Foto: Consilium.europa.eu

The European Systemic Risk Board (ESRB) will be responsible for macro-prudential oversight of the financial system within the EU. The other newly created body is the European System of Financial Supervisors (ESFS), consisting of three offices responsible for Europe-wide supervision of the sectors of banking, trading in stocks and securities, as well as the insurance and occupational pensions market. These authorities are supposed to cooperate closely with national financial supervisors.

As expected, some countries changed the original draft worked out by the European Commission. The EC proposal gave the newly created authorities powers to issue legally binding verdicts for all companies operating in the concerned sectors, but the ministers decided that such powers can be exercised only in cases when a financial institution violates European law; otherwise the ESFS should intervene only in disputes between national regulators, the daily Hospodářské noviny reported.  The basic concern of those who opposed the original version was that under certain circumstances major outflow of capital could occur in countries where a large part of the banking sector consists of daughter banks whose owners are located abroad. The Czech Republic is such a country. 

“Fears of national supervisors did not concern only uncontrollable outflow of capital, but any systemic risks menacing smooth operations of local banks,” chief economist at UniCredit Bank Czech Republic Pavel Sobíšek told CBW. “But these newly conceived supervisory bodies bring only a limited change to the existing system,” he added. “Power remains in the hands of national supervisors; there is no danger of destroying mechanisms serving their purposes well. But new European supervising authorities will be able to solve disputes between national regulators, and this component has previously been missing in the European financial architecture,” Sobíšek asserted.

Some media commented on the event as a move that would prevent future crises. Sobíšek firmly rejected such illusions, saying that no authority whatsoever is able to do that.

In practice, the new authorities will be unable to issue any decision concerning a particular subject operating on the market. “In principle, any verdict issued in such a case would finally have an impact on the subject concerned. But as I understand it, the verdict would bind the national regulator in question to change its previous decision given to the bank under its supervision. Thus a precedent would be set, allowing solution of a similar problem when it reoccurs elsewhere,” Sobíšek concluded.

Not everything is quite clear concerning the jurisdiction and powers of the newly created offices, though. For instance, what are the ESFS and ESRB supposed to do when a critical situation arises and a government decides to bail out a bank or a pension fund threatened with collapse?

“That, I think, is a matter of debate,” Sobíšek said. “If the bank in question is operating in several countries, all governments concerned should agree on a solution. The necessity to share expenses on a rescue operation may lead to a dispute,” he added.