Skip to main content

Advertisement

Log in

Strengthening the governance of national financial supervision in the EU: existing weaknesses and a proposal for reform

  • Article
  • Published:
ERA Forum Aims and scope

Abstract

The paper is a contribution to the debate on the governance of financial supervision in Europe. It analyses the: [i] rationale for delegation of regulatory and supervisory powers to an independent supervisor; [ii] governance arrangements for independence and accountability of supervision; and [iii] institutional models for supervision at national level. The paper also examines the extent of the independence and supervisory capacity of national supervisors in Europe by reference to the financial sector assessment programme reports published by the International Monetary Fund and identifies the main weaknesses in the governance of financial supervisors, which also have a negative impact on supervision on a European scale. The paper makes recommendations for a mechanism to address these weaknesses.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Diagram 1

Similar content being viewed by others

Notes

  1. Das/Quintyn/Chenard [15]; Arnone/Gambini [4]; Dickson [16]; Basel Committee of Banking Supervision, ‘Core Principles for Effective Banking Supervision–Principle 1’, September 2012 and International Organisation of Securities Commissions, ‘Objectives and Principles of Securities Regulation-Principle 2’, July 2010.

  2. Sparrow [54], vi.

  3. See amongst others: Lastra [39]; Wymeersch [63]; Lastra [35].

  4. Persaud [49].

  5. Dickson [16], 221.

  6. Athanassiou [5].

  7. Company Lawyer, ‘FSA reveals details of its ”unacceptable” supervision of Northern Rock’ Company Lawyer (2008); Palmer/Cerruti [48]; Claessens/Dell’Ariccia/Igan/Laeven [12]; Caprio/D’Apice/Ferri/Puopolo [10].

  8. Vinãls et al. Hsu [61].

  9. Vinãls et al. Hsu [61], p. 5.

  10. FSB, ‘Intensity and Effectiveness of SIFI Supervision: Recommendations for Enhanced Supervision’, 02.11.10.

  11. The author has fourteen years of experience as a financial supervisor in Malta.

  12. The author was responsible for carrying out a number of investigations of market malpractice, some of which involved insider dealing or financial product mis-selling.

  13. Lastra [40].

  14. Gilardi [26].

  15. Gilardi [26].

  16. Trillas [60].

  17. Haksoon [30].

  18. Swank/Dur [56]. Also see Frisell/Roszbach/Spagnolo [23] and Evans/Levine/Rickman [19].

  19. Alesina/Tabellini [1]; Lastra [37].

  20. BBC, ‘Italy bank boss ‘facing inquiry’ BBC (30.09.05) http://news.bbc.co.uk/2/hi/business/4296726.stm; J Cronin, ‘Antonio Fazio: Italy’s embattled banker’ BBC (11.11.05) http://news.bbc.co.uk/2/hi/business/4319090.stm; The Economist, ‘Year-End Accounts. Antonio Fazio, governor of the Bank of Italy, resigns. About time,’ Economist, (19.12.05) available www.economist.com accessed 04.01.14.

  21. Behn [6].

  22. Gilardi [27], 72–75.

  23. Cukierman [13].

  24. See reporting on LIBOR scandal: M Scott, ‘British Law Makers take aim at regulators’ New York Times (New York 16.07.12) http://dealbook.nytimes.com/2012/07/16/british-lawmakers-take-aim-at-regulators/; D Rushe, ‘Treasury secretary appears before House committee and blames British regulators for failing to stop rate manipulation’ The Guardian (London 25.07.12) http://www.guardian.co.uk/business/2012/jul/25/tim-geithner-libor-euro-testimony Schumpeter, ‘The WatchDog that didn’t bark’ The Economist (London 17.07.12) http://www.economist.com/blogs/schumpeter/2012/07/libor-and-regulation accessed 05.08.12.

  25. Meyer/Rowan [43].

  26. Alesina/Tabellini [2].

  27. (n12).

  28. Smith [53].

  29. Lastra [40], p. 486.

  30. IMF, ‘United States: FSAP-Detailed Assessment of Implementation of the IOSCO Objectives and Principles’, May 2010 https://www.imf.org/external/pubs/ft/scr/2010/cr10125.pdf accessed 03.01.13.

  31. International Monetary Fund (n30).

  32. Enriques/Hertig [18], p. 363; Dijkstra [17]; and Stigler [55].

  33. IMF, ‘Sweden: FSAP Update-Detailed Assessment of Observance on IOSCO Principles and Objectives’ September 2011 www.imf.org accessed 03.01.13.

  34. Farazmand [21].

  35. Lastra [37], p. 56.

  36. Regulation 1024/2013, Article 26.

  37. Lastra [40], p. 482.

  38. Goodhart [28], p. 157.

  39. Enriques et al. [18], p. 365.

  40. Lastra [40].

  41. Regulation 1024/2013, Article 26.

  42. Lastra/Shams [38].

  43. Lastra [40]; and Lastra/Shams [38].

  44. Bini Smaghi [7].

  45. Majone [41], p. 93. Also see Lastra [40]; Page [47].

  46. Lastra and Shams [38].

  47. This usage is borrowed from Lastra [40], p. 481.

  48. Grant/Keohane [29], p. 29.

  49. Lastra/Shams [38].

  50. Moe [44].

  51. Lastra [36].

  52. Lastra and Shams [38].

  53. Amtenbrink/Lastra [3].

  54. Lastra [36], p. 9.

  55. Lastra [36], p. 9.

  56. Inter-Institutional Agreement between European Parliament and ECB on the SSM 2013 http://www.ecb.europa.eu/ssm/pdf/130912_IIA_final_draft.pdf accessed 04.01.14.

  57. Amtenbrink/Lastra [3].

  58. Hupkes/Quintyn/Taylor[32].

  59. Amtenbrink/Lastra [3].

  60. Garciano/Lastra [24].

  61. Garciano/Lastra [24].

  62. Taylor [57].

  63. Wymeersch [62], pp. 250–251.

  64. The twin peaks model in France is only relevant to the oversight of securities markets. The Autorite de Controle Prudentiel (‘ACP’) is responsible for the prudential supervision of investment services providers and market infrastructure providers. The Autoirite des Marches Financiers (‘AMF’) is responsible for market and conduct of business supervision of all market participants and the prudential supervision of portfolio managers and funds. The ACP is also responsible for the supervision of banks and insurance companies. See IMF, ‘France: FSAP’ December 2012 www.imf.org accessed 31.10.13.

  65. With regards to the supervision of banks the Bundesanstalt Fur Finanzdienstleistungsaufsicht (‘BAFIN’) is assisted by the Deutsche Bundesbank.

  66. Wymeersch [62], p. 251.

  67. Briault [9].

  68. Taylor [59].

  69. Taylor [58].

  70. Taylor [58].

  71. (n12).

  72. Knott [33].

  73. Kremers/Schoenmaker [34].

  74. Fabri [20].

  75. Cihak/Podpiera [11].

  76. Dalla Pellegrina/Masciandro [14].

  77. Briault [9].

  78. Holopainen [31].

  79. Maschiandaro/Quin [42].

  80. Financial Stability Board, ‘Report on the Peer Review of Spain’ (Basel, January 2011) 7 www.fsb.org accessed 10.09.12.

  81. G30, ‘The Structure of Financial Supervision’ (Washington, 2008) 14.

  82. Quintyn/Ramirez/Taylor [50].

  83. Quintyn/Ramirez/Taylor [50].

  84. Quintyn/Ramirez/Taylor [50].

  85. FSB (n80) 4.

  86. IMF, ‘Spain: Basel Principles for Effective Supervision and IOSCO Objectives and Principles– Detailed Assessment-June 2012 Reports No. 12/142/12/143 www.imf.org accessed 16.05.13.

  87. IMF, ‘Luxembourg: Financial System Stability Assessment’, June 2011 www.imf.org accessed 16.05.13.

  88. IMF, ‘France: Financial System Stability Assessment’, December 2012 www.imf.org accessed 16.05.13.

  89. Shapiro [52].

  90. Geradin [25], p. 38.

  91. F. Norris, ‘Independent Agencies, Sometimes in Name Only, New York Times (New York, 08.08.13) http://www.nytimes.com/2013/08/09/business/independent-agencies-sometimes-in-name-only.html?_r=0 accessed 22.02.14.

  92. IMF(n30).

  93. Bosworth-Davies [8].

  94. Norris (n91).

  95. Norris (n91).

  96. Concerns were raised by the IMF regarding the position in Romania, Sweden, Luxembourg, Czech Republic, France, Poland; Slovenia and Spain http://www.imf.org/external/NP/fsap/fsap.aspx accessed 16.05.13.

  97. Flinder [22]; and Mulgan [46].

  98. Schillemans [51], p. 397.

  99. Moe [45], p. 767.

  100. J. DeLarosiere, ‘The High-Level Group on Financial Supervision in the EU—Report’ (Brussels, 25.02.2009) 47.

References

  1. Alesina, A., Tabellini, G.: Bureaucrats or politicians? Part I: A single policy task. Am. Econ. Rev. 97(1), 168–179 (2007)

    Article  Google Scholar 

  2. Alesina, A., Tabellini, G.: Why politicians delegate? Harvard Institute of Economic Research DP No. 2079 (2005)

  3. Amtenbrink, F., Lastra, R.: Securing democratic accountability of financial regulatory agencies—a theoretical framework. In: Mulder, R.V. (ed.) Mitigating Risk in the Context of Safety and Security. How Relevant Is a Rationale Approach? pp. 115–132. Erasmus School of Law & Research School of Safety and Security, Rotterdam (2008)

    Google Scholar 

  4. Arnone, M., Gambini, A.: Architectures of financial supervisory authorities and banking supervision. In: Masciandaro, D., Quintyn, M. (eds.) Designing Financial Supervision Institutions, pp. 262–309. Edward Elgar, Cheltenham Glos (2007)

    Google Scholar 

  5. Athanassiou, P.: The role of regulation and supervision in crisis prevention and management: a critique of recent European reflections. J. Int. Bank. Law Regul. 24(10), 501–508 (2009)

    Google Scholar 

  6. Behn, R.: Rethinking Democratic Accountability. Brooking Institution Press, Washington (2001)

    Google Scholar 

  7. Bini Smaghi, L.: Independence and accountability in supervision: general principles and European setting. In: Masciandaro, D., Quintyn, M. (eds.) Designing Financial Supervision Institutions, pp. 41–62. Edward Elgar, Cheltenham Glos (2007)

    Google Scholar 

  8. Bosworth-Davies, R.: The SEC: an examination of its structure, powers and procedures. J. Financ. Regul. Compliance 2(1), 31–41 (1993)

    Article  Google Scholar 

  9. Briault, C.: The Rationale for a Single National Financial Services Regulator. Journal of International Financial Markets (1999)

  10. Caprio, G., D’Apice, V., Ferri, G., Puopolo, G.W.: Macro Financial Determinants of the Great Financial Crisis: Implications for Regulation. MPRA Paper No. 26088 (2010). http://ssrn.com/abstract=1788063 (accessed 13.12.2012)

  11. Cihak, M., Podpiera, R.: Is One Watchdog Better Than Three?’. IMF Working Paper No. 06/57 (2006). http://papers.ssrn.com/sol3/papers.cfm?abstract_id=892948 (accessed 10.09.2012)

  12. Claessens, S., Dell’Ariccia, G., Igan, D., Laeven, L.: Lessons and Policy Implications from the Global Financial Crisis. IMF Working Paper WP/10/44 (2010). www.imf.org/external/pubs/ft/wp/2010/wp1044.pdf

  13. Cukierman, A.: Central Bank Strategy, Credibility, and Independence: Theory and Evidence. MIT Press, Cambridge (1992)

    Google Scholar 

  14. Dalla Pellegrina, L., Masciandro, D.: Politicians, central banks, and the shape of financial supervision architectures. J. Financ. Regul. Compliance 16(4), 290–317 (2008)

    Article  Google Scholar 

  15. Das, U., Quintyn, M., Chenard, K.: Does Regulatory Governance Matter for Financial System Stability? An Empirical Analysis. IMF Working Paper 04/89 (2004). www.imf.org (accessed 04.01.2013)

  16. Dickson, J.: Supervision: looking ahead to the next decade. In: Kellermann, A.J., et al. (eds.) Financial Supervision in the 21st Century, pp. 221–232. Springer, Berlin (2013)

    Chapter  Google Scholar 

  17. Dijkstra, R.: Accountability of financial supervisory agencies: an incentive approach. J. Bank. Regul. 11(2), 115–128 (2010)

    Article  Google Scholar 

  18. Enriques, L., Hertig, G.: Improving the governance of financial supervisors. Eur. Bus. Organ. Law Rev. 12(3), 357–378 (2011)

    Article  Google Scholar 

  19. Evans, J., Levine, P., Rickman, N.: Delegation to Independent Regulators and the Ratchet Effect. Discussion Paper-Economics DP09/11 (30.06.2011). http://econpapers.repec.org/paper/sursurrec/0911.htm (accessed 20.08.2012)

  20. Fabri, D.: A Single Unified Supervisory Authority for Financial Services in Malta and Beyond. Id-Dritt. (2006)

  21. Farazmand, A.: Sound governance in the age of globalization: a conceptual framework. In: Farazmand, A. (ed.) Sound Governance: Policy and Administrative Innovations, pp. 1–24. Praeger, New York (2004)

    Google Scholar 

  22. Flinder, M.: The Politics of Accountability in the Modern State. Ashgate, London (2001)

    Google Scholar 

  23. Frisell, L., Roszbach, K., Spagnolo, G.: Governing the Governors: A Clinical Study of Central Banks. Sveriges Riksbank Research Paper Series 54 (2008). http://ssrn.com/abstract=967357

  24. Garciano, L., Lastra, R.: Towards a new architecture for financial stability: seven principles. J. Int. Econ. Law 13(3), 597–621 (2010)

    Article  Google Scholar 

  25. Geradin, D.: The development of European regulatory agencies: what the EU should learn from American experience. Columbia J. Eur. Law, 11(1), 1–52 (2006)

    Google Scholar 

  26. Gilardi, F.: Delegation in the Regulatory State: Independent Regulatory Agencies in Western Europe. Edward Elgar, Cheltenham Glos (2008)

    Google Scholar 

  27. Gilardi, F.: Institutional change in regulatory policies: regulation through independent agencies and three new institutionalisms. In: Jordana, J., Levi-Faur, D. (eds.) The Politics of Regulation: Institutions and Regulatory Reforms for the Age of Governance, pp. 72–75. Edward Elgar, Cheltenham Glos (2004)

    Google Scholar 

  28. Goodhart, C.: Regulating the regulator—an economist’s perspective on accountability and control. In: Ferran, E., Goodhart, C. (eds.) Regulating Financial Services and Markets in the 21st Century, pp. 151–164. Hart Publishing, Oxford (2001)

    Google Scholar 

  29. Grant, R., Keohane, R.: Accountability and abuse of power in world politics. Am. Polit. Sci. Rev. 99(1), 29–43 (2005)

    Article  Google Scholar 

  30. Haksoon, K.: Political stability and foreign direct investment. Int. J. Econ. Finance 2(3), 59–71 (2010). http://www.ccsenet.org/journal/index.php/ijef/article/view/6822 (accessed 04.12.2012)

    Google Scholar 

  31. Holopainen, H.: Integration of Financial Supervision. Bank of Finland Paper 12/2007. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1016953 (accessed 10.09.2012)

  32. Hupkes, E., Quintyn, M., Taylor, M.: The accountability of financial sector supervisors—principles and practice. Eur. Bus. Law Rev. 16(6), 1575–1620 (2005)

    Google Scholar 

  33. Knott, D.: Straddling Twin Peaks. Financial Regulator (1999)

  34. Kremers, J., Schoenmaker, D., Peaks, T.: Experiences in the Netherlands. FMG-Paper-196 (2010). www.lse.ac.uk (accessed September 2012)

  35. Lastra, R.: Defining forward-looking judgment-based supervision. J. Bank. Regul. 14(3-4), 221–227 (2013)

    Article  Google Scholar 

  36. Lastra, R.: Accountability and Governance: Banking Union Proposals. DSF Policy Paper Series No. 30 (2012). http://www.dsf.nl/home/research/publications/dsf_policy_papers (accessed 02.01.2014)

  37. Lastra, R.: Central Bank Independence and Financial Stability. Banco De Espana Estabilidado Financiera (18), 51–66 (2010)

  38. Lastra, R., Shams, H.: Public accountability in the financial sector. In: Ferran, E., Goodhart, C. (eds.) Regulating Financial Services and Markets in the 21st Century, pp. 165–188. Hart Publishing, Oxford (2001)

    Google Scholar 

  39. Lastra, R.: Central Banking and Banking Regulation. Financial Markets Group, London (1996)

    Google Scholar 

  40. Lastra, R.: The independence of the European systems of central banks. Harvard Int. Law J. 33(2), 475–519 (1992)

    Google Scholar 

  41. Majone, G.: The rise of the regulatory state in Europe. West Eur. Polit. 17(3), 77–101 (1994)

    Article  Google Scholar 

  42. Maschiandaro, D., Quin, M.: After the Big Bang and Before the Next One? Reforming the Financial Supervision Architecture and the Role of the Central Bank. Paolo Baffi Paper No. 2009-37. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1336390 (accessed 10.09.2012)

  43. Meyer, J., Rowan, B.: Institutional organisations: formal structure as myth and ceremony. Am. J. Sociol. 83(2), 340–363 (1977)

    Article  Google Scholar 

  44. Moe, T.: Interests, institutions, and positive theory: the politics of NLBR. In: Studies in American Political Development, vol. 2, pp. 236–299 (1987)

    Google Scholar 

  45. Moe, T.: The new economics of organization. Am. J. Polit. Sci. 28(4), 739–777 (1984)

    Article  Google Scholar 

  46. Mulgan, R.: Holding Power to Account: Accountability in Modern Democracies. Palgrave Macmillan, Basingstoke, UK (2003)

    Book  Google Scholar 

  47. Page, A.: Regulating the regulator—a lawyer’s perspective on accountability and control. In: Ferran, E., Goodhart, C. (eds.) Regulating Financial Services and Markets in the 21st Century, pp. 127–149. Hart Publishing, Oxford (2001)

    Google Scholar 

  48. Palmer, J., Cerruti, C.: Is there a need to rethink the supervisory process? Paper presented at the International Conference ‘Reforming Financial Regulation and Supervision: Going back to Basics’ (2009)

  49. Persaud, A.: Macro-prudential regulation. In: MacNeil, I., O’Brien, J. (eds.) The Future of Financial Regulation, pp. 437–445. Hart Publishing, Oxford (2010)

    Google Scholar 

  50. Quintyn, M., Ramirez, S., Taylor, M.: The fear of freedom: politicians and the independence and accountability of financial supervisors in practice. In: Masciandaro, D., Quintyn, M. (eds.) Designing Financial Supervision Institutions, pp. 63–116. Edward Elgar, Cheltenham Glos (2007)

    Google Scholar 

  51. Schillemans, T.: Remedies for the accountability deficit of agencies: does horizontal accountability work? Evaluating potential. Adm. Soc. 43(4), 387–416 (2011)

    Article  Google Scholar 

  52. Shapiro, M.: The problems of independent agencies in the united states and the European Union. J. Eur. Public Policy 4(2), 267–291 (1997)

    Article  Google Scholar 

  53. Smith, W.: Utility Regulators—The Independence Debate. Public Policy for the Private Sector Note 127, The World Bank Group (1997). www.ictregulationtoolkit.org/en/Document.2848.pdf (accessed 13.12.2012)

  54. Sparrow, M.: Forward to financial supervision in the 21st century. In: Kellerman, A. et al. (eds.) Financial Supervision in the 21st Century, p. vi. Springer, Berlin (2013)

    Google Scholar 

  55. Stigler, G.: The theory of economic regulation. Bell J. Econ. Manag. Sci. 2(1), 3–21 (1971)

    Article  Google Scholar 

  56. Swank, O., Dur, R.: Why do policy makers give (Permanent) power to policy advisors? Econ. Polit. 13(1), 73–94 (2001)

    Article  Google Scholar 

  57. Taylor, M.: Twin Peaks Revisited. Centre for Financial Innovation (2009)

  58. Taylor, M.: Redrawing the regulatory map: a proposal for reform. J. Financ. Regul. Compliance 5(1), 49–58 (1997)

    Article  Google Scholar 

  59. Taylor, M.: Twin Peaks: A Regulatory Structure for the New Century. Centre for Financial Innovation (1995)

  60. Trillas, F.: Independent Regulators: Theory, Evidence and Reform Proposals. IESE Working Paper WP-860 (2010). www.iese.edu/research/pdfs/DI-0860-E.pdf (accessed 20.06.12)

  61. Vinãls, J., Fiechter, J., Narain, A., Elliott, J., Jennifer, A., Tower, I., Bologna, P., Hsu, M.: The Making of Good Supervision: Learning to Say “No”. IMF Staff Position Note SPN/10/08 (2010). http://www.imf.org/external/pubs/cat/longres.aspx?sk=23799.0 (accessed 31.10.2013)

  62. Wymeersch, E.: The structure of financial supervision in Europe. Eur. Bus. Organ. Law Rev. 8(2), 237–306 (2008)

    Article  Google Scholar 

  63. Wymeersch, E.: The future of financial regulation and supervision in Europe. Common Mark. Law Rev. 42(4), 987–1010 (2005)

    Google Scholar 

Download references

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Christopher P. Buttigieg.

Additional information

The author would like to thank Professor Eddy Wymeersch (Ghent University-Belgium), Professor Malcolm Ross (University of Sussex-United Kingdom) and Dr David Fabri (University of Malta) for their comments and suggestions on the paper. The views expressed in this paper are solely those of the author at the time of writing.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Buttigieg, C.P. Strengthening the governance of national financial supervision in the EU: existing weaknesses and a proposal for reform. ERA Forum 15, 197–227 (2014). https://doi.org/10.1007/s12027-014-0351-2

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s12027-014-0351-2

Keywords

Navigation