*Source: _wp0905*

### References..............................................................................................................

### _wp0905 - References..............................................................................................................

### Introduction: structure and purpose of EU supervisory architecture
- The regulatory and supervisory structure supporting integration of the financial sector across the EU is known as the Lamfalussy process.
- The structure has prudential elements (to ensure system soundness amid increasing cross-border linkages) and elements to promote competition and transparency (to support allocative and cost efficiency and incentives for innovation).
- The current structure is based largely on the coordination of national policies and institutions; most areas of prudential regulation and supervision remain primarily national responsibilities.
- An EU-wide regulatory framework exists but "largely reflects a compromise among national authorities" and grants national authorities considerable freedom in setting specific regulations and in implementing EU Directives.
- National supervisors implement the framework and conduct on-going supervision to achieve objectives set out in national legislation; they are answerable to national parliaments.

### Risks and inefficiencies from fragmentation
- Fragmentation can lead to poor and slow policy-making, with heightened scope for policies that neglect spill-overs or adopt "beggar-thy-neighbor" strategies, especially when dealing with failing institutions because authorities have a fiduciary duty and political imperative to minimize costs to their own country.
- Even in less acute situations, fragmentation can produce failures to internalize externalities and a tendency toward compromises and delays not in the long-term collective interest.
- A nationally-based system risks becoming ineffectual and unwieldy as financial market integration advances.

### Need for strengthened cross-border supervision and a European mandate
- Strengthening cross-border supervisory mechanisms requires more joint decision making and/or more delegation.
- A European mandate for supervisors could support joint decision making and delegation; it is considered necessary (but far from sufficient) for a fully integrated system.
- There is growing and widespread recognition of the value of assigning a "European mandate" to financial sector regulators and supervisors, and to associated European structures (Appendix I).
- Progress noted in related elements:
  - Acceptance of the concept of a European mandate or at least the desirability of supervisors taking into account the "European dimension" of their actions;
  - Formal recognition that financial stability is a common concern;
  - A commitment to share the fiscal costs of a financial crisis;
  - Greater readiness to delegate powers to supervisory colleges;
  - Development of mechanisms to ensure Level 3 Lamfalussy committees operate with more of a joint European orientation.
- The May 2008 EU Economic and Financial Council (ECOFIN) meeting endorsed a recommendation for the possible

### Impact of the global financial crisis on policy orientation
- The recent global financial crisis emphasized the importance of better cross-border coordination of financial sector policies.
- Strains were transmitted rapidly across countries as interlinkages proved strong and complex.
- Markets and authorities faced failures of major financial institutions with important operations in several countries.
- There were coordinated policy responses in some areas (for example, by central banks in the provision of liquidity), but also episodes when countries effectively competed through their policies.2
- One lesson of the crisis is that supervisors and other authorities responsible for financial sector stability need to take a more holistic, systemic approach domestically and internationally.

*Source: _wp0905 - References..............................................................................................................*

### introduction of EU mandates in national supervisors’ mission statements.

### _wp0905 - introduction of EU mandates in national supervisors’ mission statements.

### Overview and purpose
- The paper suggests ways to give national supervisory authorities, connected agencies, and European structures an effective “European mandate.”
- Many suggestions assume political and legal hindrances are overcome; authors acknowledge practical difficulties in instituting a European mandate that deeply affects financial sector policy in the short term.
- Structure of the paper:
  - Review of current supervisory cooperation, allocation of responsibilities, inconsistencies and inefficiencies from lack of a European mandate, and assessment of potential achievements of a European mandate.
  - Discussion of how to formulate a European mandate; balancing it against other mandates; measures to implement or embody it; supporting arrangements needed, notably accountability.

### A system of national supervisors — current arrangements
- Most financial sector regulatory and supervisory activities in Europe are organized on a national basis:
  - National authorities issue regulations, grant/take away licenses, conduct on-going supervision, and take enforcement action.
  - Supervisory authorities are empowered by national parliaments, are subject to national accountability mechanisms, and obtain financing from national sources.
  - For banks: home supervisors are responsible for consolidated supervision of institutions/groups domiciled in their country; host supervisors oversee stand-alone subsidiaries from other member states.
  - Supervision of the insurance sector is more nationally oriented, based on the “solo-plus” principle.
- Diversity of organizational models across EU member countries:
  - Different roles assigned to separate supervisory authority, central bank, Ministry of Finance, separate deposit insurance scheme, and private organizations.
  - Objectives/mandates vary and include (i) financial sector stability; (ii) protection of depositors; (iii) protection of investors and creditors; (iv) fostering the financial sector.
  - Responsibility over prudential, market-conduct, competition, and consumer protection policies is unified to varying degrees.
- Key cooperative elements on top of national institutions:
  - A large number of bilateral and some multilateral Memorandums of Understanding (MOUs) committing signatories to regular information exchange and timely consultation on enforcement action; some regional MOUs for banks of regional systemic importance; EU-wide/EMU-wide MOUs on emergency liquidity and crisis management, most recent dating from April 2008.
  - “Colleges” of supervisors for cross-border insurance groups and some banks; colleges operating for major cross-border banks in Benelux and Nordic regions and pilot-case colleges for other major banks. May 2008 ECOFIN conclusions recommended extending colleges to all European banking groups with cross-border activities. June 2008 MOU envisages Cross-Border Stability Groups (colleges expanded to include Ministries of Finance, bank resolution agencies, central banks without supervisory responsibilities).
  - The Lamfalussy process:
    - “Level 1”: framework legislation setting core principles and defining implementing powers.
    - “Level 2”: technical implementing measures adopted by the Commission after a vote of the competent regulatory Committee.
    - “Level 3”: three committees of supervisors (banking, insurance, securities) promote financial sector integration, provide technical advice to the Commission and Level 2 committees, issue guidelines, and review/converge national practices; qualified majority voting used extensively in deciding technical advice. Level 3 committees are developing guidelines for supervisory colleges and assessing key vulnerabilities reported to the Financial Stability Table (FST) of the Economic and Financial Committee (EFC).
    - “Level 4”: the EU Commission enforces timely and correct transposition of EU legislation into national law.
  - EU institutions influence but do not directly supervise: EU regulations are directly applicable; directives are binding as to results. Notable directives/regulations mentioned:
    - Capital Requirements Directive (CRD) for banks — fully implemented from January 2008 onward.
    - Market in Financial Instruments Directive (MiFID) for the securities sector — November 2007.
    - Solvency II directive for the insurance sector — targeted for 2012.
  - The Council of the European Union sets agendas via conclusions (e.g., developing “burden sharing” and a “European mandate”).
  - The EU Commission has autonomous powers in completion of the common market, competition, and trade negotiations and has enforcement powers in its competency areas (e.g., mergers, injections of state capital, cross-border provision of financial services).
  - The European System of Central Banks (ESCB) and ECB:
    - In the euro zone, the ECB does not have direct prudential supervisory responsibilities; many central banks that are members of the ESCB have little or no on-going prudential supervisory responsibilities.
    - Central banks are involved due to lender-of-last-resort provision, monetary policy, and payment system oversight.
    - Current arrangement: each national central bank is responsible for emergency liquidity provision to financial institutions domiciled in its jurisdiction (and takes associated risk); the ESCB and ECB must be informed promptly to allow offsetting monetary action. ECB may inject liquidity ad hoc to ease system-wide money market strains.
    - ESCB statutes anticipate some role in prudential supervision of credit institutions; mandate carried out with assistance of the Banking Supervision Committee. Art. 3.33 of the ESCB/ECB Statute: “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.”
  - Multinational institutions and standard setters (e.g., Basel Committee on Banking Supervision, IAIS, IOSCO, Bank for International Settlements, Financial Stability Forum, IMF) influence EU prudential frameworks and standards.
- Evolution accelerated under the global financial crisis:
  - November 2008: a “High Level Expert Group on EU financial supervision” established to advise the Commission on strengthening European supervisory arrangements.

### Rationale for current arrangements and identified costs/weaknesses
- Design reflects subsidiarity: responsibilities assigned to the lowest effective level; centralization limited; member states retain freedom where EU legislation does not explicitly address matters.
- Benefits of national arrangements include adaptability to domestic financial system and experimentation with approaches, while mutual recognition of standards and licenses enables cross-border trade in financial services. EU directives aim to prevent a “race to the bottom” by establishing minimum standards.
- Concerns as markets and industry integrate and innovate rapidly:
  - Reliance on consensus and large committees can produce sclerosis and slow decision-making while financial innovation accelerates.
  - Committee decisions may be sub-optimal; consensus may be achieved by recognizing all current national practices, hindering integration and adding regulatory burden.
  - Committees may be biased toward established interests, including national supervisory institutions, leading to outcomes that favor national or sectoral interests over aggregate EU welfare; lobbying effects at national and European levels noted.
  - National implementation complexity allows favoring national interests (e.g., slow information sharing; use of prudential instruments to protect domestic institutions).
  - Costs of decentralization rise as institutions become cross-border; national authorities individually may be unable to effectively supervise cross-border groups.
- Behavioral responses from financial institutions:
  - Firms may avoid entering other EU markets to evade extra regulatory burden, or pursue regulatory arbitrage.
  - Incentives for lobbying and capture of regulators increase.
- Mitigating factors:
  - Repeated-game dynamics and continued commitment to European institutions encourage cooperation and reputation-building.
  - National interests are intertwined (e.g., cross-ownership, cross-border employment), complicating strictly national approaches to stability.
- Potential for conflicts often centers on fiscal concerns (cost of rescues, benefits of attracting firms) rather than stability per se.
- The European economy’s size, diversity, and complexity necessitate supervisory arrangements that to some extent reflect that complexity.

### How a European mandate might help — potential benefits
- If national supervisors and relevant agencies were given an effective European mandate that influenced behavior, expected advantages include:
  - Stronger operational weight for EU convergence and cooperation at national level; reduced willingness to erect surreptitious nontariff barriers or shift burdens; greater readiness to adopt common practices, lowering supervisory burden on financial institutions.
  - Enhanced functioning of Level 3 committees and supervisory colleges; decisions could be more timely and focused on the common EU good; consensus easier when participants aim for EU-wide welfare rather than negotiating conflicting national interests. This gains importance with Lamfalussy outputs subject to a “comply or explain” mechanism.
  - Facilitation of a more efficient and effective European stability framework needed due to ongoing integration and expansion:
    - Spill-overs that justify coordinated/centralized policies will increase.
    - National supervision alone may become cumbersome and risky; supervisory colleges or stability groups could become unwieldy with many member agencies.
    - Delegation and tiering of responsibilities (e.g., core and periphery in supervisory colleges) may be necessary; national authorities will agree to delegation only if their interests are properly represented by delegated authorities acting in the collective interest.
    - A European mandate could streamline supervision and reduce regulatory burdens.
- Applicability of benefits:
  - Benefits could arise in Level 3 committees, in national supervisory authorities’ operations during normal times (regulation formulation, licensing, supervision), and in extreme situations (financial crises) though some measures may lose force under severe stress.

### Risks, costs, and cautions regarding a European mandate
- Risk that the “European mandate” becomes vacuous: authorities may declare commitment but continue national-prioritized behavior, providing spurious explanations of selfless action.
- Possible significant costs if poorly designed:
  - Adding another layer of obligations may reduce transparency and accountability, increasing scope for interest group machinations (including supervisory authorities themselves).
  - Direct administrative costs (staff time, travel, coordination meetings, publications) may be significant and distract from core supervisory work.
  - Crisis management complexity may rise if supervisory authorities have European mandates while other necessarily involved authorities (notably Ministries of Finance) do not.
  - Excessive focus on European convergence could reduce use of local information, adaptability to local conditions, stifle innovation and healthy regulatory competition.
- Alternative of delegation to a European supervisory agency:
  - Would introduce its own complexities and is unlikely in near term; establishment would take years even with political consensus.
  - A European mandate and reliance on lead supervisors could be halfway measures between national-only approaches and a European supervisory institution but risk augmenting bureaucratic burden.
  - Arguments favoring national supervisors over a European supervisor:
    - Proximity provides informational advantages for national institutions.
    - Effective crisis response requires financial powers (central bank’s lender-of-last-resort, government tax-levying ability) that the EU lacks, limiting effectiveness of a European supervisor in crisis situations where cross-border effects are strongest.

### Formulation and implementation of a European mandate — principles and focal areas
- Core recommendation: center the European mandate on financial sector stability.
  - Extension to other objectives (consumer/investor protection, promotion of competition and innovation, combating financial crime/money laundering) would complicate definition and increase conflicts among objectives.
  - Explicit obligations toward specific groups raise institutional liability issues; legal regimes differ across Europe; convergence on liability may be a distraction.
  - Initial, more focused approach recommended to avoid protecting particular institutions or parties that take commercial risk.
- Stability is a broad concept and entails trade-offs:
  - Stability implies absence of crises but requires a profitable financial system for long-term viability.
  - Balance must be maintained between stability goals and direct/indirect costs of regulation; need to acknowledge efficiency concerns.
  - Within prudential policies, elements include licensing, regulation, on- and off-site supervision, enforcement, and intervention/resolution/closure. Intervention and resolution are most prone to cross-country conflicts and often require quick and confidential decision-making, limiting consultation time.
  - Recommendation to concentrate initially on areas where conflict is less acute.
- Possible model: arrangements between Australia and New Zealand:
  - Bilateral mutual commitment to account for cross-border spillovers given close financial integration; arrangement functions despite asymmetries. The European context is more complex (many more countries), but cooperation might be facilitated by greater symmetry across European countries.

*Italic source attribution: _wp0905 - introduction of EU mandates in national supervisors’ mission statements.*

### Box 1. Mutual Responsibilities of Supervisors in Australia and New Zealand

### Box 1. Mutual Responsibilities of Supervisors in Australia and New Zealand

### Background and purpose
- Australia and New Zealand amended financial sector legislation in 2006 with the express aim of giving national supervisors a mandate to take into account financial stability concerns in the other country.
- Each supervisor is meant to support the other and, whenever reasonably possible, to avoid actions that would adversely affect the financial system stability in the other country, and to consult if possible before taking actions that could have a major cross-border impact.
- Supervisors are required to make an effort to consult each other and take each other’s interest into account, but it is recognized that this may not always be possible when time is of the essence.
- Specific mention is made of actions that interfere with the provision of outsourced services.
- A bank administrator or statutory manager is to inform the supervisor if they believe that their action may have a detrimental effect on financial stability in the other country.

### Structural features and national differences
- The arrangement reflects that the New Zealand banking system is almost entirely owned by large Australian banks and that New Zealand institutions have outsourced many functions to their parent banks in Australia.
- Institutional and legal differences noted:
  - As part of the reform, the Australian Prudential Regulatory Authority had to be given an explicit mandate to promote “financial system stability,” which previously had been the sole preserve of the Reserve Bank of Australia. The Reserve Bank of New Zealand has all supervisory functions.
  - Australia grants depositors preferential status in bank resolution. New Zealand does not offer deposit insurance or any special protection for depositors.
  - There does not appear to be a mechanism dedicated to achieving accountability for these mutual responsibilities.

### Implications and relevance as a model
- The Australian-New Zealand provisions could serve as a model for enhancing cross-border supervisory cooperation, particularly for conservators, administrators, or receivers of financial institutions where cross-border spillovers are important.
- Such provisions may be most valuable in the absence of a supranational institution with direct supervisory responsibilities or powers to resolve problem institutions.

### Lessons for designing a European mandate (summary of relevant considerations)
- Mandate formulation:
  - The mandate should center on financial sector stability but also recognize the need for efficiency, mainly in the sense of limiting regulatory burdens and not hindering innovation.
  - One approach would be to define a broad European mandate complemented by specific “dos and don’ts,” balancing flexibility with clarity.
- Specific “dos and don’ts” (examples provided):
  - (i) consult and coordinate with European partner authorities before taking action that would significantly affect financial systems in other Member States;
  - (ii) assist, including by providing relevant information, European partner authorities in their efforts to maintain and promote financial sector soundness and efficiency;
  - (iii) avoid taking actions that hinder the integration of European financial markets;
  - (iv) avoid taking actions that are likely to have the effect of unilaterally shifting to other Member States the costs associated with financial sector regulation and supervision, or those associated with other financial sector policies; and
  - (v) minimize the potential harmful economic impacts at the lowest EU-wide cost when managing and resolving financial crises.
- Which authorities to cover:
  - At a minimum: financial supervisory authorities and relevant central banks.
  - Consider also: financial institution conservators, administrators or receivers; the Level 3 Lamfalussy committees (and their participants); deposit insurance schemes (noting diversity and practical complications).
- How to embody and implement the mandate:
  - Legal options:
    - National legislation would give a very strong legal basis but could be lengthy and risk national idiosyncratic modifications.
    - An EU Directive could help avoid inconsistencies; an EU Regulation would leave less scope for national discretion but depends on treaty interpretation.
  - Supervisory practice and institutional measures (non-exclusive examples):
    - Inclusion of the European mandate in authorities’ mission statements.
    - An EU-wide MOU.
    - Appointment of a high-level officer in each authority with responsibility for promoting European financial sector integration and cooperation.
    - Inclusion on each authority’s Board of a member with special responsibility for promoting European financial sector integration and cooperation.
    - A commitment that all major decisions be preceded by a “European Impact Study,” with a possible presumption of publication and review, subject to override provisions for urgent action.
    - Requiring authorities to pool some resources for common projects and/or that financial institutions contribute to a common pool.
    - Establishing systems for sharing information and agreeing procedures so that deposit insurance schemes can honor claims uniformly across jurisdictions, including minimum standards for payout procedures and conditions.
    - Introducing language on the European mandate into the rules and statutes establishing the Level 3 committees.
- How to balance conflicting mandates:
  - Conflicts between a European mandate and other national mandates (e.g., fiscal considerations, promotion of “national champions,” consumer protection) are possible and may be acute during resolution of problem institutions.
  - A practical approach is to accept a hierarchy of mandates: preferably, national authorities would be responsible first for fulfilling a European mandate for financial stability, then for soundness and efficiency of national financial systems, and then other mandates (such as investor or consumer protection).
  - The European mandate should have precedence over non-prudential objectives (for example, minimizing quasi-fiscal costs or promoting the national financial industry).
  - Introducing a European mandate presents an opportunity to rationalize and harmonize other aspects of supervisory mandates.
- How to achieve accountability:
  - Strong accountability mechanisms are necessary to prevent the mandate becoming vacuous, especially in crisis situations.
  - Possible accountability measures:
    - Enhance accountability of Level 3 committees towards EU institutions through regular reporting and greater transparency (e.g., publication of voting records, non-technical summaries).
    - Require national supervisory authorities to explain to national parliaments the nature of the European mandate and actions taken to fulfill it.
    - Allow the European Parliament the right to request information and explanations (while avoiding routine reporting that could overwhelm it).
    - EU Commission periodic reports on countries’ efforts to fulfill the European mandate; potential use of the Commission’s enforcement powers.
    - Peer review by Level 3 committees as a collegial alternative (May 2008 ECOFIN conclusions envisaged such peer review).
    - Public reporting by financial sector authorities on their efforts to fulfill the European mandate and inviting public debate on “European Impact Studies”; private sector bodies and external researchers could highlight cases of non-cooperative behavior.

### Conclusions (as synthesized from the Box)
- A European mandate for national financial sector authorities could produce more timely and cooperative decisions that promote the common EU good, give operational priority to EU cooperation at the national level, and provide accountability for supervisors’ increasing cross-border responsibilities.
- The mandate could help build trust and enable supervisors to delegate increasingly to one another, necessary in an integrating financial market without a single European supervisory institution with resolution powers.
- Risks include the mandate becoming vacuous or generating confusion over responsibilities and powers; avoiding these dangers requires concrete action on formulation, scope, legal basis, implementation, mandate balancing, and accountability.

*Source: Box 1. Mutual Responsibilities of Supervisors in Australia and New Zealand*

### APPENDIX I: RECENT EU INITIATIVES ON A EUROPEAN MANDATE FOR SUPERVISORS

### APPENDIX I: RECENT EU INITIATIVES ON A EUROPEAN MANDATE FOR SUPERVISORS

### ECOFIN conclusions — October 9, 2007
- Issued an ambitious set of conclusions on enhancing arrangements for financial stability in the EU, focusing on crisis management.
- Key elements:
  - A recognition that financial stability is a common concern for all member states that must be safeguarded on the basis of close cooperation.
  - A set of common principles on cross-border financial management, which is recognized as a matter of common interest for all member states affected.
  - An invitation to the ECOFIN to prepare an extended MOU by June 2008, which will detail common principles (notably on the management of a cross-border crisis), a common analytical framework and the timely sharing of assessments, and practical guidelines.
  - An invitation to the Commission to cooperate with the member states to consider including in the mandates of national supervisors a task to cooperate within the EU and to take into account the financial stability concerns of all member states.
  - An invitation to the Commission to improve the interoperability of deposit insurance schemes and clarify the implications of sharing financial burdens.

### ECOFIN conclusions — December 4, 2007
- Included various measures on supervisory cooperation, largely relating to the Lamfalussy process.
- Provisions and suggestions:
  - The risk of excessive national discretion in implementing EU Directives and for “Gold Plating.” Therefore, member states are invited to report to the Commission on their use of discretion.
  - A proposal that the Commission review differences in supervisory powers and objectives between national supervisors and with regard to sanctioning powers.
  - The introduction of qualified majority voting Level 3 committees, where necessary.
  - A suggestion that those who do not comply with Level 3 committee decisions provide a public explanation of their actions.
  - The conclusions “underline the importance of considering” including in the mandates of national supervisors the task “to cooperate within the EU and to work towards European supervisory convergence and to take into account the financial stability of all member states.”

### IIMG final report — recommendations
- Role and mandate of Level 3 committees:
  - Provide (a) a clear EU mandate, complemented by an annual work program, which should be endorsed by the European Parliament, the Council and the European Commission, and (b) a sufficient legal basis covering their activities.
  - Serve as a platform for the coordination of supervision and regulation, facilitating the development of supervisory tools and methods, and strengthening the trust between national supervisors. One aim should be to enhance supervisory convergence and cooperation.
  - When providing technical advice to the Commission, be permitted to use qualified majority voting for a limited number of tasks which are of a highly technical nature and where a delegation is given to the committees in Level 1 or (with the exception of one Member) Level 2 legislation.
  - Other decisions on supervisory convergence should be taken by consensus and their implementation ensured by a strong "comply or explain" mechanism.
- National-level requirements:
  - A clear requirement to cooperate at EU level and to support the EU convergence process should be included in mission statements of national regulatory and supervisory authorities.
- Transparency, enforcement, and stakeholder roles:
  - Parliament, supervisors and the private sector should put forward complaints, information and concrete cases of incorrect implementation of EU rules.
  - Transparency of national transposition of EU directives and implementation through disclosure mechanisms could curb regulatory additions and enhance convergence of practices through peer pressure.
  - Improving enforcement of agreed legislation should become a common objective of all stakeholders. The Commission should play the principal role by using all available tools. Member States, the European Parliament, supervisors and the private sector should put forward complaints, information and concrete cases of incorrect implementation of EU rules.

### ECOFIN meeting and roadmaps — May 14, 2008
- Confirmed and updated several initiatives; main conclusions and elements for further work on financial market supervision and stability arrangements include:
  - Introduction of a “European dimension” into the mandates of national supervisory authorities. Member States are invited to ensure, by mid-2009, that the mandates of national supervisors allow them to take the EU dimension into account in exercising their duties. The task of financial supervisors should include cooperation at the EU level and among states.
  - Introduction by the Commission of these objectives into EU legislation. Example actions in the Commission’s proposed amendments to the Capital Adequacy Directive:
    - Clauses that supervisors in one state should have regard to the impact of their decisions on the stability of the financial system in all Member States.
    - Home supervisors should alert host supervisors as soon as they become aware of an emergency situation in a financial institution.
    - Consolidating supervisors should establish colleges of supervisors.
  - An assessment by the Financial Services Committee of the application of the European dimension in national mandates, based on reports from the Level 3 committees.
  - Strengthening the role of colleges of supervisors and their extension to all cross-border financial groups. The Level 3 committees are to provide guidelines to provide consistency and effectiveness in the work of the colleges.
  - The Commission is to assess extensions of the “winding up directive” to facilitate the winding up of cross-border banking groups, taking into account the interests of all stakeholders.

### New MOU on cross-border financial crisis situations — June 2008
- Contains:
  - A recognition that financial stability and managing a cross-border financial crisis are common concerns.
  - An acceptance of the need for a common analytic framework for assessing systemic vulnerabilities and timely sharing of information.
  - The introduction of a framework for cooperation agreements on arrangements for crisis management in the case of cross-border financial institutions. It is envisaged that “Cross-Border Stability Groups” be established; the groups would effectively expand colleges of supervisors by including Ministries of Finance and other agencies that would be involved in resolving a financial crisis.
  - Agreement that collective crisis costs should be minimized and the distribution of costs of bank resolution should be equitable and balanced.
  - A commitment to share information with counterparties in other member states as soon as an authority becomes aware of a potentially serious threat to financial stability. National authorities should share their information and assessments with one another.

### High Level Expert Group on EU financial supervision — November 2008
- Established in November 2008 and chaired by Jacques de Larosière.
- Mandate:
  - To make recommendations to the Commission on strengthening European supervisory arrangements covering all financial sectors.
  - Objectives include establishing a more efficient, integrated and sustainable European system of supervision and reinforcing cooperation between European supervisors and their international counterparts.

*Source: APPENDIX I: RECENT EU INITIATIVES ON A EUROPEAN MANDATE FOR SUPERVISORS*

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