EPFSF Lunch Discussion 27 January 2016 European Parliament, Brussels

Transcription

1 EPFSF Lunch Discussion 27 January 2016 European Parliament, Brussels Review of the European System of Financial Supervision (ESFS): how to improve the European supervisory architecture? Notes from José Manuel González-Páramo, Executive Board Member and Group Head of Research, Regulation and Public Affairs, BBVA Background In 2008 a reform of the European supervisory architecture was initiated. The former structure of consultative committees without legislative powers had proven insufficient in the financial crisis. The European Commission requested a high level group chaired by Larosière to make proposals to design a more efficient system of supervision for the European Union. The result of the reform is the European System of Financial Supervision (ESFS). It is a decentralized system of micro and macro-prudential authorities. The micro-prudential supervision and regulation is performed by the European Banking authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA), together known as the ESAs. The three ESAs work together with the National Competent Authorities (NCAs) to ensure harmonization in the rules and their application. The macro-prudential oversight is carried out by the European Systemic Risk Board (ESRB), chaired by the European Central Bank (ECB). The ESFS represents a big step towards a more effective EU supervision as it introduced new elements of centralization. However, NCAs retain competence for most of the decisions within the ESAs and the ESRB and NCAs are likely to have a national bias in crisis situations. The ESFS is not meant to be a genuinely centralized EU supervisory system, but instead it just provides full harmonization of supervisory practices. The ESAs have been granted four legal powers to fulfill their objectives: i) development of the single rulebook; ii) enforcement of EU law (investigation of alleged breaches of law and some direct supervisory tasks in the case of ESMA); iii) emergency action, and iv) mediation in cross-border supervisory disputes. Until now the ESAs workload has been more focused on the regulatory front, at the expense of the tasks that are more related to ensuring supervisory consistency. Going forward, the ESAs will and should play a more active role in (i) providing guidance in the interpretation of the single rulebook, and (ii) ensuring a harmonized implementation of the single rulebook by promoting consistent supervisory practices across the EU. The overall assessment of the ESFS is relatively positive. It has worked considerably well considering the crisis context under which it is was created, and in little time since their creation they have managed to deliver on material demands with limited resources. Going forward, it is likely that these resources would be increased and the role of the ESAs reinforced. The regulations establishing the European Supervisory Authorities (ESAs) and the ESRB include a provision of the Commission to publish a report on the experience acquired as a result of the operation of the Authorities.

2 The Commission published the first report on August 2014 and identified among others, the following as areas for improvement in the short term and medium term: Supervisory convergence; Consumer / investor protection; Internal governance; Funding arrangements; Structural changes, including a single seat and extending direct supervision powers to integrated market infrastructures. 1. There have been calls for structural changes to the ESAs, such as merging the authorities to a single seat or introducing a twin-peaks approach. What are your views on this? Any structural change of this type would be deeper than was the creation of the ESAs in 2010, as it would imply not only changes at a European level, but also on a national basis given that national supervisory schemes are very heterogeneous. If a structural change is posed, there are two main approaches that could be implemented besides the sectorial model working currently: a central supervisor, or the so called twin peaks. A central supervisor would mean to cluster all the supervisory functions in one organism. The main pros of this model are: It reduces the difficulty in the assessment of risks, since there is only one supervisor that knows about all areas and sectors (for example, for financial conglomerates); Reduces regulatory arbitrage; Increases efficiency and scale economies of sharing infrastructure, administration, IT systems, etc; More clarity in accountability and more appropriate for countries with high concentration on the banking sector. Nevertheless, there are also hurdles. The main cons are: Unification makes less clear the objectives of the supervisory agency. Under the twin peaks model, two supervisors would be established: a solvency supervisor (for banks, insurers and investment firms) and one for market conduct. The main pros of this model are: It is beneficial for financial stability as there is only one prudential supervisor for any kind of financial institution. There is no need for coordination between authorities. Synergies arise from the merge of the authorities. It prevents regulatory arbitrage. This model is not free of difficulties. The main cons are: Specialization of the sectorial model is lost as there is only one supervisor to cover all sectors (banking, insurance and investment). Not ideal for countries with diversified financial system, where all sectors play an important role for the economy.

3 From a theoretical stand point, the twin peaks model is the one that better adapts to the current reality of European markets. Increasingly, frontiers in financial sectors are beginning to dwindle and entities are starting to commercialize with products that traditionally belonged to other sectors (credit insurance, securities transactions, and reverse mortgages). Moreover, the European Union is characterised by a high concentration on banking financing (70%), which makes this option more suitable for the European financial system. However, in practical terms it seems difficult that this model is implemented in the European Union. It would require that national supervisory schemes were also organized according to this twin peaks model. Currently, National Competent Authorities in the Banking Union present a high level of heterogeneity in terms of organization of financial supervision. In addition, the creation of the Single Supervisory Mechanism makes very difficult to reform financial supervision in the Eurozone, as the ECB already has enough burden with both Monetary policy and banking supervision. 2. Is ESAs governance in line with what is generally considered best practice and are there any approaches used by NCAs that could be considered? The ESAs governance should follow the model of the SSM and be based on national best practices in order to ensure a consistent implementation of the single rulebook and a sole supervisory criterion. The conduct of peer reviews might be a useful tool for the identification of best practices and therefore should be promoted. In addition, best practices can and should be shared between the three ESAs by means of the Joint Committee. In order to ensure that the ESAs governance is based on best practices the ESAs should maintain a fluent dialogue with the industry. Both public consultations and public hearings are very useful instruments. In addition to public hearings, they can also adopt some of the practices done by NCAs or even the SSM of organising workshops to explain different concepts, process and tools which are of high value to facilitate understanding and a correct implementation, especially when dealing with new processes and tools. The ESAs should have a prominent role in harmonising the supervisory criteria on issues related to practical implementation of the regulations. They should prohibit gold plating of regulation, as the EU rules should be considered sufficient. Currently the Guidelines, Opinions and Q&As have differing degrees of practical effect in the Member States. Their practical effect must be harmonized across Europe, and its nature clarified, as they are becoming a sort of soft regulation. 3. How can the ESAs improve their governance to ensure that decisions are taken in the interests of the EU as a whole? We have some concerns that national interests might dominate EU interests in the decision-making process of the ESAs. This is due to the predominant role of the National Competent Authorities (NCAs) in the Board of Supervisors (BoS), while the Chairperson does not have voting rights. Excessive weight of BoS implies that national interests some time prevail over European interests. This could be addressed by enhancing the role and influence of ESAs staff and Chairperson (for example through providing the Chair with a voting right). The strict regime of accountability of ESAs Chairs and Vice-Chairs guarantees a genuinely European mandate which would ultimately contribute to the observance of the EU best interests. The role played by Stakeholder Groups is highly valuable and should be further promoted. They are very useful tools that facilitate the direct consultation and dialogue with and among main interested parties.

4 It is essential to ensure that their composition is balanced from a geographical viewpoint as well as ensure a sufficient representation of the main interested parties. The decision making process of the EBA should be revisited if the EBA wishes to keep its European footprint. The system of double majorities approved for the EBA 1 is unnecessary, Member States should be represented having in mind the single market and not the Eurozone.There is no need to require specific majorities from a group of countries because all Members States are equally European. Furthermore, this system introduces unnecessary complexity and lacks efficiency for taking swift decisions. It may lead to a paralysis of EBA s decision making process. The ESAs should be allowed to participate more actively (as observers) in the Level 1 legislative process as it may enhance the quality of Level 2 regulation. This should facilitate their duty of development of the Single rulebook through Level 2 legislation as well as allow the ESAs to provide input to co-legislators on the drafting of Level 1 rules and leverage on the ESAs expertise and closer relationship with NCAs and supervised agents. 4. Are the ESAs regulatory and non-regulatory powers and new (so called Level 2) processes working as intended? The purpose and effectiveness of Guidelines, Opinions and Q&A documents should be reviewed and reconsidered. Currently these instruments have differing degrees of practical effect in the Member States, with some supporting them and others only partially. Their practical effect must be harmonized across Europe, and its nature clarified, as they are becoming a sort of soft regulation. Any binding rules should be implemented with relevant consultation, discussion with the industry and due process. The ESAs should consider adequate consistency between Level 1 and Level 2 rules, as Level 2 sometimes might go beyond Level 1 texts in obligations and in restrictions. Furthermore, some kind of flexibility tools should be made available for ESAs to avoid unintended and detrimental effects that might arise from Level 1 and Level 2 when there is no time or chance to correct. These could be the case, for example, when substantial difficulties in the implementation of certain rules significantly hinder the ability of banks to finance the real economy. As an example, art 55 of BRRD entered into force on 1 January It requires that all contracts of eligible liabilities for bail-in governed by the law of a non-eu state contain a clause recognizing that the liability is subject to bail-in powers and agreeing to be bound by any resulting reduction/cancellation/conversion of the claim. Its compliance is almost impossible because many counterparts do simply not accept the clause so the introduction of such clauses may force some banks to exit trades outside the EU. The problem is shared by all EU banks, nevertheless the Directive delegates the capacity of sanctions to national competent authorities. In this sense, the choice of some countries not to include sanctions in their legal systems, compared to others which have done it, creates an unlevel playing field inside Europe. EBA has released a broad interpretation of liabilities scope that should be revised by the EBA itself or the Commission in its endorsement of EBA s RTS in order to admit, as a possible solution, a best effort approach when inserting the contractual clauses, as enough ground for compliance, provided that the bank has dully document the traceability of this best effort. 5. In what way could the ESRB enhance its own identity while at the same time continuing to rely on the ECB s reputation and expertise? The ESRB has played a more prominent role in the monitoring of risks rather than in adopting real policy decisions. Its work has been very valuable in the monitoring of financial vulnerabilities (through its systemic risk Dashboard) and developing Handbooks and warning indicators. 1 Following the establishment of the SSM the decision-making process of the EBA was amended to introduce a system of double majority voting.

5 The role of the ESRB could and should be further promoted and its powers should be reinforced. Currently, the ESRB does not have binding powers but going forward, the ESRB could extend its scope of action by developing the hierarchy of macroprudential objectives under a more forward-looking approach based on rules, and playing a more active role in the calibration and harmonization of rules. A possible way to enhance the impact achieved by the ESRB could be to improve its governance by granting more powers to the managing director. Furthermore, extending the macroprudential supervision policy to the whole financial system is a must. The ESRB should be very active in the field of shadow banking and it has already started working on this. A tailor-made approach covering all systemic risk activities and entities is required. Otherwise, regulatory arbitrage from the more regulated sectors to the less regulated areas will stimulate a substitution effect of systemic risk from the banking sector to the shadow banking sector. In addition, more joint work between the ESAs and the ESRB could contribute to ensuring that the macroprudential dimension is inherent to the entire regulatory and supervisory framework. With the same aim, we would also suggest that the ESRB is consulted at an early stage during the legislative process. By doing so, we would guarantee that financial stability considerations are sufficiently taken into account. Furthermore, this coordination might also facilitate the timely identification of the effects of different policies on bank lending, taking into account the economic cycles at both national and European level. The ESRB should also consult other institutions before issuing recommendations with effects that might go beyond the macroprudential dimension. A practical example in which this would have been advisable is the ESRB report on the revision of the prudential treatment of exposures to sovereigns. On such a delicate and complex topic it would have been convenient to involve national Treasuries and Ministries of Economy and Finance. Going forward, we need more clarity on the governance of macroprudential policies. The ESRB should play a greater role in this field but always looking for a balance of powers and effective coordination with national authorities. It is also necessary to ensure effective coordination and cooperation among all the players, including the Single Supervisory Mechanism, national central banks and Member States.