Explanatory Memorandum to COM(2009)499 - Community macro prudential oversight of the financial system and establishing a European Systemic Risk Board - Main contents
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| dossier | COM(2009)499 - Community macro prudential oversight of the financial system and establishing a European Systemic Risk Board. |
|---|---|
| source | COM(2009)499  |
| date | 23-09-2009 |
The current financial crisis has highlighted weaknesses in the EU's supervisory framework, which remains fragmented along national lines despite the substantial progress achieved in financial-market integration and the increased importance of cross-border entities. Against this background, President Barroso requested a group of high level experts, chaired by the former Managing Director of the International Monetary Fund (IMF), Mr. Jacques de Larosière, to make recommendations with a view to establishing a more efficient, integrated and sustainable supervisory framework.
The key recommendations of the de Larosière group focus on:
(i) Establishing a European Systemic Risk Board (ESRB) that would be responsible for macro-prudential oversight of the financial system within the Community in order to prevent or mitigate systemic risks, to avoid episodes of widespread financial distress, contribute to a smooth functioning of the Internal Market and ensure a sustainable contribution of the financial sector to economic growth.
(ii) Establishing a European System of Financial Supervisors (ESFS), consisting of a network of national financial supervisors working in tandem with new European Supervisory Authorities (ESAs), created by the transformation of existing European supervisory committees i in a European Banking Authority (EBA), a European Securities and Markets Authority (ESMA), and a European Insurance and Occupational Pensions Authority (EIOPA). The ESFS should be built on shared and mutually-reinforcing responsibilities, combining nationally-based supervision of firms with specific tasks at the European level. The ESFS would also foster harmonised rules and coherent supervisory practice and enforcement.
In March 2009, the Commission and European Council broadly endorsed the recommendations of the de Larosiere Group. On 27 May 2009, the Commission published a Communication on Financial Supervision in the EU, describing in detail how these recommendations could be put into effect, focusing in particular on the establishment of the proposed ESFS and ESRB. The Ecofin Council of 9 June 2009 adopted detailed conclusions, in which it agreed with the objectives laid down in the Commission Communication and stressed that financial stability, regulation and supervision in the EU must be enhanced in an ambitious way. The European Council of 18-19 June 2009 subsequently confirmed that the May Commission Communication and the Ecofin Council conclusions established the way forward in establishing a new framework for micro- and macro-prudential supervision. The European Council requested that the Commission should present all necessary proposals by early autumn 2009 at the latest so that the new framework would be fully in place in the course of 2010.
The Commission conducted two open consultations on the overall package, i.e., both on the ESFS and the ESRB. A first consultation was conducted following publication of the report of the de Larosiere Group and extended from 10 March to 10 April 2009 as input to the Commission communication on Financial Supervision in Europe published on 27 May 2009. A summary of the 116 public submissions received can be found on:
ec.europa.eu/internal_market/consultations/docs
A second consultation was conducted over the period from 27 May to 15 July 2009, whereby all financial services sector operators and their representative bodies, regulators, supervisors, other interested parties to were invited to comment on the more detailed reforms presented in the May 2009 Communication. The responses received were for the greater part supportive of the suggested reforms, with comments on detailed aspects of the proposed ESRB and ESFS. A summary of the public submissions received can be found on:
ec.europa.eu/internal_market/consultations/docs
The May 2009 Communication was accompanied by an impact assessment analysing the main policy options for establishing the ESFS and ESRB. A second impact assessment has nevertheless been made in respect of the more detailed aspects of the proposal and is available on the Commission website.
Contents
- Legal elements of the proposal
- Budgetary implications
- 2. Consultation of the interested parties
- 3. Impact assessment
- 6. Detailed explanation of the proposal
- 6.1. Establishment of the ESRB
- 6.2. Tasks and powers of the ESRB
- 6.2.1. Warnings and recommendations
- 6.2.2. Access to information
- 6.3. Relationship with the ESFS
- 6.4. Confidentiality
- 6.5. The internal organisation of the ESRB
- 6.5.1. The General Board
- 6.5.2. Chairperson
- 6.5.3. The Steering Committee
- 6.5.4. The Secretariat
- 6.5.5 The Advisory Technical Committee and other sources of advice
- 6.6. Reporting obligations
Only with arrangements in place that properly acknowledge the interdependence between micro- and macro-prudential risks can all stakeholders, e.g. financial institutions, investors and consumers, have sufficient confidence to engage in cross-border financial activities. Too often in the past, the focus of prudential supervision has been exclusively at the micro-level, with supervisors assessing the balance sheets of individual financial institutions without due consideration for interactions between institutions and between institutions and the broader financial system. Providing this broader perspective is the responsibility of macro-prudential supervisors. These supervisors shall monitor and assess potential financial-stability risks arising from developments that can impact on a sectoral level or at the level of the financial system as a whole. By addressing such risks, the ESRB would be an essential building block for an integrated EU supervisory structure necessary to promote timely and consistent policy responses among the Member States thus preventing diverging approaches and so improve the functioning of the Internal Market.
The ESRB is established on the basis of Article 95 of the EC Treaty as a body without legal personality. This legal basis allows the ESRB to have the core features outlined above and to have a mandate covering the whole financial sector without exceptions.. It allows moreover the ESRB, together with the ESFS, to form a common innovative framework for financial supervision, while maintaining a clear distinction of responsibilities between the ESRB and the other bodies.
The Regulation establishing the ESRB is completed by a Council decision which confers on the European Central Bank (ECB) the task of ensuring the Secretariat of the ESRB. Accordingly, the ECB will provide the administrative, logistical, statistical and analytical support to the ESRB. This decision will implement for the first time Article 105 i of the Treaty, which foresees the possibility for the Council, acting unanimously on a proposal from the Commission and after consulting the ECB and receiving the assent of the European Parliament to confer upon the ECB specific tasks related to prudential supervision.
The budgetary cost related to the ESRB will be borne by the ECB and will not have any direct implication for the Community budget. The cost of such support will depend on the extent to which the existing staff and resources of the ECB can be used to fulfil the tasks of the Secretariat of the ESRB.
A Council Regulation is required to establish the ESRB as a new European body, independent from existing structures.
The ESRB is an entirely new European body with no precedent, which shall be responsible for macro-prudential oversight. The objective of the ESRB shall be threefold:
- It shall develop a European macro-prudential perspective to address the problem of fragmented individual risk analysis at national level;
- It shall enhance the effectiveness of early warning mechanisms by improving the interaction between micro-and macro-prudential analysis. The soundness of individual firms was too often supervised in isolation with little focus on the degree of interdependence within the financial system;
- It shall allow for risk assessments to be translated into action by the relevant authorities.
Given the wide scope and the sensitivity of its missions, the ESRB shall not be conceived as a body with legal personality and binding powers but rather as a body drawing its legitimacy from its reputation for independent judgements, high quality analysis and sharpness in its conclusions.
The main decision-making body of the ESRB will be the General Board.
The composition of the General Board is a key issue for the effectiveness of the ESRB. The choice is made to ensure a significant representation of central Banks. In most Member States, central banks have some degree of responsibility for macro-prudential oversight of the financial sector. Because of this responsibility and acquired expertise, central banks are well-placed to contribute to the analysis of the impact on financial stability of the inter-linkages between the financial sector and the broader macroeconomic environment.
The analytical work and logistical support to the ESRB will be provided by a Secretariat, which will be ensured by the European Central Bank. Granting the Secretariat to the ECB will allow the ESRB to exploit the ECB's in-depth macro-prudential expertise and its central role in the EU monetary system. In cooperation with national central banks, the European Central Bank compiles and disseminates a wide range of monetary statistics and indicators regarding financial institutions. The European Central Bank and the Eurosystem monitor cyclical and structural developments in the euro area/EU banking sector as well as in other financial sectors to assess the possible vulnerabilities in the financial sector and its resilience to potential shocks.
The ESRB will not have any binding powers to impose measures on Member States or national authorities. It has been conceived as a 'reputational' body with a high level composition that should influence the actions of policy makers and supervisors by means of its moral authority. To this end, it will not only provide high quality assessment of the macro-prudential situation but it may also issue risk warnings and recommendations which identify the potential unbalances in the financial system which are likely to increase systemic risks and the appropriate remedial actions. The ESRB will have a broad scope of activity, not limited to a specific type of entity or market. Warnings and recommendations may address any aspect of the financial system which may generate a systemic risk. It will also cooperate with the relevant international financial institutions (IMF, FSB…) and third countries bodies on issues related to macro-prudential oversight. This proposal being based on Article 95 of the Treaty, it is relevant for the European Economic Area (EEA). The modalities of cooperation between the EFTA States participating in the EEA and the ESRB will be discussed in the EEA Joint Committee.
An essential role of the ESRB is to identify risks with a systemic dimension and prevent or mitigate their impact on the financial system within the EU. To this end, the ESRB may issue risk warnings. These warnings should prompt early responses to avoid the build-up of wider problems and eventually a future crisis. If necessary, the ESRB may also recommend specific actions to address any identified risks.
ESRB recommendations will not be legally binding. However, the addressees of recommendations cannot remain passive towards a risk which has been identified and are expected to react in some way. If the addressee agrees with a recommendation, it must communicate all the actions undertaken to follow what is prescribed in the recommendation. If the addressee does not agree with a recommendation and chooses not to act, the reasons for inaction must be properly explained. Hence, recommendations issued by the ESRB cannot be simply ignored.
The ESRB shall decide on a case by case basis whether warnings and recommendations should be made public. On the one hand, the publication of a recommendation may increase the pressure for the prompt corrective actions. On the other hand, it could trigger adverse financial-market reactions. Given the sensitive judgement to be made in deciding on the publication of warnings and recommendations, such decisions should be made on a case by case basis. Moreover, it seems appropriate that warnings and recommendations should not be made public unless a qualified majority of two-thirds of the General Board decides otherwise.
The addressees of warnings and recommendations can be the Community as a whole, one or more Member States, one or more European Supervisory Authorities, and one or more national supervisory authorities. All warnings and recommendations must be transmitted to the Council, while those related to supervisory issues should also be transmitted to the relevant ESA. The transmission to the Council and to the ESAs of warnings and recommendations is not intended as a way to water down their content, but aims on the contrary at increasing the moral pressure on the addressee to act or explain and offering the possibility to the Council to comment it.
The interconnectedness of financial institutions and markets implies that the monitoring and assessment of potential systemic risks should be based on a broad set of relevant macro-economic and micro-financial data and indicators. The ESRB should therefore have access to all the information necessary to perform its duties while preserving the confidentiality of these data. The ESRB will be able to rely on the broad set of data already collected through the Eurosystem by the ECB on Monetary and Financial Institutions. Additionally to fulfil its tasks and ensure the necessary consistency between the micro-supervisors and the ESRB, the ESRB, through its secretariat, will also be able to request the ESAs to provide information in summary or collective form. Should this information be not available (or not made available), the ESRB will have the possibility to request data directly from national supervisory authorities, national central banks (NCBs) or other authorities of Member States. The regulation furthermore creates a general obligation on the ESAs, the NCBs and the Member States to provide to the ESRB all the information needed for the fulfilment of its tasks, thus guaranteeing a wide access to the data needed for the macro-prudential analysis.
As some individual institutions can be systemic in nature (because of their size, their interconnectedness with other financial institutions or their risk profile), the ESRB – through its secretariat - shall also have access to individual data upon a reasoned request to the ESAs.
The proposed framework for EU supervision can only work if the ESRB and ESFS cooperate efficiently. Indeed, the objective of the reform is to ensure a smoother interaction of supervision at the macro-prudential and micro-prudential levels. In fulfilling its role as macro-prudential supervisor, the ESRB will need a timely flow of harmonised micro-level data, while micro-prudential supervision by national authorities will benefit from the ESRB’s insights into the macro-prudential environment. The Regulations also specify the procedures to be followed by the ESAs to act upon recommendations by the ESRB and how the ESAs should use their powers to ensure timely follow-up to recommendations addressed to one or more competent national supervisory authorities.
The Members of the General Board of the ESRB and the staff working for the ESRB shall be subject to the obligation of professional secrecy. Any confidential information received by Members of the General Board or by the persons who work in connection with the ESRB shall not be released outside except in summary or collective form so that individual institutions cannot be identified. These confidentiality rules apply notably to the ECB staff as the ECB will provide the Secretariat to the ESRB. In this respect, information acquired by the ECB in its role of Secretariat to the ESRB, shall only be used for the fulfilment of ESRB tasks. In line with the existence practice in the EU institutions, the persons who have worked in connection with the ESRB will still be bound by the obligation of confidentiality, even after their duties have ceased.
The addressees, the Council and the ESAs shall also take the measures necessary for the protection of the confidential nature of the warnings and recommendations.
The ESRB shall be composed of: (i) a General Board; (ii) a Steering Committee and (iii) a Secretariat.
The General Board is the decision making body of the ESRB and as such, will be responsible for the adoption of the warnings and recommendations described in section 6.2.1 of this explanatory memorandum.
The members of the General Board with voting rights are:
- the Governors of national central banks;
- the President and the vice-President of the ECB;
- a Member of the European Commission;
- the Chairpersons of the three European Supervisory Authorities.
The members of the General Board without voting rights are:
- one high level representative per Member State of the competent national supervisory authorities;
- the President of the Economic and Financial Committee.
The representative of the national supervisory authorities may rotate depending on the matters that are being discussed (this rotation will be needed in a large number of Member States, where there are different bodies for supervising for instance the financial and the insurance sector).
The members of the Board shall act impartially. This implies that when performing activities related to the ESRB, they shall neither follow instructions nor take into account the individual interests of any Member State. Impartiality is a crucial requirement, as the interests of an individual Member State may not always coincide with the ESRB's main objective, maintaining financial stability in the European Union as a whole.
The members of the General Board with voting rights shall each have one vote. The decisions of the General Board will be adopted by simple majority, (except for the decision to make a warning or recommendation public, which requires a qualified majority of two-thirds of the votes. In line with the common practice, a quorum is needed for the votes.)
The General Board shall meet at least 4 times per year. The meetings shall be convened on the initiative of the Chair or at the request of one third of the Members with voting rights.
The Chair will be elected for 5 years from among the Members of the General Board of the ESRB which are also Members of the General Council of the ECB. The Chair will preside the General Board as well as the Steering Committee and instruct the Secretariat of the ESRB on behalf of the General Board. The Chair shall be able to convene extraordinary meetings of the General Board on its own initiative. As regards voting modalities within the General Board, the Chair will have a casting vote in the event of a tie. The Chair shall represent the ESRB externally.
Given the size of the General Board –which will comprise a total of 61 members-, a Steering Committee will assist the decision-making process of the General Board. The Steering Committee will prepare the meetings of the General Board, review the documents to be discussed and monitor the progress of the ESRB's on-going work.
The Steering Committee will comprise the Chair and Vice-Chair of the General Board, the Chairpersons of the three ESAs, the President of the EFC, the Member of the Commission and five members of the General Board which are also members of the General Council of the ECB (12 members).
The ECB will ensure the Secretariat to the ESRB. The Secretariat will receive instructions directly from the Chair of the General Board.
The Head of the Secretariat will be appointed by the ECB, in consultation with the General Board of the ESRB. The Secretariat will provide analytical, statistical, administrative and logistical support to the ESRB, including the preparation of the meetings, the collection and processing of qualitative and quantitative information destined to the ESRB, the conduct of analysis and assessments necessary for the fulfilment of the ESRB tasks. The Secretariat will also provide support to the work of the Advisory Technical Committee (see 6.5.5.).
The role of the Advisory Technical Committee (hereinafter, referred to as the 'ATC') is to provide advice and assistance to the General Board on the issues that are within the scope of the ESRB, on request from the latter.
The members of the ATC are:
- one representative of each national central bank
- one representative from the ECB
- one representative of the national supervisory authority per Member State
- one representative of each European Supervisory Authority
- two representatives of the European Commission
- one representative of the EFC.
The Chair of the ATC shall be appointed by the General Board on a proposal from its Chair. The representative of the national supervisory authorities may rotate depending on the matters that are being discussed.
The ESRB shall be accountable to the European Parliament and to the Council and shall therefore report to them at least annually. The European Parliament and the Council may also require the ESRB to report more often.