Eddy Wymeersch - Financial Regulation and Supervision: A Post-Crisis Analysis

FINANCIAL REGULATION AND SUPERVISION

A Post-Crisis Analysis

Edited by

EDDY WYMEERSCH
KLAUS J. HOPT
GUIDO FERRARINI

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The financial crisis has left no part of the financial system untouched. While the cause or causes of the crisis are still a much-debated subject, and as the crisis is moving from private financing to public and even sovereign financing, definite steps have been taken to combat at least the symptoms. Ambitious reform plans have been adopted at the level of the worlds most important political powers, especially at the G-20 Pittsburgh Summit. These measures are now being implemented in the US through a single act, the Dodd Frank Act and its numerous implementing regulations. In the EU, the Commission has undertaken this work by submitting a long list of proposals to the European legislator, the Council and the Parliament that calls for extensive delegated acts from the Commission and heavily involves the newly constituted regulatory agencies. The final profile of the new framework will not become visible for another couple of years. In the meantime, new issues for which regulatory initiatives are also needed pop up almost every month, which may lead to another wave of legislation and regulatory initiatives. All these proposals amount to a considerable workload at financial institutions and among their advisors and representative organisations. In academia there is also a strong need for further explanation and analysis, both to understand the newly adopted regulations and to grasp their impact and how they relate to each other. The further consequences on the overall financing of the economy and on the functioning of companies and their financing have already begun to be the subject of detailed analysis.

In 2008, when the crisis reached its apex, politicians in both the US and the EU decided that bold initiatives were needed. In the EU, a high level Committee chaired by Jacques de Larosire was installed by President Barroso, who requested to develop proposals to strengthen European supervisory arrangements covering all financial sectors, with the objective to establish a more efficient, integrated, and sustainable European system of supervision. The Report, dated 25 February 2009, concluded that the European system of regulation was in great need of repairs as it had not sufficiently addressed certain issues, such as the relationship of financial stability with micro-financial regulation and supervision. This was the direct motive for some of the most thorough reforms that the financial markets in Europe have known. Their final objective remains the restoration of the publics confidence, which was shaken for so many people. These reforms involved strengthening the financial position of the banks, better regulating the functioning of the markets and making them more transparent, providing better protection for investors, and ) rightly states, the business is far from over. Indeed, new areas of concern have shown up that are affecting even the rarely doubted solvency of sovereign debtors.

Regulating financial activity is not an easy task. As Julia Black () reveals, there are major difficulties in terms of cognitive limitation and even bias; the regulators partial information on real practices and risks often lacks deep knowledge of the interactions in the markets, while regulatory remedies are often insufficient or contradictory. The European context is particularly complex because it is based on a multi-jurisdictional system with generally framed coordination through harmonization instruments, but it remains differentiated in terms of implementation and supervisory practice, leaving room for a non-level playing field and regulatory arbitrage. The coordination becomes even more complex at the international level. With the financial crisis, all these hurdles have become significantly amplified.

The crisis brought to light some major defects in the regulatory system. The link between prudential supervision and overall financial stability issues was not clearly perceived nor understood. The idea that if institutions were sufficiently healthy individually the whole system would be healthy as well did not survive the systemic shock that started in August 2007. Therefore, a new platform in the supervisory structure had to be opened, coming under the name of macro-prudential policy, and ultimately was aimed at identifying, mitigating, and avoiding systemic risk. Two main new bodies were created, the Financial Stability Oversight Council in the US and the European Systemic Risk Board. Although in many respects different, these two bodies will monitor developments that may put in danger the overall stability of our financial system. In Europe their action will liaise with the national stability boards, with the national central banks, and especially with the new supervisory authorities that coordinate the action in the fields of banking, insurance, and securities markets in the EU. The structure and functioning of the ESRB is analysed by Chryssa Papathanasiou and Georgios Zagouras ().

The supervisory framework has not been left untouched by the crisis. In the US, the Dodd Frank Act has largely maintained the existing framework, creating just two new bodies the FSOC and the Consumer Financial Protection Bureau and putting to rest the Office of Thrift Supervision. The US system remains very complicated with its many intersecting elements, but it has been the will of Congress to maintain competing financial supervisors. If Europeans complain about the number of financial supervisors in cross-border business, they should compare theirs with the complex US structures.

In Europe, a different solution has been worked out for a different problem. The core papers in this book deal with the new supervisory landscape that was introduced by four European regulations on the basis of the de Larosire report, and this within nine months. Europes weakness essentially lies in the lack of coordination between its numerous national supervisors. Rather than creating one Europe-wide supervisory agency, Member States preferred to maintain the existing structure, instead introducing ways to better coordinate their action through the creation of three regulatory authorities with autonomous powers and in charge of enhancing supervisory cooperation. Several of the papers in this book analyse various aspects of the new regulatory structure, whether in a technical legal analysis (Eddy Wymeersch and Eilis Ferran in ), the jury is still out and no model is perfect.