Today, the European Commission (EC) announced important legislative proposals that are intended to strengthen the framework of financial supervision in Europe at both “the macro- and micro-prudential supervision levels” by creating the "first EU wide system of financial supervision.” The proposals, which will require approval by both the European Council and the European Parliament, would create a European Systemic Risk Board (ESRB), which would “detect risks to the financial system as a whole with a critical function to issue early risk warnings to be rapidly acted on,” and a European System of Financial Supervisors (ESFS), which would “be composed of national supervisors and three new European Supervisory Authorities for the banking, securities and insurance and occupational pensions sectors.”

In February, the EU released a report prepared by a high-level group on the “Financial Supervision in the EU.” The report discussed the balance between supervision and regulation in the EU and, among other recommendations, called for the creation of two supervisory bodies encompassing the powers and authority of the proposed ESRC and ESFS. In May, the EC issued a Communication on Financial Supervision in Europe, which proposed a set of "ambitious" reforms to the current architecture of financial services regulation, including the creation of the ESRB and the ESFS. The European Council further reaffirmed the creation of these two bodies during its two-day summit in Brussels in June, with the caveat that "decisions taken by the European Supervisory Authorities should not impinge in any way on the fiscal responsibilities of Member States."

Under the legislative proposals the ESRB will “monitor and assess risks to the stability of the financial system as a whole and provide early warnings of such risk and where necessary provide “recommendations for action to deal with these risks.” The heads of the European Central Bank, national central banks, the European Supervisory Authorities, and national supervisors, will participate in the supervisory work of the ESRB. The creation of the ESRB "is in line with several initiatives at multilateral level or outside the EU, including the creation of a Financial Stability Board by the G20."

The ESFS will "consist of a network of national financial supervisors working in tandem with new European Supervisory Authorities, created by the transformation of [the three] existing Committees for the banking securities and insurance and occupational pensions sectors." The network will include a new European Banking Authority (EBA) (successor to the Committee of European Banking Supervisors), European Insurance and Occupational Pensions Authority (EIOPA) (successor to the Committee of European Insurance and Occupational Pensions Supervisors), and European Securities and Markets Authority (ESMA) (successor to the Committee of European Securities Regulators). In addition to discharging the responsibilities of their respective predecessor committees, the new agencies would have the authority to:

  • create "proposals for technical standards, [and] respecting better regulation principles;"
  • settle "cases of disagreement between national supervisors," in instances where the applicable legislation requires cooperation or agreement;
  • contribute to the "consistent application of technical Community rules (including through peer reviews);"
  • exercise direct supervisory authority over activities that are directly regulated at the EU-level (currently limited to credit rating agencies, which would be regulated by the ESMA); and
  • As directed by the European Council, coordinate responses in emergency situations.

Although the EC did not release legislative text, it did release sets of frequently asked questions relating to the ESRB and the ESFS. The FAQs and accompanying materials describe a number of limitations on the authority of the ESRB and the ESFS, but it is not clear that those limitations will fully address Member State concerns.

This proposed legislation represents another step in the EC’s efforts to enhance and strengthen the regulatory framework of the EU financial system since the onset of the financial crisis. In April, the EC announced its adoption of two recommendations that set forth guidance on compensation for directors of listed companies and similar guidance for “risk-taking” staff in financial institutions. In July, the EC adopted a proposal to further amend the Capital Requirements Directive, previously adopted by the EC in 2006 to address the business of credit institutions and the capital adequacy of investment firms and credit institutions. The EC had initially approved amendments to the Directive in March to enhance transparency and improve supervision and risk management.