Renewed financial supervision in Europe – final or transitory?

The financial crisis underscored both the importance of financial supervision, as well as its pre-crisis malfunctioning. In response, substantive reforms have been carried out in Europe and elsewhere. This paper discusses the renewed financial supervision system in Europe, which fully entered into effect in January 2011. It examines supervisory reforms at the EU-level and considers the role of national, cross-border and international supervision. The paper finds that the reforms undoubtedly lead to a strengthening of EU powers, both by the creation of an EU macro-prudential supervisor (the European Systemic Risk Board) and the reinforcement of three EU micro-prudential supervisory bodies (the European Supervisory Authorities). The EU’s role will even grow over time. The role of cross-border and international supervision has equally increased. Nevertheless, the heart of financial supervision remains firmly at the national level, as national supervisors conduct the bulk of supervisory tasks. Such Member State dominance is in sharp contrast with the state of EU financial sector integration. Yet, a substantial shift to EU supervision is currently unfeasible, due to legal constraints and to Member States’ financial sector crisis management responsibilities. The inability to align financial supervision with financial sector integration could result once again in supervisory failings. If so, a difficult choice between genuinely europeanising financial supervision (with the subsequent legal and fiscal implications) or cutting back the single market arises. The paper concludes that while the renewed supervisory framework is far from perfect, policymakers should strive towards making it work – or be prepared to take uncomfortable decisions.