The European Union needs to establish a single supervisory body for financial markets in order to boost the development of market finance towards creating a true single European financial market and turning the widely-discussed Capital Markets Union plans into reality. “We should not hide away from some unpleasant truths,” said Yves Mersch, former ECB board member.
The option of a single financial markets supervisor was tabled by Luxembourg’s former ECB board member Yves Mersch on Wednesday at an event hosted by the Luxembourg Stock Exchange. It was quickly endorsed by Klaus Regling, the director-general of the Luxembourg-based European Stability Mechanism, known as ESM.
“As with the Banking Union there inevitably needs to be a centralisation of supervision if we want to have a Capital Markets Union,” said Mersch. “That is a question of consistency and coherence. How it is being done is still an open question, but we should not hide away from some unpleasant truths.”
‘It could be a catalyst’
“It could be a catalyst for all the other things that need to be done,” said Regling. “Like it was a catalyst when we created the Banking Union, when it was decided to let the ECB become the single supervisor for the systemically important banks. And then a lot of other things followed.”
Financial market supervision in the EU is fragmented and is handled by 27 different national financial supervisors, such as the CSSF in Luxembourg, the FSMA in Belgium and the AFM in the Netherlands. At a European level, these supervisors cooperate closely within the European Securities Markets Authority, known as ESMA. ESMA does not have direct supervisory powers on its own, unlike its US counterpart, the Securities and Exchange Commission, or SEC.
The European Union currently has no formal plans to create a single financial markets supervisor. Before anything, the idea would first have to be discussed among finance ministers. These could then decide to ask the European Commission to draft a proposal.
The EU nevertheless has been discussing, since 2015, a 35-point plan to create a Capital Markets Union, known as CMU. The most important of these - harmonising insolvency laws, establishing a common consolidated tax base, securitisation and creating a consolidated ticker tape - remain to be realised.
‘EU integration dynamics’
“For me, Capital Markets Union is part of European Union integration dynamics,” said Mersch. “All financial crises have, especially in an area like Europe, which is so heavily bank finance, the particularity of taking much longer time to get into recovery. We are too much depending on the banks to finance our economy. So, we need to diversify and have deeper capital markets.”
Mersch and Regling both said that a single supervisor could be modelled on the supervisory role that the European Central Bank adopted when the EU implemented its Banking Union. The ECB, although reluctant because of its primary focus on monetary policy, in 2014 became the single supervisor for the biggest banks in the eurozone when the EU implemented Banking Union.
“So for the moment, we continue to have banks which are mostly now supervised at the European level, but in debts, they are still tending to be national,” said Mersch.
Better allocation of capital across Europe
“We have now for 30 years a single market for goods and services in the EU,” said Regling. “But we don’t have a single market for financial services which is in a way very strange, because I think everybody agrees that the benefits coming from the single market of goods and services are huge. And similarly, we are wasting the potential benefits and also a single market in financial services would bring because of that huge integrated capital market. And it’s not talked about - it would lead to a better allocation of capital across Europe.”.
Julie Becker, the CEO of the Luxembourg Stock Exchange, also supported the idea of a single supervisor and said it could be assigned with specific responsibilities regarding sustainable finance.
‘More resilient and inclusive economy’
“Instead of trying to find ways of undoing the past, we should be something new,” Becker said. “I’m thinking in this context about a Capital Markets Union for sustainability, to support a stronger Europe, not only in green finance, but also in the portfolio of digital transition, and to make a resilient, more resilient and inclusive economy, which could be linked and with potential, a single supervisor, at least for sustainability.”
As a single bank sector supervisor, the ECB now directly checks, and when necessary intervenes, the 120 largest banks in the EU. Together these banks account for more than 80 percent of all bank assets in the eurozone. Smaller and less significant banks are still supervised by national supervisory authorities. These cooperate closely with the European Banking Authority and also the ECB.
The ECB’s supervisory arm now works from down-town Frankfurt in the Eurotower, while the central bank’s new premises in the east of Frankfurt host all its other activities.
The new supervisory system, introduced by the EU in the wake of the Great Financial Crisis, has abolished the mix of national systems of checks and balances in the European banking sector and was designed to make the EU financial sector more resilient in the face of crisis. It has eliminated national domestic prejudices in European banking supervision.
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