Tessa de Roo Cornelis Trooststraat 26-‐3 1072 JG Amsterdam S1641697 t.de.roo.1@student.rug.nl T: 06-‐50446214 Supervisor: R.L. Holzhacker 11-‐09-‐2014
The influence of member countries’ mind-‐set on
European Union financial regulation changes
Introduction
The economic crisis that hit the world in 2007 was one of the severest in recent history. Even now in 2014, many years after its start, we are still dealing with the aftermath of this financial catastrophe. Politicians and scholars alike failed to predict this major event and the major effect it has had on national markets and policies and on cross-‐border institutions and cooperation. The countries in the Eurozone were also not left unaffected by the financial turmoil. Housing one of the largest financial markets in the world, the countries of the Eurozone took a heavy hit. Many institutions, which were previously thought to be “too big to fail”, had to be nationalized or relied heavily on state support for their survival. Although present day financial institutions seldom are active in only one European country, in Europe the crisis was initially dealt with on a national level. But it was clear that to truly battle such a large-‐scale event, a solution had to be found at the EU wide level.
financial regulation process with the following research question: To what extent did mind-‐set changes in the Eurozone countries affect the EU financial regulation process between 2007 and 2012?
In this thesis we define mind-‐set as the way European countries look at the financial regulatory process: their attitude towards this subject. Interests of countries do not only influence this mind-‐set, but also by ideas states have about regulations. This will be elaborated on in the theory section.
Social and scientific significance
We do not aim to make a value judgement about the regulation itself; economists have already conducted much research into this topic. For International Political Economists it is much more interesting to look at the regulation process. What effect did the change in mind-‐set about financial regulation had on the process of regulation? Existing literature into this process has mainly centred on the role that material factors, like national economic interests, have played. Most IPE scholar have made use of theories that adhere to Rationalism, therefore ignoring the social aspect of International Relations. Research that has taken into account the more social side of IR has mainly examined the shared ideas of different coalitions that exist in the European Union.
Methodology
To answer the main research question we will use three sub-‐questions to assist us:
1. In what way did financial regulation in the European Union change between 2007 and 2012 and how did this change come to be?
2. What different mind-‐sets are present in the countries of the Eurozone?
3. What role did the mind-‐sets play in the policy process?
To answer the first sub-‐question we will discuss the policy process before the crisis by examining the dominant mind-‐set and the evolution of financial policy within the EU between 2007 and 2012. To determine which mind-‐sets were presents during these years we will compare three countries of the Eurozone in three case studies. The countries we have chosen for this comparison are the Netherlands, Germany and Spain. These three were chosen because they each represent a different regulatory system; they have different frameworks of supervision for example. Furthermore they are different sized countries (Germany being one of the largest en Netherlands one of the smallest countries in the EU) and hold different power positions within the EU. The Netherlands is one of the oldest members, as is Germany and this country is also a big and powerful player. Spain on the other hand joined the Union at a later time and for long time was a net beneficiary. These three countries were choses because they represent a cross section of the European Union. After we have determined which mind-‐sets were present during the period examined, we will draw a conclusion on the influence these mind-‐sets had on the regulations process.
Theoretical framework
elaborate on how the theory is going to be applied. In short, this next part will establish the framework on which the analysis will be build.
Through the years scholars have developed many different theories for explaining the European financial integration process. We will discuss some of the main approaches to illustrate the academic debate on this topic. Héritier sees the policy process that creates regulation as a competition between the most powerful and most regulated states. These states have very diverse economic interest and they seek to enhance their competitive position. In other words, they seek to maximize their benefits, because European regulation that is similar to their own not only cuts down on costs but also gives them an advantage. Therefore the policy process is a patchwork of these diverse national interests and regulatory traditions. Story and Walter took a similar approach. These scholars saw financial integration in the EU as a “battle of the systems” where states want to set rules in line with their domestic regulatory approach. These approaches thus see the state as a unified actor that always seeks to maximize its benefits and use that viewpoint of explaining integration.1
Another approach that has attempted to explain the European financial policy making process is institutionalism. Institutionalism sees the creation of institutions as a way for states to minimize their transaction costs and increase information flows and monitoring. Thus by joining in an institution states maximize their benefits. Blyth examines two main variations of this theory: rational and historical institutionalism. These represent the ideational turn in International Political Economy. Unfortunately this turn did not represent a real extension of the existing research programs. Instead the addition of ideas was used to solve theoretical problems and thus ideas were a secondary method of explanation in existing theories. Neither rational nor historical institutionalism attempted to explain ideas independently and they do not see ideas as determining the outcome of a policy process.2
1 Adrienne Héritier, ‘The accommodation of diversity in European policy-‐making and its outcomes:
regulatory policy as a patchwork’ Journal of European Public Policy 3 (1996) 149-‐167, aldaar 150,164; Lucia Quaglia, ‘Completing the Single Market in financial services: the politics of competing advocacy coalitions European Union Studies Association (EUSA) conference 2009 5.
2 Mark M. Blyth, ‘Any more bright ideas? The ideational turn of comparative political economy’
These approaches all come from a main paradigm within IR: rationalism. Traditional rationalist theory considers the world to be predominantly material in nature. This material worldview entails that political actions of actors are not influenced by the way they see the world. The resources they hold and their relative position in comparison to other actors determine how actors behave in the international playing field. Therefore rationalists see the world to be very predictable and full of calculable risks and certainties. Because, when economic actors have determined their position and what is best for them, thus where their interests lie, they will always act according to these preferences and make rational choices based on these calculations. IPE scholarship has come to a comfortable status quo regarding this subject and has focused too much on rationalist theories, developing a blind spot for alternatives. But only looking at the materialistic aspects leaves many, mostly empirical, questions unanswered. Governments and actors have surprised traditional IPE scholars by acting contra to rational expectations. Different actors can act very differently in similar situations, because of the way they interpret the world around them.3
An optic that opposes this rationalistic worldview is Constructivism. This optic contradicts that social processes do not affect actors in the international field. The core of Constructivism is that the economic world is shaped by ideas that are collectively held by actors. The way in which governments or economic actors interpret the world around them is not similar in all cases. All varieties in what objects mean to agents, how they see the complex and interdependent world they act in and analyse it matter too much to just ignore, as rational theories do. According to Constructivism, government officials and economic actors in society rarely interpret the world around them purely in material terms. How they interpret all processes and cope with interdependence in the international arena is reflected in their societal identities. That is why different actors are able to act very differently than is to be expected according to rational theories and interest.4
3 Rawi Albadel, Mark Blyth, Craig Parsons, Constructing the International Economy (Ithaca; 2010) 1-‐
3; Peter J. Katzenstein, Stephen C. Nelson, ‘Reading the right signals and reading the signals right: IPE and the financial crisis of 2008’ Review of International Political Economy 20 (2013) 1101-‐1131, aldaar 1102-‐1107; Barry Axford, Gary K. Braining, Richard Huggings e.a. Politics. An Introduction (New York;2006) 492.
As it comes to International Political Economy scholarship, neither Rationalists nor Constructivists have succeeded in predicting the crisis. And while they both sides provide useful theories and approaches for looking at the economic playing field, it would be a mistake to conclude that one of them has discovered the only right way of looking at the world. Albadel, Blyth and Parsons argue that:
“Forgetting the aspect of how discourses and identities both empower and disempower agents leads to a materialist reductionism that can only narrow what we know about the world. Taking constructivism seriously as a mode of explanation in political economy illuminates much more than it obscures. It broadens our vision and our ambition, precisely at a time when we need both, inside and outside the academy.5
Thus Constructivism should not be regarded as an alternative for Rationalism or as a handy addition to complete material processes. Neither theory gives the breath and depth that is necessary to analyse the complex modern day financial world.6
Helleiner and Pagliari 7 argue that in post crisis research scholars have focused too
much on explaining the strengthening of official international standards. In their research they focus on the weakening of these standards and of fragmentation and decentralization. Katzenstein and Nelson 8 argue in favour of social optics to
explain why the materialist school of IPE has failed so badly in predicting and explaining the crisis. According to the authors, such a view brings the depth of vision necessary to explain the complex event. And finally, Marsh9 warns against
the rejection of the importance of materialist factors in explaining post crisis event.
5 Rawi Albadel, Mark Blyth, Craig Parsons, ‘Re-‐constructing IPE. Some Conclusions Drawn from a
Crisis” in: Constructing the International Economy, Rawi Albadel, Mark Blyth, Craig Parsons ed. (Ithaca; 2010) 227-‐239, aldaar 238.
6 Rawi Albadel, Mark Blyth, Craig Parsons, ‘Re-‐constructing IPE. Some Conclusions Drawn from a
Crisis” in: Constructing the International Economy, Rawi Albadel, Mark Blyth, Craig Parsons ed. (Ithaca; 2010) 227-‐239, aldaar 231-‐232; Peter J. Katzenstein, Stephen C. Nelson, ‘Reading the right signals and reading the signals right: IPE and the financial crisis of 2008’ Review of International
Political Economy 20 (2013) 1101-‐1131, aldaar 1109, 1120.
7 Eric Helleiner, Stefano Pagliari, ‘The End of an Era in International Financial Regulation? A Post
Crisis Research Agenda’ International Organization 65 (2011) 169-‐200.
8 Peter J. Katzenstein, Stephen C. Nelson, ‘Reading the right signals and reading the signals right:
IPE and the financial crisis of 2008’ Review of International Political Economy 20 (2013) 1101-‐1131.
9 David Marsh, ‘Keeping Ideas in their Place: In Praise of Thin Constructivism’ Australian Journal of
According to the author, it is the relationship between material and social factors that is important and should be considered when examining events.10
The debate between Rationalists and Constructivists is marked as one of the great debates in International Relations theory. This debate is mainly centred on ontology; they reflect different assumptions about the world. The interesting factor about Constructivism is that it takes the middle ground between Rationalism and Critical Theory. Constructivism does not deny the importance of interest, but it denies that interests are fixed and can be taken for granted. The debate thus is centred about the role of ideas and institutions in determining interests. Rationalists deny this role and, as mentioned earlier, see interests as remaining similar when once they are established. Constructivists try to explain how interests are constructed in the context of interstate interaction. 11
Drawing on this previous research and the debate within IR, we want to use a method that combines two major paradigms in International Relations theory. We want to focus on the combination of ideas and interests. How do they influence one another? What is the importance of ideas in formulating interests? What role do both play in constructing mind-‐set? Therefore we will, in our theory, draw on an approach by Quaglia.12 She argues the mind-‐set of countries towards financial
regulation is shaped by three criteria that are a combination of ideas and interest, and thus of Rationalism and Constructivism. These three criteria are:
I. National regulatory framework
II. Configuration of national financial systems and their competiveness III. Belief system about financial regulation
In this thesis we understand national regulatory framework to be the set of rules that exist in a country. Configuration of national financial systems and their
10 David Mars, ‘Keeping Ideas in their Place: In Praise of Thin Constructivism’ Australian Journal of
Political Science 44 (2009) 679-‐696, aldaar 682-‐684.
11 Barry Axford, Gary K. Braining, Richard Huggings e.a. Politics. An Introduction (New York; 2006)
492; Jill Steans, Lloyd Pettiford, Introduction to International Relations. Perspectives & Themes (Essex; 2005) 182-‐187.
12 Lucia Quaglia, ‘Completing the Single Market in financial services: the politics of competing
competiveness is defined as the economic situation in a country at the time and belief system is the set of ideas that are dominant
.
The relationship between mind-‐ set and these three criteria is that they make up the set of attitudes that is mind-‐set in the European Unions between 2007-‐2012. These three criteria is what we believe in this thesis mind-‐set consists of. Two of the criteria are Rationalist and one is Constructivist. This relationship is schematically provided in Figure 1.
Figure 1: Theoretical framework
To operationalize this theory we have derived four factors from the three criteria that we are going to use to compare the three case studies. These four factors are:
a. National regulatory tradition
b. Effect of the crisis on the economy of the country (state of the national economy)
c. Political mood
d. Believe system about EU financial integration
influence on the regulatory and financial integration process. What differs this approach from existing theories on EU financial integration is that ideas are examined as an individual factor that can influence interests. Therefore we will focus on the interplay between the two in the following analysis section.
Analysis
We will start the analysis by examining the regulation process. To fully understand the changes that were made during the 2007-‐2012 period we will start by giving a short overview of the history of European financial regulation. This will help establish the framework as it was before 2007. After that a short background of the financial crisis and why existing regulation was not sufficient to prevent it will be given. Finally the regulation process and changes in the period central to this thesis will be discussed. Key element in this discussion will be the combination of Rationalist and Constructivist elements.
As it comes to supervision and financial regulation in general, in 1977 the European Community established the First Banking Directive. This early policy paper laid down important ground rules for the financial sector that have dominated European financial regulation up until the crisis in 2007. The most important of the principles provided by the directive is the principle of home country control. This means that if a financial corporation has branches in two or more countries, the duty of supervising this institution lies with the country in which it is headquartered. Supervision of banks was thus not organized on a supranational level, but on a national level. The directive did however obligate the different national supervisors to cooperate. 13
Almost two decades after the First Banking Directive the regulatory process in the European Union led to its final destination; the single banking market that came into effect as from 1st of January 1993. With the implementation of the single
market, the ground rules did not change. Supervision was still the responsibility of the member states, not of the European Central Bank. When it came to financial regulation, the integration process in the EU could be characterized by minimal interference. The European Commission set minimal standards by issuing directives, which the member states then had to implement into national law. This
13 Gillian G.H. Garcia, Maria J. Nieto, ‘Banking crisis management in the European Union: Multiple
caused some significant differences in ways of supervising banks. The Commission did however state that there had to be mutual recognition among the member states of each other’s agreements and control systems. This measure had to ensure the quality of supervision throughout the Union.14
In 2001 a committee of wise men under the chair of Lamfalussy issued a report with a new approach to the development of financial regulation in the EU. One of the measures that was taken after this report was the creation of the Committee of European Banking Supervisors (CEBS) in 2004. This committee was composed of senior representatives of bank supervisory authorities and central banks of the European Union and found legal basis in decision 2004/15/EC of the Commission. The duties of CEBS were to enhance cooperation between member states in the field of supervision and to provide a platform for information to be exchanged. Furthermore the committee had to contribute tot the consistent application of the Commissions’ directives and play an advisory role in the decision-‐making of the Commission.15
The Lamfalussy process was especially important and well know as the key factor in the rulemaking process for the financial sector in the European Union. The policy process has four different levels:
Level 1: This level starts at the European Commission, which has an important function by identifying the need for new regulations. The Commission holds the sole right to initiate the financial rule making process.
Level 2: This level is the implementation of directives into national law or the execution of new EU regulations.
Level 3: At level three the supervisory organs advise the EC about the applicability of the rules in practice
Level 4: To close the circle, at this level the Commission checks on the implementation and execution of regulation.16
14 Gillian G.H. Garcia, Maria J. Nieto, ‘Banking crisis management in the European Union: Multiple
regulators and resolution authorities’ Journal of Banking Regulation (2005) 5; Reinoud Rini, La
responsabilité des autorités de surveillance bancaire en Europe (Lausanne; 2007) 93-‐94.
15 EC Decision 2004/15/EC
Another important instrument on the field of international financial regulation is the Basil Committee on Banking Supervision (BCBS). This is a worldwide organ where supervisory organs from all over the world unite. The BCBC was created in 1974 to better the quality of supervision by international cooperation, by sharing information and by setting minimum standards. The committee is most known for the Basel I and Basel II agreements. These are guidelines for capital requirements for banks. Slightly less known, but certainly not less important are the Basel Core Principles for the efficient and effective supervision of banks. When it comes to the criteria of capital requirements, all member states of the EU use the Basel agreements as minimum standards.17
The situation within the EU before the crisis of 2007 can be best characterized as not transparent. There were minimum standards in some important fields, but when it came to regulation and supervision many differences existed within the member states. There was no central European organ that could adequately reply in case of a crisis situation.18 When we look at the social identity
of Europe as a whole, it is divided into two opposing coalitions. These two groups of countries have different belief systems about financial regulation on a European scale and the transference of powers to the EU. We identify a Southern and a Northern coalition. The Northern one is formed by the United Kingdom, the Netherlands and the Scandinavian countries and can also be referred to as the market-‐making coalition. The Southern group composes of France, Belgium and the Mediterranean countries and is also referred to as the market-‐shaping one of the two coalitions.19 The market-‐making coalition advocates principle-‐based
regulation that is light-‐touched and competition friendly. The countries in this coalition are pro liberalisation of the market and endorse competition and market efficiency. They believed in market governance and consultation of the industry in
17 In het spoor van de crisis De Nederlandsche Bank (Amsterdam;2010) 99-‐101; Jean Pisani-‐Ferry,
Andre Sapir, ‘Banking Crisis Management in the EU; an early Assesment’ Economic Policy 2010 341-‐ 373 aldaar 348.
18 Gillian G.H. Garcia, Maria J. Nieto, ‘Banking crisis management in the European Union: Multiple
regulators and resolution authorities’ Journal of Banking Regulation (2005) 6; David Green, ‘The Relationship between Micro-‐Macro-‐Prudential Supervision and Central Banking’ Financial
Regulation and Supervision. A Post-‐Crisis Analysis, Eddy Wymeersch, Klaus J. Hopt, Guido Ferrarini
ed. (Oxford; 2012) 59-‐61.
19 Lucia Quaglia, ‘Completing the Single Market in financial services: the politics of competing
rule making. The Southern, market-‐shaping coalition believed in consumer protection through rule-‐based strict regulation. Financial stability is key and the public authorities are at the steering wheel, far from involvement of the institutions on the market. Germany has traditionally switched sides between this coalitions, being somewhere in the middle ground.20
Before the crisis the dominant mind-‐set shaping financial regulation in the European Union can be best described as in favour of letting the market run its course and having as little regulation as possible. It was clear that the market-‐ making coalition was clearly winning. A clear sign of this success was the completion of the single market and the rules adopted prior to the financial crisis, such as minimal standards. This caused there to be a lot of differences between countries in financial regulation and supervision. Therefore, although the countries of the Eurozone were interconnected in many ways, the regulatory framework was still incomplete in many ways. There are two important reasons why the coalition of mostly Northern states was most successful before 2007. These reasons, the evolution of the policy environment and a process of learning, were interconnected. During the start of the 2000s the single European currency was introduced, realigning economic interests of the EU countries and giving more power to the Northern coalition. Furthermore this increased financial integration and caused there to be increased competition between the Euro countries and the United States. As completing the single market now was a priority, a competition friendly approached seemed the way forward, as such there was a learning process. 21
If we examine the situation before the crisis it is clear that a further integration of financial regulation was in the best interest of the countries in the Eurozone. Because of the introduction of the Euro in 2002 the economic interests of the states realigned. Further integration would lower costs and create a stronger
20 Lucia Quaglia, ‘Completing the Single Market in financial services: the politics of competing
advocacy coaltions’ European Union Studies Association (EUSA) conference 2009 4.
21 Lucia Quaglia, ‘The “Old” and “New” Politics of Financial Service Regulation in the EU’
Observatoire Social Europeen research paper 2(2010) 7; Elliot Posner, Nicolas Véron, “The EU and
financial regulation: power without purpose?” Journal of European Public Policy 17 (2010) 400-‐415, aldaar 401, 410; Hans-‐Jurgen Bieling, “Social Forces in the Making of the new European Economy: The Case of Financial Market Integration” New Politcal Economy 8 (2003) 203-‐224, aldaar 206-‐216; Geoffrey R D Underhill, ‘The political economy of (eventual) banking union’ in: Banking Union for
bloc in the battle against other large financial markets. It seems therefore that interests were an important motivation for creating the single market. In the creation of this market ideas are not to be overlooked however. As described before, the type of regulation choses was a clear win of the states in favour of a market-‐making approach. The rules created were light-‐touched and left many important elements (like supervision of institutions) at the mercy of individual countries. Of course one could argue that these less strict measures were also in the best interest of these countries. With favourable conditions states could lure large international financial firms to their markets. The situation that was created in Europe before 2007 was therefore a consequence of interplay between ideas and interests.
The financial crisis
Everything changed in 2007. The world now finds itself in the biggest financial crisis up-‐to-‐date. The European Union did not manage to prepare for this crisis. This was largely due to a failing supervision. Many scholars and institutions have since examined why supervision failed. To understand the regulation process that followed and to support the following case study section, we will have to shortly pay attention to these studies. This section will therefore give an overview of the most important reasons mentioned for this failure.
explain that the entire concept of regulation and supervision that was used was out-‐dated. With the fast moving and changing capital market, just setting standards was not sufficient anymore. There was a lack of a pro-‐active approach that included on-‐sight monitoring of financial institutions.22
The pressure that supervising institutions felt from policy makers and the market as a whole is another reason Palmer and Cerutti present for their failure. This had a direct connection with the mind-‐set at the foundation that was mentioned before. It was believed that it was not the supervisors’ task to intervene in the overall business strategies of banks. The principles of deregulation and free-‐ market were very important before the crisis and governments often wanted to stimulate the financial sector in their country. This led to pressures to make the business climate more hospitable to compete with other member countries of the EU. As a consequence the authors state that supervisory institutions were often competing to make regulations as favourable as possible, to attract financial firms. This put the supervisors in a strange position. Private actors had enormous power and influence and could force policy changes, for example reducing capital requirements. This resulted in substantial weakening of prudential rules and of supervisory quality. Often supervisory institutions did not have a strong enough legal basis to be fully independent or have independent and strong leadership. This made the institutions a target of the pressure of politicians. As a final argument the authors state that there was often suboptimal cooperation among supervisors. This was especially the case with large financial actors that operated in many different countries. The individual supervisory organs often did not see the consequences their actions had for the system as a whole.23
In the paper ‘The Making of Good Supervision: Learning to Say “No”’ Jose Vinals and Jonathan Fiechter contribute to the debate a few more reasons for the supervisory failure. The authors first make an argument that is in line with Palmer and Cerutti’s argument that supervisory institutions were not pro-‐active enough. According to Vinals and Fiechter they stayed too much on the side-‐lines and had a misplaced confidence in the market to lead itself. Institutions did not sufficiently
22 John Palmer, Caroline Cerutti, ‘Is there a need to rethink the supervisory process?’ Reforming
Financial Regulation and Supervision: Going back to Basics, World Bank, 15 June 2009, 1, 15-‐17.
23 John Palmer, Caroline Cerutti, ‘Is there a need to rethink the supervisory process?’ Reforming
react to the changing financial environment and it becoming more international and complicated. They did not look far enough into the future in some cases and did not fully understand risks that were taken and what the consequences would be.24 Furthermore the authors argue that the supervisors did not look at the
system as a whole. They concentrated on the institutions under their control, but did not look at other parts of the system. They did not see the influence their decisions had and vice versa did not recognize the impact of other parts of the system on their situation. When the situation became critical, the supervising institutions did not take action quick enough to prevent things from getting out of hand.25
The causes of the financial crisis are an interesting combination of interests and ideas. As mentioned in the starting section of the analysis, the regulatory system before 2007 was a win of the ideas of free market rule. However, this also coincided with the interests of the countries having these ideas. They wanted less stringent rules to not harm their financial sector and attract financial firms, thus benefiting them economically. Its hard to define exactly what was the main driver for this process; the ideas of the interest. They seem mutually dependent, affecting each other and creating a, in hindsight, very dangerous situation. When examining the causes of the crisis it is plain to see that some risks were grossly underestimated. This underestimation came from a set of ideas (believing in the market) and was fed by economic interests.
After the crisis
We will now turn to the situation after the highpoint of the crisis to see if the crucial mistakes made and flaws of the system were changed. After the crisis a committee of wise men headed by former head of the International Monetary Fund Jacques de Larosière was asked by the European Commission to write a report on the financial regulation in Europe. This report, named after the chairman of the committee, pointed out the flaws in the former system of supervision of financial institutions in the EU and called for institutionalisation of the supervisory model.
24 Jose Vinals, Jonathan Fiechter, ‘The Making of Good Supervision: Learning to Say “No”’ IMF Staff
Position Note 18 May 2010, 6-‐7.
To achieve such an institutionalisation, the report recommended several reforms of the structure of supervision within the Union.26
Following the advice given by De Larosière the European Council in 2009 confirmed that a new supervisory system should be established. The aim of this new system should be to better the quality of and ensure uniformity in national supervising authorities, to create a single rule book for all financial institutions on the European market and to strengthen the control and oversight of cross-‐border groups. Another important aim of this systemic change was to bring back stability in the internal market and regain trust for the establishment of a fully integrated European financial services market. Realising the old framework had reached the limits of its capability to do so, the institutions of the new European System of Financial Supervisors (ESFS) began their work in 2011. These are the European Systemic Risk Board (ESRB) and three European Supervision Authorities (ESA’s): the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA). These ESA’s were created because of the “ shortcomings in the area of cooperation, coordination, consistent application of Union Law and trust between national supervisors”.27
The ESFS should bring together “the actors of financial supervision at national level and at the level of the Union, to act as a network (…) the parties of the EFSF should cooperate with thrust and full mutual respect, in particular to ensure that appropriate and reliable information flows between them.”28
In this thesis we will focus on only one of the institutions of the European System of Financial Supervisors: the European Banking Authority (EBA). This organization
26 Gianni Lo Schiavo, ‘The European Supervisory Authorities: A True Evolutionary Step Along the
Process of European Financial Integration?” The Interaction of National Legal Systems: Convergence
or Divergence? Conference papers Vilnius 2013, 293-‐301 aldaar 296; James Buckley, David
Howarth, “Internal Market: Gesture Politics? Explaining the EU’s response to the Financial Crisis”
Journal of Common Market Studies 48 (2010) 119-‐141, aldaar 124-‐126.
27 Gianni Lo Schiavo, ‘The European Supervisory Authorities: A True Evolutionary Step Along the
Process of European Financial Integration?” The Interaction of National Legal Systems: Convergence
or Divergence? Conference papers Vilnius 2013, 293-‐301 aldaar 294; Regulation 1093/2010 EU, 24
November 2010, Official Journal of the European Union 331/12; James Buckley, David Howarth, “Internal Market: Gesture Politics? Explaining the EU’s response to the Financial Crisis” Journal of
Common Market Studies 48 (2010) 119-‐141, aldaar 124-‐126.
is the replacement of the former European Committee of Banking supervisors, but is more far reaching in its scope of actions. The impressive list of the broad scope of tasks of the Authority was laid out in Regulation No 1093/2010 EU:
“I) The Authority should act with a view to improving the functioning of the internal market, in particular by ensuring a high, effective and consistent level of regulation and supervision taking account of the varying interests of all Member States and the different nature of financial institutions.
II) The Authority should protect public values such as the stability of the financial system, the transparency of markets and financial products, and the protection of depositors and investors.
III) The Authority should also prevent regulatory arbitrage and guarantee a level playing field, and strengthen international supervisory coordination, for the benefit of the economy at large, including financial institutions and other stakeholders, consumers and employees. Its tasks should also include promoting supervisory convergence and providing advice to the Union institutions in the areas of banking, payments, e-‐ money regulation and supervision and related corporate governance, auditing and financial reporting issues.
IV) It is desirable that the Authority promotes a consistent approach in the area of deposit guarantees to ensure a level playing field and the equitable treatment of depositors across the Union.”29
Article 1 of the Regulation summarizes these tasks. In short, the EBA had to improve the functioning of the internal market, ensure the integrity, transparency, efficiency and orderly functioning of financial markets, strengthen supervisory coordination, promote equal conditions of competition, ensure risks are appropriately regulated and supervised and better the protection of costumers.30
Apart from that, the European Banking authority was meant to give independent advice on the financial market situation in the EU to Commission, the European Parliament and the European Council. The Authority was furthermore allowed to develop draft regulatory standards and submit these draft standards to the European Committee for endorsement. On the aspect of issuing guidelines and recommendations, no approval of the EC was necessary and the EBA could issue
29 Regulation 1093/2010 EU, 24 November 2010, Official Journal of the European Union 331/13-‐
331/15.
these independently. Another task of the Authority was to investigate possible breaches of the European Union law. The organization could take the initiative to do so or can act in on request from another EU institution or competent supervisory institution. If the EBA constituted there to be a breach of Union law it can issue a recommendation to the authority in question. If there was still a lack of compliance, the European Commission could then issue an opinion and following this, the EBA can take the necessary action to stop the breach of law by an institution.31
In the event of a new crisis in the European Union, the EBA was meant to facilitate and, if necessary, coordinate actions undertaken by the national supervisors. To do so, the Authority had to be fully informed of the financial situation at each given moment in the EU. Therefore, the Regulation on the EBA holds that the relevant authority in each member state must provide the Authority with the information necessary to carry out its tasks. The Board of Supervisors and the Managing Board were responsible for governing the new European Banking Authority. The members of the Board of Supervisors consist of the head of the national public authority responsible for the supervision in each member state, a representative of the Commission, a representative of the ECB, a representative of the European Systemic Risk Board and a representative of each of the other European Supervisory Authorities. The Board had to give guidance to the work of the Authority and is the main decision making organ. From the Board of Supervisors, the members will chose six of them who, together with the chairman, will form the Managing Board of the EBA. The Managing Board was responsible for ensuring the Authority works according to the tasks that were designated to it and is responsible for policy plans and budgetary matters.32
Was this new European supervisory structure, which began working in 2011, a departure from the old situation? Before the 2008, the main decision-‐ making structure was the Lamfalussy-‐structure. This four level structure, as described earlier, came into force in 2001 and was meant to harmonise financial supervision and regulation in Europe. When we look at the structure of the
31 Regulation 1093/2010 EU, 24 November 2010, Official Journal of the European Union 331/13-‐
331/27.
32 Regulation 1093/2010 EU, 24 November 2010, Official Journal of the European Union 331/37-‐
