SAFE Finance Blog
03 May 2017

Integrated European Financial Supervision

Matthias Goldmann about possible legal obstacles in the way to a further centralization of supervisory competences

Brexit provides an opportunity to promote the integration of the European financial supervision. Various models of a new structure of financial supervision in Europe are currently subject of discussions in academia and politics. One of the proposals is to merge the European Banking Authority (EBA) with the European Insurance and Occupational Pensions Authority (EIOPA) to form an integrated European financial supervision with extended competences. Matthias Goldmann, Junior Professor for International Public Law and Financial Law at the Goethe University Frankfurt, explains what is legally possible.

A centralization at the European level will constraint national competences. Would such a centralization of the financial supervision be feasible under the current EU-law?

When EBA, EIOPA and the European Securities and Markets Authority (ESMA) were established shortly after the financial crisis in 2008, they were endowed with few decision-making powers. Legal concerns played a role in that. In the meantime, a judgement of the European Court of Justice (ECJ) of 2014 dealing with ESMA dissipated most of these concerns. European agencies can take over considerably more decision-making competencies than is currently the case under the framework of the European System of Financial Supervision (ESFS) as long as they have a clear mandate, are sufficiently controlled by EU institutions and respect due process rights. Whether there should be only a single agency or three different agencies, as it is the case at present, depends on purely pragmatic aspects.

Is it legally possible to transfer decision-making powers from national authorities to subordinated EU authorities?

Yes. There is no rigid allocation of competencies for the internal market of the European Union and the Economic and Monetary Union. Instead, Art. 114 TFEU states that the European legislature can adopt further measures for the establishment of the internal market. Following the mentioned judgement of the ECJ, this also includes the transfer of decision-making powers to subordinated EU authorities.

Within which constitutional boundaries and to what extend is such a transfer possible?

The delegation of supervisory competencies needs to respect the principle of subsidiarity and the principle of proportionality. Subsidiarity means that member states shall assume those competences which they can exercise better than the union. In accordance with the principle of proportionality, that measure must be chosen which is the least restrictive for the sovereignty of the member states. However, the European legislator has a wide margin of discretion in the assessment of both questions. The transfer of supervisory competencies over certain actors or products to a European authority is admissible if the legislature can plausibly show that this measure is necessary for the establishment of an integrated capital market and the prevention of regulatory arbitrage between the member states. Since the European authorities are committed to respecting the EU Charter of Fundamental Rights, I do not see any difficulties with respect to the member states’ constitutional laws.

The aim of the European supervisory architecture is to bring financial market risks under control. Is the current (sectorial) structure of the European supervisory authorities suitable for this?

The sectorial structure of the supervisory authorities does not facilitate the prevention or mitigation of systemic risks. However, this may not be the main issue. The European Systemic Risk Board (ESRB), which is primarily responsible for systemic risks, has no powers to control systemic risks effectively. It depends on the cooperation of those supervisory authorities which have effective decision-making powers. Besides the Single Supervisory Mechanism (SSM), these are currently the national supervisory authorities. Therefore, I am convinced that an increased Europeanization of supervisory powers would make the control of systemic risks more effective and expedient. It would simply be no longer necessary to coordinate 27 national authorities. But systemic risks do not only concern supervision. They also affect monetary and fiscal policy, which are, for constitutional reasons, in the hands of the European Central Bank (ECB) and the national parliaments - and they should stay there. Hence, it requires a spirit of cooperation on all sides to keep systemic risks in check. In my opinion, this is an ethical and attitudinal requirement that goes beyond legal duties of cooperation.

Conflicts of interest between European and national supervisory authorities impede a consistent implementation of rules adopted by EU institutions. Could this be countered by an extension of the powers of the EU bodies?

In this respect, one should distinguish legitimate from illegitimate differences in the implementation. Banking sectors vary significantly between different member states. For example, consider the important role of savings banks and cooperative banks in Germany. As far as a different implementation is due to these different structures, it may be legitimate. With respect to the principle of subsidiarity, such a situation also speaks against the complete centralization of supervision. However, only a fine line may separate legitimate differences in the implementation from illegitimate attempts to secure a competitive advantage for the domestic banking sector due to regulatory arbitrage. The latter may lead to misallocations which result in stability risks. If regulatory arbitrage becomes rampant, the principle of subsidiarity will not stand in the way of transferring further competences to the SSM or the EBA.