Blog Post

Supervisory Colleges

In this column, Nicolas Véron argues that ‘supervisory colleges’, a much-discussed concept these days in Europe, are unlikely to deliver better supervision of cross-border financial firms.  On 15 November the G20 countries stated in their Washington declaration that: ‘The supervisors are to work together to create supervisory colleges for all large cross-border financial organisations in […]

By: Date: November 26, 2008 Topic: Banking and capital markets

In this column, Nicolas Véron argues that ‘supervisory colleges’, a much-discussed concept these days in Europe, are unlikely to deliver better supervision of cross-border financial firms. 

On 15 November the G20 countries stated in their Washington declaration that: ‘The supervisors are to work together to create supervisory colleges for all large cross-border financial organisations in order to reinforce the supervision of cross-border companies.’ What is this all about? Until the start of the 1990s most large financial companies were almost exclusively national in their activity. Then the financial world globalised at breakneck speed.

International coordination problems surfaced, notably with the collapse of BCCI in 1991 and Barings in 1995. However, this was not enough to justify major reform of the system.
In 2004 the European Union created a committee of national banking supervisors but it operates on a consensus basis and has no formal power beyond that of issuing opinions for the attention of the EU institutions.
As long as the sun was shining on the financial system, the shortcomings in these arrangements troubled only a handful of experts.
But since the crisis has hit, the absence of a credible framework for the supervision of crossborder groups has becoming a gaping hole in Europe’s regulatory system.
The fragmentation between several national authorities, such as the Financial Services Authority in the UK or the Commission bancaire in France, result in neither of them being able to form a full picture of the overall financial commitments of a given group.
It causes additional costs and above all reflects less and less the way cross-border groups increasingly aggregate functions at a regional or global level. Such groups can no longer be boiled down to a cocktail of national entities susceptible to separate financial health and risk assessment.

‘Supervisory colleges’ are intended as a response to these shortcomings. They would offer a formal structure bringing together the relevant national authorities under a ‘lead supervisor’, which would generally be the home country authority.
This proposal is being promoted by both the UK and France, who have spotted a means of reforming the current framework without having to create an EU-level authority. But supervisory colleges, attractive as they may be on paper, are not working in practice.
The reason is that countries where subsidiaries of foreign financial groups have major systemic importance cannot accept key regulatory decisions
being taken in a foreign capital. France and the UK, where the vast majority of retail financial services firms are domestically headquartered, sometimes sound as though they were not fully aware of this obstacle.

By contrast, in Central and Eastern Europe, but also in Belgium and Finland, most large financial companies are now local branches of foreign groups.
In such countries, either the mechanism would provide for no substantive delegation of power to the lead supervisor, in which case the situation would be akin to the status quo. Or else there is substantive delegation, and that would be politically unfeasible.
Moreover colleges may spur regulatory competition with potentially harmful consequences. In Finland, for example, the three main banks would each have a different lead supervisor, one based in Stockholm, one in Helsinki and one in Copenhagen.

Each one of these public authorities would naturally tend to defend the interests of ‘its’ champion against those of its counterparts, which would hardly contribute to consistent public policy. In insurance, these contradictions have already come to the fore. The ‘Solvency II’ directive was meant to establish supervisory colleges for crossborder insurance firms. But owing to a failure to find consensus, the compromise of the French presidency will not deal at all with the issue of supervisory organisation.
In the case of banks, colleges were planned to be established through the revision of the Capital Requirements Directive, scheduled for 2009. But this attempt is likely to fail, for the same reasons.
In spite of the reservations of several member states, the creation of a new EU-level authority is the only way to establish credible cross-border supervision in Europe.
As for supervision of cross-border groups at global level, the G20 can only create what exists already: exchanges of information on a voluntary basis between public bodies of different continents, without any effective supranational authority.
Whether one likes it or not, this is a reality that is not about to change.

Nicolas Véron is a research fellow at Bruegel.
Andrew Fielding’s help in translating from the French is gratefully acknowledged
.

This comment was originally published in La Tribune.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article
 

Blog Post

Now is not the time to confiscate Russia’s central bank reserves

The idea of confiscating the Bank of Russia’s frozen reserves is attractive to some, but at this stage in the Ukraine conflict confiscation would be counterproductive and likely illegal.

By: Nicolas Véron and Joshua Kirschenbaum Topic: Banking and capital markets, Global economy and trade Date: May 16, 2022
Read about event More on this topic
 

Upcoming Event

May
25
14:30

How can we support and restructure firms hit by the COVID-19 crisis?

What are the vulnerabilities and risks in the enterprise sector and how prepared are countries to handle a large-scale restructuring of businesses?

Speakers: Ceyla Pazarbasioglu and Guntram B. Wolff Topic: Macroeconomic policy
Read about event More on this topic
 

Upcoming Event

May - Jun
31-1
10:30

MICROPROD Final Event

Final conference of the MICROPROD project

Speakers: Carlo Altomonte, Eric Bartelsman, Marta Bisztray, Italo Colantone, Maria Demertzis, Filippo di Mauro, Wolfhard Kaus, Steffen Müller, Gianluca Santoni, Verena Plümpe, Andrea Roventini, Valerie Smeets, Nicola Viegi, Markus Zimmermann and Javier Miranda Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event
 

Past Event

Past Event

[Cancelled] Shifting taxes in order to achieve green goals

[This event is cancelled until further notice] How could shifting the tax burden from labour to pollution and resources help the EU reach its climate goals?

Speakers: Niclas Poitiers and Femke Groothuis Topic: Green economy, Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 12, 2022
Read about event More on this topic
 

Past Event

Past Event

How are crises changing central bank doctrines?

How is monetary policy evolving in the face of recent crises? With central banks taking on new roles, how accountable are they to democratic institutions?

Speakers: Maria Demertzis, Benoît Coeuré, Pervenche Berès, Hans-Helmut Kotz and Athanasios Orphanides Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 11, 2022
Read article Download PDF More by this author
 

Book/Special report

European governanceInclusive growth

Bruegel annual report 2021

The Bruegel annual report provides a broad overview of the organisation's work in the previous year.

By: Bruegel Topic: Banking and capital markets, Digital economy and innovation, European governance, Global economy and trade, Green economy, Inclusive growth, Macroeconomic policy Date: May 6, 2022
Read article Download PDF
 

Policy Contribution

European governance

Fiscal support and monetary vigilance: economic policy implications of the Russia-Ukraine war for the European Union

Policymakers must think coherently about the joint implications of their actions, from sanctions on Russia to subsidies and transfers to their own citizens, and avoid taking measures that contradict each other. This is what we try to do in this Policy Contribution, focusing on the macroeconomic aspects of relevance for Europe.

By: Olivier Blanchard and Jean Pisani-Ferry Topic: European governance, Macroeconomic policy Date: April 29, 2022
Read article More by this author
 

Blog Post

Owning up to sustainability risks: the EU should champion international standards

To keep European Union capital markets open and integrated, new international standards should be reflected in future European law and accounting practice to provide further incentives for a reallocation of capital, reflecting in particular climate risks.

By: Alexander Lehmann Topic: Banking and capital markets, Green economy Date: April 26, 2022
Read article Download PDF More on this topic
 

Working Paper

The low productivity of European firms: how can policies enhance the allocation of resources?

A summary of the most important policy lessons from research undertaken in the MICROPROD project work package 4, related to the allocation of the factors of production, with a special focus on the weak dynamism of European small and medium-sized enterprises (SMEs).

By: Grégory Claeys, Marie Le Mouel and Giovanni Sgaravatti Topic: Macroeconomic policy Date: April 25, 2022
Read article More by this author
 

Podcast

Podcast

War in Ukraine: sanctions on Russia two months in

A further look into sanctions on Russia and the implications for the global financial system.

By: The Sound of Economics Topic: Banking and capital markets, European governance Date: April 22, 2022
Read article
 

Blog Post

The European Union should sanction Sberbank and other Russian banks

Sanctions on Sberbank and most other Russian banks should be imposed by the EU, without delay and at no major cost to either itself or like-minded countries, while it ponders an oil and gas ban.

By: Joshua Kirschenbaum and Nicolas Véron Topic: Banking and capital markets, Global economy and trade Date: April 15, 2022
Read article More on this topic
 

External Publication

What drives implementation of the European Union’s policy recommendations to its member countries?

Article published in the Journal of Economic Policy Reform.

By: Konstantinos Efstathiou and Guntram B. Wolff Topic: Macroeconomic policy Date: April 13, 2022
Load more posts