fundamentals of european banking law law … · law-making procedures, sources and key provisions,...

FUNDAMENTALS OF

EUROPEAN BANKING LAW

Law-making procedures, sources and key provisions, and the way ahead

Christos Vl. Gortsos

Associate Professor of International Economic Law, Panteion

University of Athens

Visiting Professor, Europa-Institut, Univestität des Saarlandes,

and Law Faculty, National and Kapodistrian University of Athens

Notes for the postgraduate program of the Europa Institut, University of Saarland

July 10, 2013

3

TABLE OF CONTENTS

INTRODUCTION

CHAPTER ONE

European Banking Law within the system of European Financial Law

SECTION 1

European financial integration: economic, financial and legal aspects

A. Economic and financial aspects of European financial integration

B. An introduction to European Financial Law

SECTION 2

The making of European Financial Law: the dynamics of evolution

A. Introductory remarks

B. The legal acts of European Financial Law prior to the adoption of the Lamfalussy

Committee proposals

C. The Lamfalussy process

D. The regulatory comitology procedure with scrutiny

E. The proposals of the de Larosière Group on the future of financial supervision in the

European Union

F. Legal acts: the impact of the Lisbon Treaty (not included in these notes)

SECTION 3

The role of the European Banking Authority within the European System of

Financial Supervision

A. The European System of Financial Supervision (ESFS): an overall examination

B. The European Banking Authority (EBA)

C. Concluding remarks

4

SECTION 4

The sources of European Banking Law

A. The status quo

B. Classification of the provisions of the sources

C. Current regulatory developments

CHAPTER TWO

The key provisions of European Banking Law

SECTION 1

The provisions on negative financial integration: freedoms to establish and to provide services by credit and financial institutions

A. The principle of mutual recognition of authorisations of EU credit institutions

B. Procedural conditions for credit institutions to exercise the right of establishment

and the freedom to provide services

SECTION 2

The provisions on positive financial integration (A): prevention of crises

I. Authorisation and operation of credit institutions

A. Conditions for authorisation

B. Conditions for conducting business

C. Conditions for the revocation of an authorisation

II. Micro-prudential regulation of credit institutions (not included in these notes)

III. Macro-prudential regulation of credit institutions (not included in these notes)

IV. Micro-prudential supervision of credit institutions (not included in these notes)

V. Macro-prudential oversight of the financial system: the role of the European

Systemic Risk Board

5

SECTION 3

The provisions on positive financial integration (B): crisis management

I. Reorganisation and winding-up of credit institutions (not included in these notes)

II. Resolution of credit institutions (not included in these notes)

III. Deposit-guarantee schemes

A. Terms and conditions of EU credit institutions’ membership in deposit-

guarantee schemes

B. Terms of operation of deposit-guarantee schemes

CHAPTER THREE

The way ahead: towards a “European banking union”

A. Issues at hand - a historical overview

B. The main elements of the proposed institutional framework on the 'single

supervisory mechanism'

C. In particular: specific tasks conferred on the ECB and their discharge within the

framework of the ‘single supervisory mechanism’

D. Other provisions of the Council Regulation proposal: an overview

E. Final remarks

SECONDARY SOURCES

7

List of Tables

# of Table Title Pages

Table 1 Financial policy objectives and instruments 32-35

Table 2 The bank safety net: the instruments employed

to safeguard the stability of the banking sector 52

Table 3 The Lamfalussy process 80

Table 4

Overall review of the de Larosière Report

proposals with regard to strengthening the

effectiveness of supervision in the European

financial system

94

Table 5

The cooperation of national banking

supervisory authorities at European level: from

informal fora to “European (quasi-)

supervisory authorities”

115

Table 6

Procedure for the issuance of legal acts which

constitute the sources of European financial

law after the entry into operation of the ESFS

137

Table 7 European banking law (I): status quo 155-157

Table 8 An overview of the proposal for a Directive

on the recovery and resolution of credit

institutions and investment firms

162

Table 9 European banking law (II): current regulatory

developments 164-166

Table 10 Services benefiting from mutual recognition

according to Annex I of Directive 2006/48/EC 181

Table 11

Services and activities benefiting from mutual

recognition according to Annex I of Directive

2004/39/EC

182

8

List of Tables (continued)

# of Table Title Pages

Table 12 Towards a European Banking Union:

Elements of change and continuity 247

Table 13 ECB's tasks following the adoption of the

Council Regulation proposal 250

Table 14

Setting the perimeter: specific tasks conferred

on the European Central Bank exclusively in

relation to the micro-prudential supervision of

certain credit institutions

254-255

Table 15

The specific tasks conferred upon the ECB

with rgard to credit istitutions incorporated in

participating Member States

266-267

Table 16 The composition of the Supervisory Board 289

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INTRODUCTION

The present notes are submitted as a basis for the teaching material of my course in

'European Banking Law' for the postgraduate program of the Europa Institut,

University of Saarland, in July 2003. They constitute an extension of those submitted

last year and their structure reflects my intention to complete, during 2014, a

comprehensive book on the 'Fundamentals of European Banking Law'.

These notes do not include the following sub-sections of the text to be finalised (since

they are still under development):

� in Section 2 of Chapter One, sub-section F,

� in Section 2 of Chapter Two, sub-sections II-IV, and

� in Section 3 of Chapter Two, sub-sections I-II.

The notes, apart form being distributed to my students in Saarland, will be posted, by

July 15, at the site of the European Center of European Economic and Financial Law,

ECEFIL (www.ecefil.eu). I am, really, looking forward to any constructive remarks on

the text by its recipients and readers.

Professor Christos Gortsos

11

CHAPTER ONE

European Banking Law within the system of European Financial Law

13

SECTION 1

European financial integration: economic, financial and legal aspects

A. Economic and financial aspects of financial integration

1. The reference framework

1.1 Functions and infrastructures of the financial system

In every economy operating under free market conditions (market-based economy), the

financial system is the system through which two main economic functions are

performed:

(a) The first function consists in channelling funds that households, enterprises and

governments (positive savers) have saved by spending less than their income towards

those that have a shortage of funds because they want to spend more than their income

(negative savers).1 Such channelling of funds is carried out/conducted:

• either indirectly, with the intermediation of specialised financial firms, known

as ‘financial intermediaries’, i.e. mainly banks and insurance firms,2

• or directly, through the public placement of stocks and bonds in primary

money and capital markets, which are then traded on secondary markets3

(alongside with derivative financial instruments),4 where certain categories of

financial firms provide services (investment services) to both issuers (negative

savers) and investors (positive savers).5

1 From the very extensive literature on this function, see indicatively Mishkin (2007), pp. 23-25,

and Stillhart (2002), pp. 8-12.

De Haan, Oosterloo and Schoenmaker (2009), pp. 3-4, define it as the main “task” of the

financial system – with reference to Mishkin (2007) – and identify its “functions” as:

• reducing information and transaction costs, and

• facilitating the trading, diversification and management of risk (ibid., pp. 6-10).

These are, in the author’s view, the main objectives of the financial system’s primary function.

2 For more details, see Stillhart (2002), pp. 12-121, Allen and Santomero (1999), Allen

(2001), Allen and Gale (2001), and Gorton and Winton (2002). See also Mishkin (2007), pp.

39-42, and De Haan, Oosterloo and Schoenmaker (2009), pp. 5-6, and, more specifically, for

banking, pp. 205-212.

3 The distinction between money markets and capital markets relates to the initial duration of

the securities issued: money markets trade in short-term corporate and government bonds (with

an initial term of up to one year), while capital markets trade in long-term bonds, as well as

stocks of listed companies. For the sake of brevity, only the term “capital market” will be used

hereinafter to denote both money and capital markets.

4 On these instruments, see Cox and Rubinstein (1985) and Hull (1997).

5 See Mishkin (2007), pp. 25-32, and De Haan, Oosterloo and Schoenmaker (2009), pp. 65-

72.

14

In this context, the financial system comprises three main sectors: the banking sector,

the insurance (and reinsurance) sector, and the capital markets sector.

(b) The second function of the financial system is the issuance and acquisition of

payment instruments, as well as provision of other payment services to agents who wish

to make and accept payments without the use of cash (i.e. banknotes and coins, issued

by the central bank and the government, respectively).6

In order for these two functions to be performed, specific infrastructures are required,

mainly:

• systems for the clearing and settlement of payments with regard to various

payment instruments and other payment services, and

• systems for the settlement of transactions in financial instruments (stocks,

bonds and derivatives) traded on capital markets (collectively referred to as

“payment and settlement systems”).7

Albeit closely connected with the financial system, the monetary system is definitely

independent from it. Monetary is the system that helps generate the assets that are

generally used in the economy as a means of payment and transactions, namely, money.

A distinction is usually made between:

• primary money in the form of banknotes and coins (known in economic theory

as “monetary base”), and

• secondary money in the form of bank deposits.8

The close link between the two systems is mainly attributable to the fact that deposits,

the main source of bank financing , are, concurrently, the core element of money in the

framework of the monetary system’s operation (given that universally, banks are the

most important category of financial intermediaries).

1.2 Definition of the concept of financial integration

Financial integration between two or more sovereign states is one of the dimensions of

these states’ microeconomic integration which, along with their macroeconomic

integration, compose the whole of economic integration

The author defines microeconomic integration as the aggregation of markets (for the

provision of goods and services) of sovereign states participating in the integration

process, aimed at creating a common economic area. On the other hand,

macroeconomic integration is defined as the harmonisation-unification of the

instruments used in the conduct of macroeconomic policies of participant states with a

view to implementing a single macroeconomic policy.

6 See Stillhart (2002), p. 121.

7 See De Haan, Oosterloo and Schoenmaker (2009), pp. 136-151.

On the interdependencies of payment and settlement systems, see the homonymous study of the

Committee on Payment and Settlement Systems (2005) (available at: www.bis.org/publ/

cpss84.htm).

8 See Barro (1990), pp. 81-84 and 427-429.

15

At the same time, financial integration forms part of the broader process of financial

internationalisation,9 but usually materialises at regional level and penetrates deeper

into the financial system of participating states. According to a recent study of the

European Central Bank (hereinafter the “ECB”):

“Taking as a starting point the view that national financial systems have historically

been segmented, financial integration is part of the currently heavily emerging process

of financial internationalisation. Evidently, however, the process of financial

integration aims at deeper results in comparison to that of financial

internationalisation, because its ultimate purpose is the establishment and functioning

of a single financial area within the context of a common economic area

(“microeconomic integration”). It may be even deeper if the states concerned strive

also at “macroeconomic integration”, as it is the case in the European Union, which

has already achieved its monetary unification.”10

To the author’s knowledge, there is no commonly accepted definition of financial

integration in the relevant literature. In view of this, the point of reference used is the

ECB’s definition, as follows:11

“The ECB […] considers the market for a given set of financial instruments or services

to be fully integrated when all potential market participants in such market are subject

to a single set of rules when they decide to deal with those financial instruments or

services, have equal access to this set of financial instruments or services, and are

treated equally when they operate in the market.

This integration can be achieved through initiatives of the market itself (“market-led

process of integration”), through self-regulation, and/or through binding rules arising

from intergovernmental or supranational institutions.”

For the purposes of this study, financial integration is thus defined as the aggregation

of the financial systems of two or more sovereign states within the framework of the

operation of a common economic area, which is:

• aimed at meeting the three (3) abovementioned conditions pertaining to the

operation of a single financial area, and

• pursued through the regulatory framework established by intergovernmental

and/or supranational institutions, via self-regulation or, finally, by means of

market-led initiatives.12

International, including European, experience, has demonstrated the difficulties of

implementing (and, sometimes, even coming close to) full financial integration.13

This

is mainly due to two closely linked factors:

9 See Herring and Littan (1995), pp. 13-48.

10 European Central Bank (2007).

11 European Central Bank (2008a), p. 6.

12 For a detailed presentation of these conditions which, once met, signify that full financial

integration has been achieved, see European Central Bank (2008a), pp. 64-65.

13 The outcome of a successful financial integration process is the creation of a single financial

area among participating states, i.e. the materialisation of financial integration per se.

16

(a) As a rule, the starting point of a financial integration process is an effort to

amalgamate fragmented national financial systems, which present significant

differences in several components of their structures and infrastructures, the terms of

operation of financial services providers, as well as the objectives of regulatory

intervention in the financial system and, all the more so, the instruments employed for

such an intervention.

(b) Progress on this process usually stumbles on resistance from participating

states for fear of a loss of power to exercise autonomous regulatory intervention in the

financial system.

1.3 The two dimensions of financial integration

1.3.1 Negative financial integration

To the extent that financial integration is pursued through the regulatory framework,

two dimensions can be identified: a negative and a positive one. The materialisation of

negative financial integration requires, on the one hand, the liberalisation of trade in

financial services and, on the other hand, the adoption of rules to ensure free

competition in the financial system, a policy objective of primary importance for the

entire common economic area (i.e. not particular to the financial system only).14

Implementation of this dimension of financial integration should be regarded as the

“necessary” condition for achieving full financial integration.

1.3.2 Positive financial integration

The content of positive financial integration, which constitutes the “sufficient”

condition for achieving full financial integration, is, in the author’s view, twofold:

(a) According to a stricto sensu approach, the achievement of positive integration

initially requires the adoption of rules that, within a single financial area, enable

meeting the objectives of regulatory intervention in the financial system, i.e. specific

financial policy objectives. These rules must be designed so as to ensure conditions of

competitive equality across all categories of financial services providers operating in

the single area, offering similar services and exposed to similar risks.

In this context, there are three (3) issues of key significance that need to be

addressed:15

(aa) The first concerns identifying the necessary financial policy objectives and

appropriate financial policy instruments in order to achieve them. This aspect will be

examined more closely just below (under 2).

(ab) The second issue concerns the level and extent of harmonisation of rules,

within a single financial area, which prescribe regulatory intervention in order to meet

the identified financial policy objectives.

14

See Bellamy & Child (2008), pp. 40-42.

15 For more details, see Gortsos (1996), pp. 79-89.

17

(ac) The third (related) issue concerns pinpointing administrative authorities (and,

in certain cases, schemes), which should be competent for the implementation of

regulatory intervention in the financial system. In this respect, decisions need to be

taken on two sub-issues:

• whether these authorities and schemes should remain national or become

supranational, and

• if national, which country’s authorities and schemes should be competent for

foreign establishments (i.e. branches and subsidiaries) of financial firms

operating in several states within the single financial area.

(b) The second (and undoubtedly more ambitious) aspect of positive financial

integration consists in the adoption of a single set of rules with respect to the provision

of financial services, namely a single ‘financial contracts and mortgage credit law’.

Meeting this parallel target according to a lato sensu approach of positive financial

integration, would require the full harmonisation of corresponding aspects of private

law of the states participating in the single financial area.

2. The case for regulatory intervention in the financial system in market-based economies: financial policy objectives and instruments

2.1 General overview

The financial system (and definitely some of its sectors, mainly the banking sector) is

one of the branches of the economy that are subject – in almost every state around the

world – to heavy ‘sector-specific’ regulatory intervention and supervision.16

The extent

of this intervention is graduated and there are significant differences between

economically less-developed and developing states, on the one hand (see under 2

below), and economically developed states, on the other (under 3), mainly on account

of different policy objectives.17

The following analysis is based on the ‘public interest approach’ to regulatory

intervention, which argues that financial regulation is intended to promote the

common good by calling upon individuals and firms to change their preferred

behaviour in ways that will benefit others.18

This is opposed to:

• the ‘public choice theory approach’, which views regulation as the outcome

of efforts by interest groups, politicians and bureaucrats to use the political

process to further their own personal gain,19

and

16

According to Kane (1987), p. 111: “On average, across the world, the financial sector (and

in particular the banking industry) is probably more closely regulated than any other segment

of the private economy.” A notable exception to this statement can be seen in ‘offshore

financial centers’, which display a substantial lack of regulatory intervention in monetary and

financial systems, coupled with favourable corporate taxation (‘tax havens’).

17 As a rule, the classification of the International Monetary Fund can be followed in this

respect. See on this Nielsen (2011).

18 See Herring and Littan (1995), pp. 79-82.

19 Ibid., pp. 82-83.

18

• the ‘industrial organisation theory approach’, which regards financial

regulation as a response to the demand on the part of financial firms and

their customers for certification of soundness and facilitation of the clearing

and settlement of transactions.20

Financial firms are also subject to regulatory intervention in every state for reasons that

apply equally to other categories of services providers, as reflected in the provisions of

the following (indicative) areas of law: company law, competition law, data protection

law, taxation law, as well as labour and social law.

Here, it is useful to delineate the content of the three concepts examined at length

below:

• regulation,

• supervision, and

• oversight.

(a) Regulation is the adoption of legislative or administrative provisions that

prescribe or prohibit behaviour on the part of financial firms and markets aimed at

meeting a specific policy objective. The outcome of regulatory intervention consists in

(administrative law) regulations, which comprise the regulatory (or normative)

framework.

(b) Supervision means monitoring of financial firms and markets by competent

authorities, in accordance with regulatory framework provisions. Such monitoring is

carried out on a preventive basis and is known as ‘micro-prudential supervision’.

(c) Oversight refers to monitoring by competent authorities with a view to

ensuring the sound operation of a market or a subsystem of the financial system.21

2.2 Regulatory intervention in economically less-developed and developing states

In economically less-developed states, regulatory intervention in the financial system,

notably in the banking sector, is mainly aimed at achieving specific economic and

broader social objectives.22

Taking into account that the financial system and banks, in

particular, act as intermediaries for the channelling of borrowed funds (or own funds,

in the case of listed companies) from positive to negative savers, regulations are

imposed on them in order to ensure that these funds are channelled:

• either to the government, for financing public expenditures under favourable

terms (i.e. administratively fixed interest rates), or

20

Ibid., pp. 83-84. For an overall review of regulatory intervention in the financial system, see

ibid., pp. 49-64, and Herring and Santomero (2000).

21 Taking road traffic as an example:

• regulation means laying down rules on the maximum speed limit,

• supervision of compliance with these rules is carried out by traffic wardens, who issue

speed tickets to the offenders, and

• oversight is conducted by traffic police helicopters that look for congestion problems

in given roads, in order to smooth traffic flows with the appropriate instructions.

22 See World Bank (1989), pp. 54-69.

19

• to enterprises considered by the political system to be eligible for financing

under the applicable development policy (without due assessment of the credit

risk involved).

Some examples of such regulatory intervention include:

(i) Imposing restrictions on banks relating to:

• the provision of non-purely banking services (e.g. not allowing the provision

of investment services and/or non-financial services), and/or

• the geographical range of their activity.23

(ii) Imposing maximum limits on loan rates (in order to subsidise bank financing)

and minimum limits on deposit rates (in order to make bank deposits attractive).

(iii) Imposing an obligation on banks to invest a significant percentage of their

deposits:

• in specific segments of the real sector of the economy, usually with

preferential terms and subsidised interest rates, and

• in government (short- and long-term) bonds, thus ensuring the subsidised

financing of public expenditures.

(iv) State ownership of commercial banks, either directly or through state-

controlled entities (mainly pension funds).

(v) Setting-up, by virtue of legal acts, specific, typically state-owned, banks, such

as agricultural, mortgage and development banks.

2.3 Regulatory intervention in economically developed states

2.3.1 Introductory remarks

In economically developed states, the above-mentioned objectives of regulatory

intervention – particularly the first three – are not common, since most of the measures

taken to achieve relevant regulatory objectives are not compatible with the principle of

an open market economy with free competition. Therefore, given that this principle is

applied in such states as a model for an economy’s organisation and functioning, the

adoption and implementation of these measures is prohibited.

On the other hand, in economically developed states, there is also strong regulatory

intervention in the financial system and, over the past three (3) decades, this

intervention has been greatly expanded mainly because of the extensive laxity of other

regulatory measures (a process known as ‘financial deregulation’). However, as a rule:

• the policy objectives of regulatory intervention are primarily associated with

the sound operation of the financial system, and

• their main (albeit not sole) task is to address market failures emerging in the

financial system.24

23

However, a striking example of an economically developed state which resorted to this

measure is the United States, which, for a long period of time, did not allow banks to operate

beyond the border of the state of their registered office.

20

Τhese aspects of financial regulatory intervention will be examined in more detail

below. More specifically, apart from ensuring free competition in the financial system,

which is the prevailing objective in the entire market, regulation is also aimed at

meeting the following objectives:

• ensuring the stability of the financial system (see under 2.3.2 below),

• ensuring investor protection and capital market integrity, efficiency and

transparency (under 2.3.3),

• compensating investors in the event of an investment firm’s insolvency (under

2.3.4),

• safeguarding the efficiency of payment systems (under 2.3.5),

• protecting the economic interests of consumers trading with financial firms

(under 2.3.6), and

• combating the use of the financial system for the purpose of economic crimes,

such as money laundering, terrorist financing and fraud in payment

instruments and systems (under 2.3.7).

It should be pointed out, however, that the policy objectives justifying regulatory

intervention in the financial system cannot be exhaustive at any given time, because the

prevailing economic and social conditions may call for new objectives in future. The

dynamics of this variability are clearly demonstrated by the fact that certain policy

objectives which stand today, were out of the question a few years ago. In particular:

(a) The rationale for regulatory intervention in the financial system with a view to

tackling consumer over-indebtedness emerged in the late 1990s, as a result of the full

liberalisation of consumer credit and the subsequent extensive exposure of households

to debt.

(b) The rationale for combating terrorist financing through the financial system

emerged mainly following the 11 September 2001 terrorist attacks on the United States.

(c) A predominant debate in the financial policy agenda after the recent (2007-

2009) international financial crisis concerns the need to deal with the adverse impact

on public finances of exposure to insolvency of banks and other financial firms, which

have grown ‘too big to be left to fail’ or are ‘too interconnected to be left to fail’

(currently referred to as ‘systemically important financial institutions’ or SIFIs),

especially those with cross-border activities. By default, the main concern is to ensure

that:

• these entities will not be exposed to insolvency, or

• if otherwise exposed, their resolution will be feasible without being charged to

public finances.

This problem, along with the policy objective of ensuring financial stability, is

definitely not new, but has become more acute during the recent crisis owing to large-

scale government bailouts of financial firms and the ensuing negative impact on public

finances (see, for example, the case of Ireland).

24

As regards market failures, and, in particular, negative externalities and information

asymmetries, see Mercuro and Medema (2006), pp. 60-67 and, in more detail, Ippolito (2005), pp. 153-379.

21

2.3.2 Safeguarding the stability of the financial system

The first (and primary) policy objective justifying regulatory intervention in the

financial system of economically developed states is safeguarding the financial

system’s stability, potentially threatened by the occurrence of ‘systemic crises’. Within

this framework, there are five individual –yet closely linked – financial policy

objectives (based on distinct sectors and infrastructures of the financial system):

(a) The first objective is to ensure the stability of the banking sector by preventing

the evolution of negative externalities in the form of contagious bank failures (i.e. by

preventing a chain reaction of bank failures or ‘bank failure spillover effects’).25

The

policy instruments employed to attain this objective comprise the ‘bank safety net’ and

are materialised through the adoption of rules concerning:

• the authorisation of banks by competent authorities,

• the micro-prudential and macro-prudential regulation of banks,

• the micro-prudential supervision of banks,26

• the macro-prudential oversight of the banking and in general the financial

system,

• the reorganisation of troubled banks, as well as the recapitalisarion (by pubic

funds), resolution or winding-up of insolvent banks,27

and

• the operation of deposit-guarantee schemes.28

Last-resort lending by the central bank (in its capacity as monetary authority) to

solvent banks exposed to temporary illiquidity, as well as monetary authority measures

to neutralise a shift in public demand for cash – which is excessive in periods of crisis

– aimed at preventing the cumulative collapse of the financial system, constitute the

last components of the bank safety net. Recourse to these components is usually not

premised on legislative rules but on discretionary decisions of central banks.

It is worth mentioning that the first four components of the bank safety net are

preventive, whereas the remaining components are considered protective (‘crisis

management’) financial policy instruments.

25

From the very extensive literature on this financial policy objective, see Herring and Litan (1995), pp. 50-61. Regarding the synergies between the stability and effectiveness of the

financial system, see Barth, Caprio and Levine (2006), pp. 307-309.

26 For a more detailed analysis of authorisation and micro-prudential regulation and supervision

of banks, see Barth, Caprio and Levine (2006), pp. 110-132. On the best international

practices with regard to the authorisation and micro-prudential supervision of banks, see Basel

Committee on Banking Supervision (2006), Core Principles for Effective Banking

Supervision (available at: http://www.bis.org/publ/bcbs129.pdf).

27 This component of the bank safety net is discussed in greater detail in Santomero and

Hoffman (1999).

28 For more details on this component of the bank safety net, see Carisano (1992). As regards

best international practices on deposit guarantee schemes, see Basel Committee on Banking

Supervision and International Association of Deposit Insurers (2009), Core Principles for

Deposit Insurance Systems (available at: http://www.bis.org/ publ/bcbs156.pdf).

22

(b) The second objective is ensuring capital market stability, which may be

disrupted owing to either an abrupt and large-scale price fluctuation of financial

instruments traded therein29

or to the bankruptcy of a financial intermediary offering

investment services.30

The latter argument has, however, been criticised by those who are of the view that the

risk of spillover effects, i.e. of more investment firms becoming insolvent, is extremely

limited.31

Within this framework, it may be reasonably argued that provisions are

adopted mainly to ensure a level-playing field between investment undertakings and

banks, in terms of conditions for their authorisation, operation and supervision (in the

case of banks, such conditions are aimed at safeguarding the banking system’s stability,

given the palpable systemic risk of a ripple of successive bank authorisation

withdrawals), to the extent that the former provide the same type of services and are

exposed to the same kind of risks as the latter.32

This objective is pursued through the adoption of rules concerning:33

• on the one hand, the sound operation of trading mechanisms for primary and

derivative financial instruments,

• the authorisation, oversight and ongoing supervision by competent

(administrative) authorities of securities exchanges and other markets for

trading in financial instruments, and

• the authorisation and micro-prudential regulation and supervision by

competent (administrative) authorities of financial firms providing investment

services in capital markets on an individual basis, as well as micro- and

macro-prudential regulation of markets.

(c) The third objective is protecting the stability of the insurance (and reinsurance)

sector against the risk of bankruptcy of insurance and reinsurance services providers.34

It is achieved through the adoption of rules on the authorisation and micro-prudential

regulation and supervision of insurance and reinsurance undertakings by competent

(public) authorities.35

29

This risk is associated with market operation and, in principle, cannot be addressed with

regulatory interventions. What is needed is to prevent the emergence of inefficient institutional

infrastructures that accentuate any problems caused by strong market fluctuations.

30 See IOSCO (2008), Objectives and Principles of Securities Regulation, pp. 6-7, available at:

http://www.iosco.org/library/index.cfm?section=pubdocs.

31 See Haberman (1987), and Herring and Litan (1995), pp. 72-73.

32 As regards differences between banks and investment undertakings in terms of a potential

ripple of failures, see Haberman (1987), Herring and Litan (1995), pp. 72-73, and Allen and

Herring (2001).

33 On the best international practices with regard to this aspect, see IOSCO (2010), Objectives

and Principles of Securities Regulation (available at: http://www.compliance-

exchange.com/governance/library/ioscoprinciples2010.pdf ), principles 10-12, 29-34, and 37-38.

34 See Herring and Litan (1995), pp. 73-74.

35 On the best international practices with regard to this aspect, see International Association

of Insurance Supervisors (2011), Insurance Core Principles and Methodology (available at:

http://www.iaisweb.org/__temp/Insurance_Core_Principles__Standards__Guidance_and_Asses

sment_Methodology__October_2011.pdf), principles 1-23.

23

(d) The fourth objective (which has become topical of late) concerns safeguarding

the stability of the financial system as a whole against the emergence of widespread

financial crises in the economy as a result of excessive risk-taking by financial

conglomerates, comprised of banks, insurance undertakings and investment firms (in

accordance with what was mentioned under D in Section 1 above). This objective is

sought after through the adoption of rules concerning the ‘supplementary’ micro-

prudential regulation and supervision of such conglomerates by competent

(administrative) authorities.36

(e) Finally, the fifth objective consists in ensuring the normal and smooth

operation of payment and settlement systems. The risk to such systems consists in the

contagion of liquidity and/or solvency problems from one member of the system to

another, with all the adverse systemic consequences that this may potentially have on

the functioning of the financial system.37

Exposure to this risk is controlled through

proper oversight of payment and settlement systems.38

2.3.3 Ensuring investor protection and capital market integrity, efficiency and

transparency

2.3.3.1 The content of the objective

The second policy objective for regulatory intervention in the financial system is

related to:

• ensuring the protection of investors that wish to invest, or already invest, in

primary and derivative financial instruments, either to be listed in a regulated

market (the ‘primary market’) or already traded therein (the ‘secondary

market’),39

and also to

• safeguarding the integrity, efficiency and transparency of capital markets.40

The ‘closeness’ of the connection between these two financial policy objectives with

regard to capital markets can be explained by the fact that they share, to a large extent,

the same financial policy instruments; as a result, a distinction between the two is often

difficult.41

36

The supervision exercised on such conglomerates is supplementary in nature. Namely it is

exercised in addition to the supervision exercised on participating financial firms on an

individual and consolidated basis within homogeneous activity groups. See Dierick (2004), pp.

20-26.

37 See Committee on Payment and Settlement Systems and IOSCO (2012), Principles for

Financial Market Infrastructures, April (available at: http://www.bis.org/publ/cpss101a.pdf),

section 2.

38 See Committee on Payment and Settlement Systems (2005), Central Bank Oversight of

payment and settlement systems, Bank for International Settlements, May (available at:

http://www.bis.org/publ/cpss68.htm).

39 See IOSCO (2008), pp. 5-6.

40 Ibid., p. 6.

41 Ibid., p. 5.

24

A detailed examination of these two policy objectives exceeds the scope of this study.42

Nevertheless, it is worth making three (3) remarks:

(a) Investors need special protection given their participation in the process of

direct financing of enterprises and governments in capital markets where financial

instruments – in which they invested or will invest – are traded. Fostering and

bolstering investor confidence in a capital market’s efficient operation is in any event

crucial, as it is a necessary condition for investor participation in such a market. This

dictates the adoption of special measures on the basis of the given market’s

characteristics and mechanisms governing its operation.

(b) In line with the above, obligations set and dictated by the need to protect

investors – as those persons who invest in a market with specific characteristics and

risks – thus making sure that such persons trust and invest in a market’s efficiency,

respond to special requirements under capital markets law, independent of those

arising from consumer protection law (see below, under 3.6). Of course, it is possible

for an investor to also be a consumer depending on the transactions effected with the

investment undertaking.

In this respect, investors/consumers are usually subjected to information asymmetries

and have limited negotiating capacity vis-à-vis providers, i.e. financial firms; as a

result, consumer protection provisions enter into effect. Here it should be noted,

however, that investor protection measures are also sometimes aimed at redressing

information asymmetries which, manifestly, come at the expense of investors. But such

information asymmetries differ from those under consumer protection law, given that:

• information asymmetry under capital markets law is a function of an investor’s

knowledge regarding the profile and financial condition of the issuer of

instruments in which he/she will invest his/her savings or regarding the price

formation mechanism in the markets where trading takes place, and that

• information asymmetry may also exist among investors themselves, e.g. in the

case of privileged information abuse.

(c) With regard to the extent of protection afforded to recipients of investment

services under capital markets law, it should be noted that a distinction is made

between professional (institutional) and private (existing or potential) customers. It has

been rightly pointed out that the distinction between private and institutional does not

serve an abstract need to categorise investors, but is inextricably linked with the

realisation that the need to protect investors – as subjects of capital markets law – is

not as strong across all categories.

2.3.3.2 Policy instruments

Attaining the objectives of safeguarding investor protection and capital market

integrity, efficiency, and transparency justifies strong regulatory intervention in capital

markets. For this purpose, certain regulations are adopted, which can be systematically

divided into five (5) categories, depending on their recipients, i.e.:

• issuers of transferable securities (under (a) below),

• investment firms and banks providing investment services (under b),

42

See IOSCO (2008), pp. 5-6.

25

• undertakings for collective investment in transferable securities (UCITS) and

hedge funds (under c),

• secondary market operation (under d), and

• credit rating agencies, as well as auditors (under e).43

(a) The first set of rules applies to issuers of transferable securities in capital

markets, i.e. listed companies and firms planning to admit their transferable securities

to trading in regulated markets, and refers to:

• the obligation of firms intending to raise own or borrowed funds through the

capital market to report information to their prospective investors, which is key

to their decision on whether to invest in the transferable securities of such

companies/firms,

• corporate governance (including internal audit mechanisms) of listed

companies,

• listing particulars for issuers,

• prospectus requirements for issuers,

• the periodical dissemination of information by listed companies,

• the protection of rights and interests of minority shareholders in the case of

takeover bids, and

• accounting and auditing standards for listed companies.

(b) The second set of rules applies to investment firms and banks providing

investment services and refers to:

• adequate internal organisation with regard to the provision of investment

services mainly aimed at avoiding conflicts of interests, and

• the stricto sensu investor protection ensured, inter alia, by imposing: a code

of conduct on the provision of investment services to consumers, an

obligation to execute orders in the most favourable terms for customers, and

also rules on equal treatment of customer orders.

(c) The third set of rules applies to UCITS and hedge funds management

companies. With respect to UCITS, the relevant rules refer to:

• authorisation and supervision of UCITS management companies,

• segregation and protection of investor assets,

• dissemination of information by UCITS management companies, essentially

addressed to investors as part of their decision-making,

• criteria for the evaluation of UCITS assets and redemption of UCITS units,

and

• rules concerning the investment policies of UCITS.

43

This categorisation is based on IOSCO’s 2008 report. On the best international practices

with regard to this aspect, see IOSCO (2010), principles 16-18, 31, 24-28, 33 and 35-38 and

19-22, respectively.

26

The rules concerning hedge funds management companies set out the following:

• the conditions for the authorisation and supervision of hedge fund managers,

• the conditions that must govern the conduct of their business, and

• the transparency requirements with which both investors and supervisors need

to comply.

(d) The fourth set of rules relates to the sound operation of secondary markets and

refers to:

• the conditions for authorisation and conduct of business, and the supervision

and oversight of regulated markets,

• the transparency of transactions conducted in secondary markets (i.e. equity,

bond and derivative markets),

• combating (i.e. preventing and containing) market abuse (market

manipulation and insider trading),

• oversight of systems for the clearing and settlement of transactions in

securities and derivative instruments, and

• the obligation to clear over-the-counter (OTC) derivatives that meet certain

criteria (e.g. highly liquid OTC derivatives) through a central counterparty

(CCP) and report them to trade repositories, in view of bolstering

transparency and identifying and addressing systemic risk.

(e) Finally, the fifth set of rules relates to the operation of credit rating agencies

and auditors. With respect to credit rating agencies, the relevant rules lay down obligations for their supervision and registration, as well as the necessary conditions

for the issuance of credit ratings. Rules relating to auditors concern:

• their supervision,

• quality requirements for audit standards, and

• the independence of auditors.

2.3.4 Compensation of investors


The third policy objective for regulatory intervention also concerns capital markets. It

refers to the compensation of investors trading with an investment undertaking or bank

that provides investment services (i.e. investment services provider), if both of the

following conditions are met:

• supervisory or judicial authorities decide to suspend the investment services

provider’s operation, normally in the event of insolvency, and

• if the investment services provider cannot return funds or financial assets to

their owners, i.e. the investors.

27


The appropriate policy instrument in this case is the establishment of explicit investor

compensation systems to offer ‘explicit coverage’ to investors (usually up to a certain

amount).44

2.3.5 Safeguarding the efficiency of payment and settlement systems

The fourth policy objective of regulatory intervention in the financial system concerns

safeguarding the efficiency of payment and settlement systems, which is the second

policy objective associated with these systems.45

Proper oversight of payment and

settlement systems is the appropriate policy instrument in this case as well.46

Here, the significant role played by central banks should be highlighted. The

assignment of such power to central banks is a corollary of the operational synergies

that exist between the tasks of conducting monetary policy, safeguarding the stability

of the financial system and overseeing payment systems.

The scope of the relevant power covers primarily large-value payment and settlement

systems – given the interest in the smooth execution of monetary policy operations.

With regard to small-value payment systems, the scope of the relevant power varies

across different states and it may include:

• low-value payment systems,

• systemically important small-value payment systems, and

• systems involving ad hoc systemic risk.

2.3.6. Protection of the economic interests of financial services consumers


The fifth policy objective relative to regulatory intervention in the financial system is

the protection of the economic interests of financial services consumers, namely

consumers contracting with financial firms.47

Policy concerns in this area are, first of

all, based on generally accepted assumptions in the context of financial services

provision, which apply across the board as far as the protection of consumers’

economic interests48

is concerned. These assumptions have to do with three (3) aspects:

44

The term ‘explicit coverage’ is used to incorporate arrangements other than those based on

the premise that investor coverage should be ex post, at the discretion of supervisory authorities

or the State, and solely conducted on an ad hoc basis, i.e. after a ‘politically’, ‘socially’ or

‘systemically’ important investment services provider becomes insolvent (‘implicit coverage’).

On the best international practices with regard to this aspect, see IOSCO (2010), principle 32.

The operation of investor compensation systems is another financial policy instrument.

45 See Committee on Payment and Settlement Systems and IOSCO (2012), Section 1.

Regarding the synergies between the stability and efficiency of payment and settlement systems,

see ibid., para. 1.15, and Committee on Payment and Settlement Systems (2005), paragraph

60.

46 See Committee on Payment and Settlement Systems (2005).

47 See Herring and Litan (1995), pp. 61-62.

48 These policy objectives and policy instruments refer to the precontractual phase , as well as

the contractual relationship forged between the provider and the consumer for the promotion

28

(a) Reducing the information asymmetry that exists between consumers and

financial firms49 with regard to available information on a product or service that may

become the object of a transaction between them. Such information asymmetry can be

attributed to:

• the provider’s typically greater expertise and knowledge on the provided

financial service’s features, function and characteristics, and

• the consumer’s lack of experience and acquaintance with financial

transactions.

This information asymmetry – accentuated in the case of specialised and complex

financial services – and the consumer’s typical lack of the resources necessary to fill

the information gap upsets the balance between the two parties, given that the

consumer50

cannot make an accurate assessment of a financial service’s features in

order to opt for the service of his/her choice. The policy objective for regulatory

intervention consists in redressing this information asymmetry, so that the consumer

may understand the financial service’s nature and characteristics, and make an

informed and conscious choice appropriate not only to his/her needs, but also to his/her

economic profile.

(b) Addressing the problem of the limited negotiating capacity of consumers

compared to financial firms, mainly on account of the broad use of general transaction

terms.51

The broad recourse to general transaction terms as a result of the standardisation of

modern transactions is aimed at ensuring predictability, security and equal treatment,

as well as saving providers and consumers time and money. But the absence of a

genuine negotiating equity between the parties, given the use of general transaction

terms, results in upsetting their contractual balance, particularly to the extent that

abusive terms are used, while it is anyway agreed that the parties do not have the same

level of influence on the elaboration of contractual terms.

Consequently, the policy objective in this case is to address this limited negotiating

capacity which is presumed to exist in the contractual relationship between the

consumer and the provider for the reasons mentioned above.

(c) Particularly with regard to the extension of credit to consumers, households (at

the very least) have shown an increased tendency towards over-indebtedness in the last

decade. The liberalisation of consumer credit, consumers’ increasingly easier access to

financial services, certain households’ resort to multiple borrowing, and sometimes

consumers’ inability to assess their financial capacity objectively and accurately are

simply some of the main causes of consumer over-indebtedness.

and provision of a service. In other words, they are lato sensu associated with the consumption

of a product or service.

49 With regard to this form of information asymmetry, see Cartwright (2004), pp. 49-84,

Calais-Aulois and Steinmetz (2006), pp. 53-67 and Rasmusen (1989), pp. 133-153.

50 For example, through the assistance of a legal or technical consultant, available to business

people, who either have the necessary infrastructure within the framework of their business or

are able to afford such assistance.

51 With regard to this issue, see Calais-Aulois and Steinmetz (2006), pp. 188-203, and

Howells and Weatherill (2005), p. 261 ff. General transaction terms mean the terms set a

priori by the provider for an undefined number of future contracts.

29

The term ‘over-indebtedness’ refers to a consumer’s inability to meet either his/her

financial obligations (default) arising from a loan contract that he/she has signed or

his/her current household financial obligations (i.e. payment of utility bills). However,

there are quite different approaches with regard to:

• the notion of such a default (for instance, is it genuine inability to repay loans

or levels of borrowing considered to be unbearable?),

• the timing of such a default (how long does it take for a default?), and

• the criteria based on which it is calculated (on the basis of the person’s total

assets or net income).

The policy objective for regulatory intervention in this case is to prevent consumer

over-indebtedness and avoid any negative social or economic consequences


The policy instruments employed in order to achieve the above-mentioned objectives

include rules pertaining to the following:

(a) The provision of adequate information to consumers so that they are

sufficiently informed (prior to the contract, upon conclusion of the contract and in the

course of its duration) on the nature, characteristics and risks entailed by the provided

service, the content of concluded contracts, as well as the ensuing rights and

obligations of the parties.

Furthermore, unfair commercial practices which might either be misleading to

consumers about a given service’s properties and features or exert pressure on

consumers to accept a service that they would not have accepted, had they not been

misled or pressured, are prohibited.

Despite the latest trend of legislative provisions on very extensive information

obligations for service providers aimed at achieving the above-mentioned objective, it

is the author’s view that 'over-information' cannot achieve this objective, since it is

equally harmful as 'dis-information', 'under-information' or 'mis-information' and

weakens the consumer’s position by not allowing him/her to focus on, and understand,

the key characteristics of the provided financial service, which should affect his/her

choice. In this context, the role of financial education could be particularly useful, as it

may help consumers understand financial risks and make informed decisions, which is

why it has been taking on an increasingly broader sense.

(b) Provisions are also laid down in order to address the problem of consumers’

limited negotiating capacity, aiming at:

• control and prohibition of abusive terms, so that the consumer is not bound by

any abusive general terms of financial services contracts (see under (i) below),

• the safeguarding of certain contractual rights, which are considered as crucial

for the consumer (e.g. the right of withdrawal), in order to ensure that the

consumer can exercise them under certain circumstances (under (ii), and

• the possibility for consumers to have recourse to judicial proceedings through

collective actions or to out-of-court dispute settlement systems (under (iii).

30

(i) The prohibition of abusive general transaction terms is the most direct

manifestation of the protection of consumers given their limited negotiating capacity

vis-à-vis providers. This limited ability to shape the content of contractual terms can

result in binding consumers to abusive terms, thus posing an immediate risk that must

be dealt with through regulatory intervention.

A contractual term which has not been individually negotiated shall be regarded as

abusive if, contrary to the requirement of good faith, it causes a significant imbalance

in the parties' rights and obligations arising under the contract to the detriment of the

consumer. The abusive nature of a contractual term is assessed by a court of law.

(ii) The limited negotiating capacity of consumers justifies, to a certain extent,

further intervention by the legislator on the principle of private autonomy which

governs all contractual relations. Such intervention is aimed at safeguarding certain

consumer rights concerning the content of contracts concluded, but not negotiated on

equal terms, with providers. Particularly with regard to financial services, such

regulation consists indicatively in establishing the right of consumers for early loan

repayment under certain conditions, as well as their right to withdraw from a contract

within a given deadline and with specific legal effects.

(iii) Within the same framework, measures are taken to facilitate the settlement of

disputes between consumers and providers, either by encouraging out-of-court dispute

settlement systems, which save consumers both time and money, or by establishing

measures to facilitate consumer access to the courts.52

In this case, the means to meet

the policy objective for regulatory intervention are legally premised solely on the

limited negotiating capacity of the consumer, i.e. aimed at facilitating consumer access

to the courts for ex post settlement of disputes with the provider.

Such measures are also adopted bearing in mind that the – usually small –

amounts associated with relevant disputes, the time-consuming processes and

comparatively elevated cost of court action discourage consumers from effectively

asserting their rights.

(c) As already mentioned, especially in relation to consumer lending, tackling (i.e.

preventing and containing) consumer over-indebtedness has been elevated to a separate

rationale for regulatory intervention in recent years, with a view to avoiding any

negative social and economic consequences of consumers’ excessive exposure to

debt.53

An adequate policy instrument in this case is the adoption of rules on

‘responsible lending’ and consumer bankruptcy.54

As regards the relatively recent phenomenon of over-indebtedness in modern

economies, there is still no convergence of opinion on optimum intervention to prevent

or address this phenomenon effectively. In the current conjuncture, five (5) measures

are being implemented:

• imposing an obligation on banks to develop internal credit risk management

systems (already in place in most banks), in order to detect (and, subsequently,

not finance) existing or potential customers with a high probability of default,

52

An illustrative example of the latter case is the establishment of collective court action.

53 See Finlay (2009), pp. 73-76, Rosenthal (2002), p. 150 ff., and Barret-Barney (2002).

54 See Bouteiller (2004), p. 155, Ramsay (1997) and Piedelièvre (2008), p. 475 ff. The latter is

also a protective financial policy instrument.

31

• establishing rules providing for increased capital requirements if doubtful

loans are included in a bank’s portfolio,55

• indirectly limiting ‘financial pressure’ on consumers by imposing an obligation

on banks not to grant loans to consumers whose debt servicing absorbs more

than a reasonable amount (i.e. 40%) of their monthly income,

• establishing the principle of responsible lending, and

• adopting rules on ‘consumer bankruptcy’.

It should be noted that the first three (3) categories of measures are not exclusively

aimed at the prevention of household over-indebtedness, but also safeguarding the

stability of the banking system. Furthermore, the first four (4) categories of measures

refer to the (ex ante) prevention of over-indebtedness, and the fifth to addressing its

consequences (ex post).

2.3.7 Combating the use of the financial system for the purpose of economic crimes

Finally, the sixth policy objective for regulatory intervention in the financial system

consists in combating (i.e. preventing and containing) the use of the financial system

for the purpose of economic crimes, such as money laundering, terrorist financing and

payment instruments fraud.56

In order to achieve this policy objective, rules are

adopted with regard to:

• the prevention and containment of money laundering through the control of

transactions carried out (with a view to identifying ‘suspicious transactions’)

and the forwarding of information to the competent authorities,

• the prevention and containment of terrorist financing, and

• the prevention and containment of fraud in the use of payment instruments

(cards, in particular).

55

The regulatory framework on banks’ capital adequacy under the Basel Committee’s rules on

capital adequacy moves in this direction. See under Β 2 in Section 6 below.

56 See Dupuis-Danon (2005) and Blair, Walker and Purves (2009), pp. 487-488.

32

Table 1

Financial policy objectives and instruments

Policy objectives Policy instruments

1. Ensuring financial system

stability

1.1 Ensuring banking sector

stability

Components of the ‘bank safety net’ (for more

details see under B below)

• Rules on authorisation of banks

• Rules on micro- and macro-prudential

regulation of banks

• Rules on micro-prudential supervision of

banks

• Macro-prudential financial oversight

• Reorganisation, resolution and winding-up of

banks

• Establishment of deposit-guarantee schemes

• Lending of last resort

1.2 Ensuring capital market

stability • Rules on the authorisation of investment firms

• Rules on the micro-prudential regulation of

investment firms

• Rules on the micro-prudential supervision of

investment firms


• Rules on the sound operation of markets and

infrastructures for trading in financial

instruments

1.3 Ensuring insurance and

reinsurance sector stability • Rules on the authorisation of insurance and

reinsurance undertakings

• Rules on the micro- and macro-prudential

regulation of insurance and reinsurance

undertakings

• Rules on the micro-prudential supervision of

insurance and reinsurance undertakings


33

TABLE 1 (continued)



1.4 Ensuring financial stability in

globo, as regards financial

conglomerate activities

• Rules on the supplementary micro-prudential

supervision of financial conglomerates

• Ancillary micro-prudential regulation of

financial conglomerates

1.5 Ensuring the stability of

payment and settlement systems • Oversight

• Functional interventions

2. Ensuring investor protection

and capital markets integrity,

efficiency and transparency

2.1 Rules addressed to issuers of

transferable securities

• Reporting of information to investors

• Corporate governance rules for listed

companies

• Listing particulars for issuers

• Prospectus requirements for issuers

• Periodical dissemination of information by

listed companies

• Protection of rights and interests of minority

shareholders in the case of takeover bids

• Accounting and auditing standards for listed

companies

2.2 Rules addressed to investment

firms and banks providing

investment services

• Adequate internal organisation with regard to

the provision of investment services

• Stricto sensu investor protection

2.3 Rules addressed to UCITS

and hedge funds management

companies

2.3.1 Rules addressed to UCITS

management companies

• Authorisation and supervision of UCITS


• Segregation and protection of investors’ assets

• Dissemination of information by UCITS


• Criteria for the evaluation of UCITS assets

and redemption of UCITS units

• Rules on the investment policies of UCITS

2.3.2 Rules concerning hedge

funds management companies

• Authorisation and supervision of hedge funds


• Rules on conduct of business

• Transparency requirements

34

TABLE 1 (continued)



2.4 Rules on the sound operation

of secondary markets

• Authorisation, conduct of business,

supervision and oversight of regulated

markets

• Transparency of transactions conducted in

secondary markets

• Combating market abuse (market

manipulation and insider trading)

• Oversight of systems for the clearing and

settlement of transactions

• Obligation to carry out clearing of OTC

derivatives through central counterparties

(CCPs) and obligation to record transactions

in these derivatives in central databases

2.5 Rules concerning credit rating

agencies and auditors

2.5.1 Rules concerning credit

rating agencies

• Supervision and registration in a register of

CRAs

• Conditions for the issuing of credit ratings

2.5.2 Rules relating to auditors • Supervision of auditors

• Quality requirements of audit standards

• Independence of auditors

3. Compensation of investors in

the event of suspension of the

operation of firms providing investment services

Establishment of explicit investor compensation

systems

4. Safeguarding the efficiency of

payment and settlement

systems

Oversight

5. Protection of the economic

interests of financial services consumers

5.1 Reducing information

asymmetry • Provision of adequate information to

consumers

• Prohibition of unfair commercial practices

• Financial education

5.2 Addressing the problem of

consumers’ limited negotiating

capacity vis-à-vis financial firms

• Rules on the control and prohibition of abusive

general terms of transactions

• Rules on safeguarding of specific consumer

rights after the conclusion of a contract

• Rules on facilitating consumer access to justice

(in-court/out-of-court)

35

TABLE 1 (continued)


5.3 Tackling consumer over-

indebtedness • Rules on responsible lending

• Rules on consumer bankruptcy

6. Combating the use of the financial system for the purpose

of economic crimes

Rules on the prevention and containment of:

• money laundering

• terrorist financing

• fraud in the use of payment instruments

36

Excursus: The components of the ‘bank safety net’

1. Introductory remarks

As already mentioned in the preceding subsection, the need for regulatory intervention

in the banking system is aimed at protecting its stability against the risk of

simultaneous or successive bank authorisation withdrawals. Safeguarding the stability

of the banking system, by preventing the above-mentioned spillover effects between

banks, renders necessary the adoption of various preventative measures, as well as

protective (or ‘crisis management’) policies.

Public authorities are greatly concerned about the vulnerability of the banking system

to economic and financial shocks and the preservation of its stability and soundness. In

order to prevent the emergence of negative externalities in the form of contagious bank

failures, they command a broad range of instruments which comprise the ‘bank safety

net’. According to Guttentag and Herring (1988), the components of the bank safety

net can be viewed as “a series of circuit breakers designed to prevent a shock to one

part of the financial system from surging through the financial network to damage the

rest of the system.”57

Even though the various components of this ‘crisis prevention

and crisis management system’ are somewhat complementary,58

each has its own

contribution to the protection of the banking system’s stability.

Apart from the components to be analysed below, the bank safety net also includes

measures by monetary authorities to eliminate any tendencies for excessive cash

withdrawals on the part of depositors in periods of crisis. This measure is inextricably

linked with the conduct of monetary policy and is a manifestation of the close

relationship between the operation of the banking and that of the monetary system.

2. Authorisation requirements

The first component of the bank safety net consists in laying down certain conditions,

whose fulfilment is a sine qua non for taking up a banking activity. Authorisation

requirements serve a screening function. They are aimed at preventing market entry by

private or legal persons whose management could lead to heavy losses in a bank and

impair the reputation of the banking system as a whole.59

Authorisation requirements

also ensure that a banking firm has sufficient financial resources to finance its initial

investments and withstand temporary losses.

Standard requirements imposed by supervisory authorities in the context of the

licensing procedure are the following:

• an initial minimum capital requirement,60

• requirements for the organisational structure of the bank,

• specific fit-and-proper criteria for major shareholders, and

• similar criteria for bank managers (the ‘four-eye principle’).61

57

See Guttentag and Herring (1988), p. 9.

58 Ibid., p. 8.

59 Ibid., pp. 12-13.

60 The first function of bank capital consists in representing shareholder equity, the second

being to serve as a loss buffer.

37

3. Micro-prudential banking regulation and supervision

3.1 Micro-prudential regulation

3.1.1 Content

Micro-prudential banking regulation seeks to enforce the safety and soundness of

banks by limiting their exposure either to insolvency or to liquidity risk (which might

lead to insolvency under certain circumstances)62

and by curbing their risk

vulnerability through:

• limiting their exposure to various categories of financial risks, as well as all

other risks associated with the conduct of their business, to which they might

be exposed, and

• increasing their capacity to absorb losses incurred in the event of such risks. 63

Hence, micro-prudential regulation serves a failure-preventing function, by preventing

the failure of individual banks, the risk of contagion and subsequent negative

externalities in terms of confidence in the financial system as a whole.

3.1.2 Policy instruments

Micro-prudential banking regulation is mainly conducted through the establishment of

rules on:

• banks’ capital adequacy against exposure to risks associated with the conduct

of their business,

• provisions for future exposure to risks,

• portfolio diversification (namely rules on ‘large exposures’),

• a leverage ratio,

• liquidity ratios,

• rules on the organisation and operation of in-house risk management units,

and

• rules for imposing limits on banks’ holdings in other companies, mainly

outside the financial system.64

61

See OECD (1987), pp. 46-49.

62 See Guttentag and Herring (1988), pp. 34-45) are of the view that supervisors should focus

more on the potential exposure of banks to insolvency, because it is such banks at risk of

insolvency that seriously threaten the stability of the system.

63 In this respect, it should be pointed out that the measures taken by banks themselves in

managing the risks involved with their portfolio are aimed at the same objective. Indeed, quite

often, supervisory authorities issue guidelines to banks regarding the management of their risk

exposure.

64 Micro-prudential banking regulation and its policy instruments (as well as its correlation with

micro-prudential supervision) are discussed in greater detail in Barth, Caprio and Levine

(2006), pp. 110-132 (a study published before the outbreak of the recent (2007-2009)

international financial crisis). On the concept and necessity of introducing a leverage ratio, see

Hildebrand (2008).

38

3.2 Micro-prudential supervision

3.2.1 General remarks

Micro-prudential banking regulation can only be effective if coupled with micro-

prudential supervision by competent authorities, with a view to:

• assessing the quality of banks’ portfolios, and

• ascertaining compliance with the applicable regulatory framework, in order to

prevent banks’ exposure to exceptional, unmanageable risk levels.

Micro-prudential supervision is conducted by means of:

• regular and extraordinary examinations by supervisory authorities themselves,

and

• audits of annual accounts (along with other financial and organisational

aspects) by external auditors on behalf of supervisory authorities.

Supervisory authorities may also request from banks to elaborate recovery and

resolution plans on how to deal with financial stress.65

3.2.2 Institutional aspects

There are three (3) alternative approaches to the institutional structure of micro-

prudential banking (and, more generally, financial) supervision.66

Irrespective of the

approach opted for, the established authorities have the competence to supervise and

impose sanctions, but also to regulate to a certain extent.67

Hence, supervisory

authorities are also regulatory authorities.

(a) In accordance with the ‘sectoral approach’, a different supervisory authority is

entrusted with the authorisation and micro-prudential supervision of financial firms for

each of the three main sectors of the financial system (banking sector, capital markets,

and private insurance sector).68

One of these authorities is also responsible for

conducting ancillary micro-prudential supervision of financial conglomerates.69

65

See on this Avgouleas, Goodhart, and Schoenmaker (2010).

66 For an overview of these approaches, see Lastra (2006), pp. 324-328, Group of Thirty

(2008) and, more recently, Central Bank Governance Group (2011). As regards different

governance practices of financial regulatory and supervisory agencies in 103 IMF member

countries before the recent (2007-2009) international financial crisis, see Seelig and Novoa

(2009).

67 Regulatory competence may be legislatively assigned to supervisory authorities on the basis

of a general procurement or on an ad hoc basis.

68 As already mentioned under B in Section One above, payment and settlement systems are the

fourth main sector of the financial system.

69 Typically, this competence is assigned to the supervisory authority responsible for the

supervision of a group’s parent company or, in the case of horizontal groups, the supervisory

authority responsible for the micro-prudential supervision of the group’s largest company.

39

The task of checking compliance with rules on ensuring capital market efficiency is

assigned to the supervisory authority responsible for the authorisation and micro-

prudential supervision of investment firms. As regards banks providing investment

services, an issue arises regarding the competence for their micro-prudential

supervision in terms of their compliance with rules on ensuring capital market

efficiency and investor protection, given that such supervision can be carried out either

by the supervisory authority responsible for the authorisation and micro-prudential

supervision of banks, or by the capital market supervisory authority.

As regards banks, the supervisory authority may be:

• either the central bank, namely the monetary authority,70

or

• an administrative authority.

Micro-prudential supervision of banks has historically been the main competence of

central banks in many countries (with the exception of certain central European states),

but over the twenty years before the crisis, an increasing number of states around the

world have been entrusting independent authorities, other than central banks, with the

(exclusive or concurrent) competence for this supervision.71

However, following the

outbreak of the recent (2007-2009) international financial crisis, many independent

supervisory authorities were found to have failed in effectively discharging their tasks

and it was ascertained that micro-prudential supervision of banks is closely

intertwined with the competence of central banks to ensure the stability of the financial

system, thus leading many states (such as Germany and the United Kingdom) to review

their practices and include micro-prudential supervision of banks in the tasks assigned

to their central banks.72

Under a ‘modified sectoral approach’, there are only two supervisory authorities:

• one for the two main sectors of the financial system (usually the banking sector

and capital markets), and

• the other for the private insurance sector.

(b) Under the ‘full integration approach’, a single supervisory authority is

exclusively competent for the micro-prudential supervision of financial firms operating

in the three main sectors of the financial system. Usually, this supervisory authority is

an administrative authority, even though in certain countries (such as Ireland) the task

is assigned to the central bank.

(c) Finally, under the ‘functional approach’, responsibilities are allocated between

two supervisory authorities, as follows:

70

In the majority of economically developed states, central banks are independent authorities

(in personal, institutional, financial, and operational terms). For more details on the concept and

extent of central bank independence, see Amtenbrik (1999) and Central Bank Governance

Group (2009), chapters 5 and 6.

71 For a more detailed analysis of arguments for and against the separation of monetary and

supervisory competencies of central banks, see – from an extensive literature – Goodhart and

Schoenmaker (1993), and Goodhart (2000a). As regards trends in the 1990s and 2000s, up

until the onset of the recent crisis, see Herring and Carmassi (2008).

72 See Davies and Green (2008), pp. 187-213, with extensive bibliographical references.

40

• the first is competent for the authorisation and micro-prudential supervision of

financial firms operating in the three main sectors of the financial system, as

well as for ancillary supervision of financial conglomerates, and

• the second is competent for checking compliance with provisions on ensuring

capital market efficiency and investor protection.

In this case, the former may be either the central bank or an administrative authority,

and the latter is always an administrative authority.

4. Macro-prudential policies73

4.1 Content

The term ‘financial macro-prudential policies’ includes the set of (mainly preventive)

policies adopted and implemented in order to limit the financial system’s exposure to

‘systemic risk’ arising from factors not associated with individual financial firms or

individual markets and structures of the financial system, but of a more general

nature.74

Macro-prudential policies seek to address the two above-mentioned

dimensions of systemic risk:75

(a) The first is the ‘time dimension’, namely the systemic risk’s evolution through

time. In this regard, macro-prudential policies seek to strengthen the resilience of the

financial system at times of economic downturn by limiting procyclicality, which can

accentuate systemic risk because of the interactions developed either within the

financial system, or between the financial system and the real sector of the economy.76

The objective is to ‘lean against the financial cycle’,77

given that it has been historically

proven that failures caused by credit expansion are generated on the upside of the

economic cycle, but become apparent on the downside, especially when the economic

cycle is in a downturn. More specifically, during economic upturns, there are typically:

large credit expansion (with increased numbers of extended loans and credits),

significant rises in real property, security and other asset prices, significant leveraging

of banks 78

and money and capital markets, as well as maturity mismatches of assets

and liabilities in the balance sheet of banks.

73

As regards this issue, which came to the forefront particularly in the wake of the recent

(2007-2009) international financial crisis, see Committee on the Global Financial System

(2010a), Financial Stability Board, International Monetary Fund and Bank for

International Settlements (2011) Macro-prudential policy tools and frameworks, February,

available at: http://www.financialstabilityboard.org/publications/r_1103.pdf, and Galati and

Moessner (2011).

74 See Financial Stability Board, International Monetary Fund and Bank for International

Settlements (2011), section 2. 75

See Committee on the Global Financial System (2010a), Annex 1, section 2, and Financial

Stability Board, International Monetary Fund and Bank for International Settlements (2011), section 2. 76

For a detailed overview of contagion channels between the financial system and the real

sector of the economy, see, in the secondary sources, Basel Committee on Banking

Supervision (2011), and Galati and Moessner (2011), section 5.2.

77 See Committee on the Global Financial System (2010a), section 2.1.

78 ‘Leverage’ is the (non-risk based) ratio of a bank’s total assets (including off-balance sheet

items) to its regulatory capital.

41

In the absence of proper protection of the financial system during a downturn,

problems may emerge for financial firms and they can be aggravated by the need for

deleveraging. Usually, under such circumstances the capacity to extend loans and

credit is limited, impacting negatively on the real sector of the economy.

(b) The second dimension is the ‘cross-sectional dimension’, namely allocation of

risk in the financial system at any given point in time. In this case, macro-prudential

policies are aimed at limiting systemic risk concentration, which could result:

• either from the concurrent exposure of multiple financial institutions to risks

arising from similar exposures, or

• from the interconnectedness of such institutions (and the contagion of

problems among them), especially if they are systemically important financial

institutions (‘SIFIs’).79

4.2 Policy instruments


A mixture of instruments is used in order to meet the objective of addressing these two

dimensions of systemic risk. In more detail:

(a) First of all, it is necessary to set up institutions and procedures for ensuring

macro-prudential financial oversight, thus enabling the identification, measurement and

assessment of systemic risk.80

Macro-prudential oversight of the financial system by central banks is gradually

becoming a common instrument to achieve financial stability. It is aimed at limiting

distress for the financial system as a whole and thus protect the overall economy

against significant losses in real output.

Risks to the financial system may in principle stem from the failure of a single financial

institution, if its size is large in relation to the state concerned and/or if it has multiple

branches/subsidiaries in other states, but –the much more important – international

systemic risk arises from exposure of several financial institutions to the same risk

factors.81

Macro-prudential analysis must therefore pay particular attention to

common or correlated shocks and shocks to those segments of the financial system that

trigger spillover effects.

79

Regarding the delineation of the definition of SIFIs, see Huertas and Lastra (2011), pp.

255-258 (who use the term ‘systemically significant financial institutions’ or SSFIs). 80

See Financial Stability Board, International Monetary Fund and Bank for International

Settlements (2011), section 3.

Regarding this issue in the European Union, the European Systemic Risk Board was instituted

and entered into operation on 1 January 2011, pursuant to Regulation (EU) No 1092/2010 of the

European Parliament and of the Council of 24 November 2010 “on European Union macro-

prudential oversight of the financial system and establishing a European Systemic Risk Board”

(OJ L 331, 15.12.2010, pp. 1-11), and Council Regulation (EU) No 1096/2010 of 17 November

2010 “conferring specific tasks upon the European Central Bank concerning the functioning of

the European Systemic Risk Board” (OJ L 331, 15.12.2010, pp. 162-164).

81 On the content of macro-prudential financial oversight see, inter alia, Borio (2003) and

Clement (2010).

42

Macro-prudential oversight cannot be meaningful, unless it can somehow impact on

supervision at the micro-level, whilst micro-prudential regulation and supervision

cannot effectively safeguard financial stability without adequately taking account of

macro-level developments.

(b) Moreover, it is necessary to adopt macro-prudential regulations:

• directed at banks and/or other financial firms, as well as money and capital

markets, and

• differentiated depending on the systemic risk dimension they are called upon

to address.82

(c) Finally, it should be noted that oversight of payment and settlement systems

has now been formally established as a necessary instrument to address the systemic

risk’s cross-sectional dimension.83

4.2.2 Macro-prudential regulations to address the systemic risk’s time dimension

The policy instruments used in order to achieve the objective of addressing the

systemic risk’s time dimension, and notably the financial system’s procyclicality issue,

mainly include the following macro-prudential regulations:

(a) First of all, it is necessary to adopt rules imposing an obligation on banks to

set:

• capital conservation buffers,

• countercyclical buffers, and

• forward-looking provisions.84

(b) The second, ancillary measure, concerns the development of appropriate

micro-prudential regulations such as requiring banks to maintain leverage and liquidity

ratios (as mentioned under 3.1.2 above), thus making it possible to address the

systemic risk’s time dimension.

(c) Other prudential measures are also included:

• either affecting the prices of banking services (‘price-based prudential tools’),

such as the introduction, in the upward phase of the economic cycle, of

stricter risk weights to calculate the capital adequacy ratio (CAR) on specific

exposures (e.g. loans denominated in foreign currency, mortgage loans or

loans for the purchase of securities and positions in derivatives),

• or affecting the quantity of services provided (‘quantity-based prudential

tools’), such as time-variation, depending on the phase of the economic cycle,

the loan-to-value ratios of mortgage loans, and the debt-to-income ratios in

mortgage and consumer loans.

82

See Committee on the Global Financial System (2010a), section 3, and Galati and

Moessner (2011), section 4. For an overall review of how these measures were adopted, both at

a national and international level, see Financial Stability Board, International Monetary

Fund and Bank for International Settlements (2011), pp. 5-9.

83 See Committee on Payment and Settlement Systems (2005) “Central bank oversight of

payment and settlement systems”, May, available at: http://www.bis.org/publ/cpss68.htm.

84 See Brunnenmeier et al. (2009), chapter 4.

43

(d) Finally, the systemic risk’s time dimension (and notably the procyclicality

caused by leveraging capital markets) can be addressed by stricter rules imposing

margins and haircuts on positions in securities and derivatives during economic

upturns.85

4.2.3 Macro-prudential regulations to address the systemic risk’s cross-sectional

dimension

The policy instruments used to attain the objective of addressing the systemic risk’s

cross-sectional dimension mainly include the following macro-prudential regulations:

(a) The key measure is to adopt rules on the resolution of systemically important

banks (and other categories of financial firms) exposed to insolvency, which will

enable (in part or in whole) the suspension of their operations without:

• jeopardising the stability of the banking (and, more generally, financial)

system, and

• making state intervention necessary for their bailout, on the pretext that they

are too-big-to-fail.

(b) The second measure is ancillary and consists in adopting appropriate micro-

prudential regulations (such as rules to protect banks against exposure to credit risk

from specific portfolio items, included within the regulatory framework on capital

adequacy), thus making it possible to address the systemic risk’s cross-sectional

dimension.

(c) Measures are also taken to strengthen infrastructures in relation to OTC

derivatives, notably the obligation for clearing OTC transactions through central

counterparties.86

(d) Finally, addressing the systemic risk’s cross-sectional dimension can also be

achieved with the introduction of restrictions on the range of services provided by

systemically important financial institutions (especially banks).87

5. Reorganisation, recapitalisation, resolution and winding-up of troubled banks

5.1 General considerations

In light of the above, the key difference between the banking sector and other sectors

of the financial system (as well as other sectors of the economy), which renders

imperative the adoption of measures on micro- and macro-prudential regulation of

bank operation, lies in the fact that an individual bank’s insolvency may (under certain

circumstances associated with depositor behaviour, the economic conjuncture, banks’

financial structure, and the state’s involvement in the banking system):

85

See Committee on the Global Financial System (2010b).

86 See the report of the Financial Stability Board (2010) “Implementing OTC Derivatives

Market Reforms”, October, available at: http://www.financialstabilityboard.org/publications/

r_101025.pdf.

87 See Financial Stability Board, International Monetary Fund and Bank for International

Settlements (2011), p. 9, paragraph 5(iv).

44

• lead to the default of other banks (through various channels, as mentioned

above) and, subsequently,

• destabilise the banking system and thus have a serious negative impact on the

functioning of the real economy.

5.2 Reorganisation

In this context, there is a need for the adoption of crisis management policies with

regard to banks exposed to insolvency. Initially, supervisory authorities can prevent an

unviable bank from becoming insolvent, to the detriment of its depositors and public

confidence in the financial system, by reorganising it.88

The means to this end include:

• replacing the bank’s management and appointing an administrator,

• arranging mergers with healthy banks, and

• imposing an increase in the bank’s own funds (subject to limitations set by

company law with regard to the rights of existing shareholders).89

It has been rightfully argued that supervisory or other competent authorities have been

chronically unable to reorganise banks before their net worth has been depleted.

Guttentag and Herring (1987b) identify three reasons for this slow response on the

part of the authorities:90

(i) Firstly, there is a lag between the time when the bank becomes unviable and

the moment when the authorities recognise this (the ‘recognition lag’).

(ii) There is a second lag extending from the time when the authorities

recognise the non-viability of a bank until they decide to terminate it (the

‘reaction lag’).

(iii) Finally, the ‘implementation lag’ is the period between the time when the

authorities initiate the procedure for closing down an unviable bank and the

moment when the bank actually terminates its operation.

5.3 The 'regulatory trilemma' with regard to insolvent banks

To the extent that reorganisation measures prove ineffecive, the following 'regulatory

trilemma' emegres with regard to insolvent banks:

(a) The first option is the government bailout of banks (recapilisation by public

funds), the authorisation withdrawal of which would have a serious systemic impact

(‘taxpayers money solution’).91

88

See Guttentag and Herring (1988), pp. 15-16, and Santomero and Hoffman (1998).

89 On this issue, see Claessens, Herring and Schoenmaker (2010), as well as individual

contributions to the collective volume Lastra (2011 ed.), both including further references. For

the detailed concept and content of ‘resolution’, see Huertas and Lastra (2011), pp. 258-267. 90

See Guttentag and Herring (1987b), pp. 48-50.

91 See Padoa-Schioppa (2000), pp. 24-26.

45

(b) In order to ward off the moral hazard in case of ‛too-big-to-fail’ or

‛systemically important’ banks, the failure/closing down of which would either

endanger the stability of the banking (and, more generally, financial) system or require

a government bailout, the following resolution tools may be put in place:

(i) sell all or part of a failing bank’s business to another bank, and simultaneously

withdraw the former’s licence and liquidating it,

(ii) transfer ‛clean’ assets and essential functions onto a publicly controlled

‛bridge bank’, again with a simultaneous licence withdrawal of the failing bank

and its liquidation,

(iii) creating a 'bad bank', to which 'toxic assets' of banks would be transferred, in

order to carry out their restructuring, and/or

(iv) activate the 'bail-in clause' for depositors, bondholders and shareholders, by

order of seniority.

The resolution fund ‒ necessary in this case in order to provide funding ‒ may be a

separate fund of the deposit guarantee scheme or a totally separate entity, funded, in

principle, by the banking sector.

(c) Failing all the above, winding-up procedures are put into place following the

withdrawal a bank’s operating license. Nevertheless, in this case (as opposed to the

case of resolution (see under (b) above), the deposit guarantee system must be

activated.92

6. Deposit guarantee

6.1 Contributions of deposit-guarantee schemes

The establishment of a deposit guarantee scheme is, first of all, necessary for the

protection of small depositors. The concept of ‘small depositor’ refers to those

categories of savers who, given their limited knowledge, are insufficiently informed in

order to be in a position to assess the solvency of the banks entrusted with their savings.

This category of savers usually place a significant share of their total savings in their

bank accounts (inter alia, for conducting payments), and they cannot be expected to

discipline the market by behaving as ‘investors’.93

Deposit-guarantee schemes, however, also act as buffer mechanisms in the event of a

banking crisis, contributing to ensuring the stability of the banking system.

92

For more details on deposit system guarantees, see below, under 2.6.

93 Small depositors must be able to have access to safe financial instruments for their payments

and savings. Taking into account that banks – just like all other enterprises operating in

accordance with market rules – are exposed to insolvency risk (resulting in authorisation

withdrawal), it is through regulatory intervention, i.e. the establishment of deposit guarantee

schemes, that bank deposits become a relatively safe financial instrument.

It is worth noting, however, that if the bail-in resolution tool were to implemented in general (as

was the case with Bank of Cyprus in March 2013), large depositors would in fact be treated as

investors.

46

The failure of coordination among depositors under adverse market conditions,

leading to runs and panics, can be addressed either by suspending the convertibility of

deposits into cash, or by the establishment of deposit-guarantee schemes. As a rule,

such a scheme is exclusively funded by bank contributions (usually without government

and/or central bank participation, only limited to a part in the system’s administration),

which guarantees the default-free character of deposits in the event of bank failure.

The establishment of deposit-guarantee schemes is aimed at eliminating the incentive

for massive withdrawals from individual banks or, in the worst-case scenario, a run on

the entire banking system.

In particular, the system is assigned with the task of compensating depositors in the

event of their bank’s closure and performs a dual function:

(a) On the one hand, it ensures compensation of small and unsophisticated

depositors by the guarantee fund, if their bank is unable to convert their deposits into

cash.94

This first contribution lies in eliminating the incentive for hurried deposit

withdrawals from banks facing real or alleged liquidity and solvency problems and/or

the eventuality of suspension of operations. If a bank cannot meet depositor claims, the

incentive for such withdrawals is eliminated by the existence of a body responsible for

reimbursing each depositor to an amount equal to his/her deposits (normally up to a

certain ceiling, known as the ‘coverage level’).

Where there is no adequate micro-prudential supervision and a bank is particularly

exposed to risks associated with the business it conducts in the banking, but also

money and capital markets, and if its own funds do not suffice to absorb losses, the

emergence of such risks might lead to a decline in the present value of the banking

book and, in a worst-case scenario, render the bank insolvent. In this case, the

dissemination of news � even uncorroborated � regarding a potential, temporary or

definitive termination of a bank’s operation might urge depositors to rush to withdraw

their deposits from the given bank.95

The existence, therefore, of a deposit guarantee

scheme removes the incentive for depositor panic after the spreading of news on the

financial condition of individual banks.

(b) On the other hand, a deposit guarantee scheme protects the banking system

from a bank run by panic-stricken depositors. Thus, such schemes do away with some

of the inherent problems leading to runs and panics. The second contribution of

deposit-guarantee schemes to the stability of the banking system is that they act as a

buffer against the spreading of panic conditions across the entire banking system

through indiscriminate cash withdrawals from most banks that would result in the

depletion of banks’ net worth. This is done by guaranteeing depositor coverage across

all banks and preventing healthy banks from turning ‘bad’ due to their objective

inability to meet the widespread demand for deposit withdrawals.

94

See Carisano (1992), p. 17.

95 The lack of coordination of depositor actions is justified by the particuliarity of bank deposits

as financial instruments: given that depositor claims have a stable market value which does not

vary in accordance with the fluctuating value of a bank’s portfolio, those depositors who

withdraw in time receive cash payments to the full nominal value of their deposits, while others

receive nothing. If the nominal value of bank deposits was marked to market on a daily basis,

reflecting their present value (which is a function of the present value of a given bank’s

portfolio), there would be no threat of uncoordinated withdrawals on the part of depositors. In

this case, the loss from the decline in portfolio value would be equally incurred by each

depositor (as is the case with unit-holders of Undertakings for Collective Investment in

Transferable Securities).

47

Depositor panic, which might be caused by more than one reasons, is, as mentioned

above, an occurrence that results in mass depositor withdrawals (runs on their banks).

Under such circumstances of mass withdrawals even the most solvent bank would not

be in a position to meet credit obligations, other than borrowing funds at particularly

high rates on money/capital markets or from its central bank or if it liquidates its

assets at unfavourably low prices.

As a component of the bank safety net, a deposit guarantee scheme seeks to curb

incentives for depositor involvement in bank runs and panics by guaranteeing the

transformation of illiquid bank assets into cash and maintaining public confidence in

the banking system.

A deposit guarantee scheme is characterised by five (5) main attributes:96

(i) It assumes an explicit obligation; when a bank fails, it is required to

compensate the bank’s depositors to the extent that their financial claims are

covered.

(ii) The guarantee provided by the scheme is non-discretionary; once the

operation of the bank has been suspended, depositors have a direct claim for

compensation against the deposit guarantee scheme, irrespective of the

reasons why the bank has failed.

(iii) Deposit guarantee is an ex-ante ‘safe device’ for depositors; it makes them

certain of compensation, thus curbing incentives for bank runs and panics.

(iv) The level of protection offered by the scheme is usually limited; there is a

ceiling on intervention depending on the amount of covered deposits and

guarantee percentage.

(v) The cost of bank failure is incurred by the banking system itself (‘no

taxpayers’ money solution’), as the deposit guarantee scheme is funded

either ex ante, through contributions of its members, or ex post, through

payment of the amounts required for the compensation of depositors if a

bank’s license were to be revoked.97

6.2 Problems arising from the operation of deposit-guarantee schemes

The obviously positive contribution of deposit-guarantee schemes to public confidence

in the banking system may be mitigated, in reality, by the adverse effects of its

operation. There are two main negative effects of deposit-guarantee schemes:

• banks’ exposure to moral hazard (see under 6.2.1 and 6.2.2 below), and

• the ‘too-big-to-fail’ problem (under 6.2.3).

96

See Carisano (1992), pp. 22-29.

97 It should be pointed out that a body responsible for managing a deposit guarantee scheme

may also have supervisory competencies on banks, the deposits of which it insures, as in the

case of the Federal Deposit Insurance Corporation (FDIC) in the United States. See Carisano (1994), pp. 156-161.

48

6.2.1 Exposure to moral hazard in terms of portfolio riskiness

Participation in a deposit guarantee scheme enables bank managers to finance risky

assets with partially insured liabilities. Excessive risk-taking is also made possible by

the lack of incentives for insured depositors to monitor and control their banks. In view

of all these reasons, it is argued that the existence of deposit guarantees undermines the

safety of banks and creates the need per se for enhanced prudential supervision.98

Hence, the first adverse effect is that participation in a deposit guarantee scheme gives

banks an incentive to take greater risks than they would have done if their depositors

were uninsured. Such behaviour on the part of banks, also known as exposure to moral

hazard, is a rational reaction to the behaviour of uninsured depositors who seek

protection from competent authorities rather than banks. This also applies to uninsured

depositors who consider that they must be compensated by the competent authority ex

post, once the payment procedure enters into effect.

Inadequate market discipline can be explained by the fact that depositors, either

explicitly insured or expecting to be compensated ex post after their bank’s

authorisation is withdrawn, do not have an incentive to monitor the development of

their bank’s financial condition. Therefore, depositors do not request (as would

normally happen in a market without deposit guarantees) higher interest rates from a

bank with relatively lower solvency. Banks’ tendency to take on greater risks if (or

precisely because) they participate in deposit-guarantee schemes is even stronger in

the absence of any correlation between paid premia and the riskiness of investment

decisions (if applicable). The lack of variable premia means that investment proposals

can easily be presented to the market as equally safe and increases bank exposure to

insolvency as a result of greater exposure to credit risk (as well as other risks).

6.2.2 Exposure to moral hazard in terms of capital adequacy

The second adverse effect of deposit-guarantee schemes regards the exposure of

participating banks to moral hazard, as far as the level of their own funds is concerned.

Since insured depositors do not have an incentive to control their bank, the latter tends

to reduce its capital adequacy ratio (which supposedly helps increase its solvency and,

hence, bolster public confidence), concurrently reducing its ‘antibodies’ for absorbing

losses in the event of risk occurrence.

In this case, a spillover mechanism may be set in motion. The smaller a bank’s capital

base, the greater its tendency to take on extensive risks, given that the profits from

higher returns go to shareholders, whereas losses are rolled over to the deposit

guarantee scheme.

98

Alternative means for encouraging proper portfolio management in the presence of deposit

guarantees are market-value accounting, risk-based deposit insurance premiums and radical

structural solutions. For a more detailed overview of these alternatives, see Carisano (1992), pp.

128-151.

49

6.2.3 Differential treatment of banks deemed ‘too big (to be left) to fail’

The ex post treatment of small and large banks participating in a deposit guarantee

scheme can be unequal under given circumstances. Governments may feel urged to

bail out depositors of large failing banks, if these are considered ‘too big to fail’ (or,

more accurately, ‘too big to be left to fail’), due to the extent of the losses they would

cause to their creditors. Hence, depositors in large banks may be covered ex post more

comprehensively than those of other banks.99

By contrast, small banks fully assume the

losses incurred as a result of an insolvency decision on the part of supervisory or

judicial authorities. Such behaviour by the competent supervisory authority can be

explained by the fact that if a big bank’s authorisation were to be withdrawn, the risk

of spillover effects in the banking market would be severe.

7. Last-resort lending

Last-resort lending is the provision of liquidity assistance by monetary authorities to

banks experiencing difficulties with converting deposits into cash because of an

unexpected increase in cash needs.100

Monetary authorities may intervene in their

capacity as ‘lenders of last resort’ in order to address a solvent bank’s extraordinary

liquidity needs, so as to avoid its insolvency in the event of a potentially extensive,

albeit temporary, exposure to liquidity risk.101

This form of intervention is at the bottom of the list of circuit breakers which make up

the ‘bank safety net’, but has historically been the first to be used by monetary

authorities whenever they attempt to manage financial crises.102

Lending of last resort

(LLR or emergency liquidity assistance) performs a dual function:

• on the one hand, it enables solvent banks to control losses resulting from an

abrupt exposure to liquidity risk and prevents the development of illiquidity-

caused solvency problems, and

• on the other hand, it prevents the closure of banks suddenly exposed to

liquidity risk103

and thus controls the negative impact of their failure on the

economy.

99

For instance, this was the case of depositors with two big failed US banking institutions,

Continental Illinois Bank and the Bank of New England (defunct in 1984 and 1991,

respectively), who received compensation for the entirety of their claims.

100 See Guttentag and Herring (1983), p. 4.

101 Such a responsibility is assigned to the central bank as a result of operational synergies

between the conduct of monetary policy and the oversight of payment systems.

102 This circuit breaker is closely linked to the conduct of monetary policy and provides a good

manifestation of the close links existing between the monetary and the financial system.

103 See Guttentag and Herring (1987a), pp. 163-165.

50

In theory, a precondition for recourse to last-resort lending is for a bank to be

solvent.104

But in reality, despite the fact that LLR is meant to be confined to solvent

banks facing a liquidity shortage, loans (always under ‘adequate’ collateral) can also be

extended to undercapitalised banks, depending on how a central bank assesses general

market conditions. Amidst a generalised crisis, the latter may even be tempted to

support a bank whose solvency is known to be doubtful, in an attempt to avoid

contagious effects.105

The power of central banks to assume the function of lender of last resort can only be

substantiated interpretatively. This is due to the fact that, in accordance with the

‘principle of constructive ambiguity’,106

no state has explicit legislative provisions

granting such competence to the central bank, given that such provisions would:

• by themselves put the stability of the banking system at greater risk due to

banks’ greater exposure to moral hazard, and thus insolvency,107

and, as a

result,

• require stricter – than generally required – micro-prudential regulations for the

prevention of banks’ exposure to risks undertaken in the conduct of their

business.108

When comparing the last-resort lending function to deposit insurance schemes, the

following differences are evident:109

(i) Since the liquidity provided by the central bank to a failing bank is not

contingent, this function is discretionary; it depends, in principle at least, on

the central bank’s assessment of the solvency of the bank experiencing

liquidity strains.

(ii) The position of depositors is ambiguous, since they cannot be a priori

certain whether the central bank will intervene or not.

(iii) The liquidity provided by the central bank in its function as lender of last

resort has no constraints; in extremis, it can be limitless.

104

See Guttentag and Herring (1987a), pp. 163-165. Under European law, the provision of

liquidity to insolvent banks also goes against rules relating to the prohibition (in principle) of

state aids. For a more detailed discussion, see Smits (1997), pp. 270-271, and Lastra (2000), pp.

207-208.

105 Guttentag and Herring (1987a), p. 164) list numerous examples on this situation. The

current eurozone fiscal crisis provides another striking example.

106 According to Herring and Litan (1995), pp. 126-131, the ‘constructive ambiguity’ policy

has significant adverse effects, as it leads in reality to unequal treatment between big

(systemically important) and small banks. For a detailed overview of this subject, and more

particularly on the need for constuctive ambiguity (‘explicit last-resort lending function’), see

Guttentag and Herring (1987a), pp. 167-172.

107 This debate has been discussed by Bagehot already in 1873.

108 In the euro area, there is an emergency liquidity assistance, which (in accordance with what

was mentioned above) is not based on specific provisions of European or Member State law,

but is at the European Central Bank’s/National Central Banks’ complete discretion. See

European Central Bank (2007).

109 See Carisano (1992), pp. 22-29.

51

It should be pointed out that at times of crisis, there are two (2) alternatives to the

‘central bank money solution’, i.e. central banks acting as lender of last resort:

• provision of liquidity to failing banks through coordinated actions of the

private banking sector (‘private money solution’),110

and

• one-off, non-standard monetary policy measures by central banks.111

110

See Padoa-Schioppa (2000), pp. 24-26.

111 See Borio and Disyatat (2009), and Lenza, Pill and Reichlin (2010).

52

Table 2

The bank safety net: the instruments employed to safeguard the stability of the banking sector

(elements in italics denote instruments mainly used after the recent (2007-2009)

international financial crisis)

Policy instruments Competent institution Attributes of the institution

A. Preventative measures

Bank authorisation Supervisory authority Central bank or other

administrative authority

Micro- and macro-

prudential regulation of

banks

• Parliament

• Supervisory authority

• General regulator

• Upon delegation

Micro-prudential

supervision of banks

Supervisory authority Central bank or other


Macro-prudential oversight

of the financial system

(including the banking

sector)

Specific authority with

the active involvement of

the central bank (in most

cases)

Public authority

B. Crisis management measures

Reorganisation of banks Supervisory authority Central bank or other


Provision of state subsidies

to systemically important

banks (recapitalisation in

the context of a ‘taxpayers’

solution’)

Ministry of Finance

(funds being part of the

public debt)

Other ‘emergency’

instruments: debt

guarantees, asset purchase

and guarantees, liquidity

measures

Ministry of Finance and

central bank

Resolution of banks • Resolution authority

• Resolution fund

• Public authority

• A fund financed either by

the public sector (part of

the national debt) or by

credit institutions

Winding-up of banks Supervisory or judicial

authority

On an ad hoc basis

Deposit guarantee Deposit guarantee scheme Entity of private or public law

Last-resort lending Central bank or monetary

authority/agency

53

B. An introduction to European financial law

1. Definition of European financial law

1.1 Introductory remarks

The process of European financial integration has been put forward in the European

Union (hereinafter the “EU”) mainly during the last three decades, in stages, but at a

gradually intensified pace.112

This process, the starting point of which was the

complete fragmentation of its Member States’ financial systems,113

is constantly

evolving and aims at shaping a single financial area within its common market.

As mentioned in the previous section of this chapter (under 1), implementation of

financial integration is sought either through the regulatory framework established by

intergovernmental and/or supranational authorities, through self-regulation, or, finally,

through market-led initiatives. In the EU, implementation of financial integration

through the regulatory framework is sought (and achieved) with the adoption of the

provisions of those legal acts that constitute the sources of European financial law, a

subset of European economic law.114

1.2 The two alternative definitions of European financial law

Based on the definition of the concept and the two dimensions of financial integration

developed in section A of this chapter (under 1.2 and 1.3), the author considers that

European financial law can be defined in two alternative ways: stricro sensu (under a)

and lato sensu (under b).115

(a) According to the stricto sensu definition, European financial law is defined

as:“the set of provisions of secondary EU law aimed at the achievement of the EU’s

negative and positive financial integration, with a view to creating a single financial

area in the common market, positive financial integration relating to the achievement

at EU level of specific financial policy objectives”.

Consequently, the concept of the stricto sensu European financial law, based on a

functional approach, is demarcated on the basis of legal acts issued by the competent

institutions of the EU (hereinafter “EU institutions”) aimed at:

• on the one hand, materialising three of the EU law’s basic freedoms (capital

movement, freedom of establishment and freedom to provide services) in

relation to various categories of EU financial services providers, in the

context of negative financial integration, and

112

The annual reports of both the European Commission and the European Central Bank on

European financial integration offer a systematic overview of its progress.

113 The abovementioned problem of fragmented financial systems is intensified in the case of

the EU, given, in particular, its constant enlargement, and notably most recently to Member

States which had adopted market economy institutions as recently as in the 1990s.

114 Regarding the concept and content of European economic law, see Kellerhals (2006) and

Schwarze (2007).

115 The first definition is consistent with the abovementioned stircto sensu approach of positive

financial integration and the second consistent with the abovementioned lato sensu approach of

positive financial integration.

54

• on the other hand, adopting provisions on the implementation of individual

rationales for regulatory intervention in the financial system (according to

what was mentioned above under 2.2.1, section A of this chapter), in the

context of positive financial integration.

Even though the provisions in certain articles of the Treaty on the Functioning of the

European Union (hereinafter the “TFEU”)116

constitute the legal basis for issuing the

basic legal acts that constitute the sources of European financial law, primary EU law

contains no European financial law provisions (as opposed to European monetary

law). One could claim that the sole exception in this respect are the institutional

provisions of paragraphs 5 and 6 of Article 127 TFEU, which set the existing (para. 5)

and potentially future (para. 6) duty of the ECB and the European System of Central

Banks (hereinafter the “ESCB”) with respect to prudential supervision of financial

services providers, and ensuring the stability of the financial system in the EU.

(b) Under the lato sensu definition of European financial law, this is defined as:

“the set of provisions of secondary EU law aimed at the achievement of the EU’s

negative and positive financial integration, with a view to creating a single financial

area in the common market, positive financial integration relating in this case both to:

• the achievement at EU level of specific financial policy objectives, and

• the creation of a European financial contract and mortgage credit law”.

The provisions of European financial contract and mortgage law adopted by the time

this study was completed are piecemeal and, therefore, adoption of this definition is

deemed, at least for the time being, unnecessary. The relevant provisions of EU law,

based on Article 114 TFEU,117

are confined to:

• consumer protection law, and

• the field of provision of investment services.118

Initiatives have also been taken for a European civil law code, including provisions on

financial transactions, which, however, are far from being completed.119

Nevertheless,

the possibility cannot be ruled out that such provisions will become more systematic in

future, if EU institutions deem that the objective of full European financial integration

can be better achieved through them.

116

OJ C 83, 30.3.2010, pp. 47-199 (consolidated version).

117 According to the provisions of Articles 114 and 115 TFEU, the competent EU institutions

are entitled to issue legal acts covering a broad range, in the fields of not only administrative,

but also private and criminal law. See Kahl (1999), p. 1068.

118 In this context it is worth mentioning the initiatives undertaken by the European Commission

with the Green Paper “on Retail Financial Services in the Single Market” (COM(2007) 226

final), and with regard to European contract law.

119 See the Commission’s Communication “The European contract law and the review of the

acquis communautaire: the way forward” (COM(2004) 651 final), as well as its progress

reports on the “Common Frame of Reference”. On this, see Lando and Beale (2000), Lando,

Clive, Prüm, and Zimmermann (2003), Hartkamp, Heelnik, Hondius, Joustra, and du

Perron (eds.) (1998), Karsten and Petri (2005), p. 31 ff., Hondius (2004), p. 245 ff., Reich (2005), p. 383 ff., and Hesselink (2007), p. 323 ff.

55

The vast majority of the legal acts which constitute the sources of the European

financial law in force contain provisions consistent with the stricto sensu definition.

Accordingly, in the rest of the present chapter, the analysis will be confined to this

definition of European financial law, with specific emphasis on European banking law.

2. The branches of European financial law

2.1 General overview

Considering the above, and taking into account the financial policy objectives

mentioned in section A of this chapter (under 2), it is the author’s position that

European financial law contains seven (separate, albeit closely linked) branches:

• European banking law (see in more detail below, under 1.3.2),

• European capital markets law,

• European insurance law,

• European law on the supplementary supervision of financial conglomerates,

• European law on payment and settlement systems,

• European law on the protection of the economic interests of consumers of

financial services, and

• European law on combating the use of the financial system for the purpose of

economic crimes.

The approach adopted for the definition of the individual branches of European

financial law, especially as to the dimension of positive financial integration, is in this

case functional as well. In the author’s opinion, such an approach is not only suitable,

but also necessary, because, if the definition was based on an institutional approach

(focusing on the categories of financial services providers coming under the individual

scope of relevant provisions), there would be extensive overlapping between individual

branches.

As an indication, it should be mentioned that the regime governing the operation of EU

credit institutions (and partly also the branches of non-EU credit institutions

established in the EU) is also affected by the provisions of almost all the other

branches of European financial law (with the exception of European insurance law). If

the institutional approach were to be adopted, these provisions would need to be

concurrently included in European banking law (alternatively defined in this case as

“European law of credit institutions”), as well as in European capital markets law, if

they also apply to investment firms.

Moreover, given that EU credit institutions (and all other categories of EU financial

services providers) are also subject to the provisions of several other legal acts

constituting the sources of other branches of European economic law not included in

European financial law, if the functional approach was not pursued, these provisions

should also be included, for reasons of consistency, in European banking law.

56

2.2 In more detail: definition of European banking law and scope of application of its provisions

European banking law is defined as the set of provisions of European financial law,

aimed at the following two objectives:

• to materialise the two basic freedoms laid down in the TFEU, i.e., the freedom

of establishment (by setting up branches) and the freedom to provide services,

with regard to EU credit institutions,120

and

• to ensure the stability of the European banking system, which may be

disrupted due to the occurrence of contagious credit institutions’ failures.121

The overwhelming majority of the provisions of European banking law apply to EU

credit institutions.122

The term ‘credit institution’ has been defined to mean “any

undertaking whose business is to receive deposits or other repayable funds from the

public and to grant credits for its own account.”123

By virtue of Directive 2000/28/EC, the definition of credit institutions was broadened

in 2000 to include also electronic money institutions.124 This definition was repealed in

2009 by Directive 2009/110/EC (see in detail below in the present Chapter,in Section

4, under A 2(ae)).

This branch of European financial law also contains provisions on the establishment of

branches of non-EU credit institutions in the European Union.125

120

An “EU credit institution” means a credit institution incorporated under the laws of a

Member State of the European Union or a member of the EEA.

121 On this financial policy objective, see section A of the present chapter under 2.2.1 (a) above.

122 The provisions of European banking law (and, more generally, European financial law) also

apply to credit institutions incorporated in member countries of the European Economic Area

(EEA), notably Norway, Lichtenstein and Iceland. Some of them also apply to EU financial

institutions, which are subsidiary companies of EU-based credit institutions (see Directive

2006/48/EEC, Article 4, point 5). This category comprises mainly finance, leasing and

factoring companies.

123 This definition was firtly introduced in the so-called “First Banking Directive” (Directive

77/780/EEC, OJ L 322, 17.12.1977, p. 30 ff.) and then recurrently adopted in subsequent

Directives constituting the sources of European banking law, unchanged. For more details, see

Fernandez-Bollo et Tabourin (2007), pp. 92-93.

124 Directive 2000/28/EC “amending Directive 2000/12/EC relating to the taking up and

pursuit of the business of credit institutions” (OJ L 275, 27.10.2000, p. 37-38), Article 1, para. 1,

point (b). On this, see Fernandez-Bollo et Tabourin (2007), pp. 95-96.

125 An “non-EU credit institution” means a credit institution incorporated under the laws of a

third country, which is not a Member State of the EU or a meber of the the EEA.

57

3. The evolution of European banking law: a short overview

3.1 Introduction

The content of European banking law is being shaped gradually, always within the

limits set by the institutional framework, based on the initiatives taken by European

(previously Community) institutions and within the context of political conditions

prevailing in each given period, as well as developments in international financial law.

The process of European financial integration has developed autonomously.

Nevertheless, the content of the provisions of a significant subset of the legal acts

constituting the sources of European banking law is being shaped under the influence

of international banking law, taking into consideration the rules of the Basel

Committee on Banking Supervision.126

In the context of a short overview of the evolution of European banking law, the

following four (4) periods can be identified:127

• the period from the beginning of the functioning of the European Economic

Community until 1988 (see under 3.2, below),

• the period of the estabishment of the 'single banking market' (under 3.3),

• the period from beginning of the functioning of the Economic and Monetary

Union (EMU) until the onset of the recent (2007-2009) international financial

crisis (under 3.4), and

• the current period since 2008 (under 3.5)

3.2 The first period: the period of stagnation (1958-1988)

The first period extends from the beginning of the functioning of the (then) European

Economic Community, in 1958, until the impementation of of the European

Commission’s 1985 White Paper on Completing the Internal Market, which identified

the legislative measures needed to complete the internal market and establish a

common market.128

During this period, developments in European banking law were

slow and piecemeal.

3.3 The second period: the period of establishment of the 'single banking market' (1989-1998)

This White Paper was followed in 1986 by the Single European Act,129

which was the

first major amendment of the 1958 Treaty establishing the European Economic

Community. In order to facilitate the establishment of a common market, it introduced

the principle of qualified majority voting in the Council (rather than unanimity as a

rule of decision) for almost all relevant legal acts, thus paving the way for a higher

126

On this, see indicatively Giovanoli (2010a and b) and Gortsos (2012).

127 For a short but very precise overview of the evolution of the European financial law, see

Dermine (2003), pp. 33-50 (only with respect to European banking law), Blair, Walker and

Purves (2009), pp. 98-102, Hadjiemmanuil (2006), pp. 786-804, and Tridimas (2011).

128 COM (85) 310 final. On the distinction between the terms “common market” and “internal

market”, the former being broader, see Ukrow (1999), p. 280.

129 OJ L 169, 29.6.1987, p. 1 ff.

58

degree of harmonisation of national legislative and administrative measures, including

those in the financial sector.

Another key benchmark during this period was the 1992 Treaty of Maastricht130

which

introduced major amendments such as:

• the co-decision procedure for the adoption of basic legal acts between the

European Parliament and the Council, and

• the objective of creating a monetary (and economic) union and adopting a

single European currency (the euro), launched in 1999 and, inter alia, acting as

a trigger for the deepening of European financial integration.

3.4 The third period: the period of consolidation of the single banking market

after the EMU bacame fully effective (1999-2007)

The third period extends from the beginning of the functioning of the European

Economic and Monetary Union, on 1 January 1999, until the onset of the recent (2007-

2009) international financial crisis. This period is characterised by three (3) benchmark

initiatives:

(a) The first benchmark was the so-called 1999 “Financial Services Action Plan”

(FSAP), a Communication of the European Commission entitled “Financial Services:

Building a framework for action”.131

The FSAP laid down all the legislative measures,

in the fields of European financial, company and taxation law, which the European

Commission deemed necessary for the acceleration of the financial integration process

after the introduction of the euro.

(b) This was followed in 2001 by the “Lamfalussy Report”, which laid down the

institutional reforms necessary to enhance the legislative process with regard to the

adoption of the legal acts constituting the sources of some core branches of European

financial law.

This Report will be examined in detail in Section 2 of the present Chapter of this study,

under C.

(c) The final benchmark of this period was the European Commission’s 2005

White Paper “Financial Services Policy 2005-2010”, which outlined the

Commission’s financial services policy for the said period with a view to further

deepening of European financial integration through legislative provisions.

130

OJ L 191, 29.7.1992, p. 1 ff.

131 COM (1999) 232 final.

59

3.5 The (current) fourth period - the period of readjustement amidst the recent (2007-2009) international financial crisis and the current (since 2010) sovereign crisis in the Eurozone

The progress towards implementation of this policy programme was interrupted in

2007, when the recent international financial crisis broke out, and rendered necessary a

more comprehensive re-adjustment of European financial law. Apart from the

regulatory developments which have already taken place and those that are under way,

the current fourth period was marked by the publication of the Report of the de

Larosière Group, which laid down the foundations for:

• reshaping (and further deepening the institutionalisation of) arrangements at

European level, introduced by the Lamfalussy Report, with regard to the

financial system’s micro-prudential supervision, and

• establishing for the first time a European framework for the financial system’s

macro-prudential oversight.

This Report will be examined in detail in Section 2 of the present Chapter of this study,

under E, and its implementation in Section 3.

61

SECTION 2

The making of European Financial Law: the dynamics of its evolution

A. Introductory remarks

Over the last two decades (most notably following the introduction of the euro as the

single European currency), the volume of European financial law, namely the totality

of provisions of primary and (mainly) secondary European law adopted to achieve the

maximum possible European financial integration within the operation of the EU

single market, has increased exponentially. In light of this development, convergence

was achieved to a large extent (compared to the situation in the late 1990s) in terms of

the content of Member State legislative, regulatory and administrative provisions

pertaining to fields covered by European financial law.

European financial law evolves independently, based on political initiatives undertaken

by EU institutions (European Commission, European Parliament and EcoFin Council),

and under the opinion-giving influence of the European Central Bank, but is greatly,

and in some fields, decisively influenced by the international financial law that takes

its form within the context of the operation of numerous international organisations

and fora, in particular, with the participation of national supervisory/regulatory

authorities. The legal acts issued pursuant to TFEU provisions cover a very broad

range of issues, seeking to attain various policy objectives concerning both the removal

of barriers to the free provision of financial services within the EU (the field of

negative integration), and the elaboration of single policies (the field of positive

integration).

Given the reaffirmed political will to strengthen and deepen European financial

integration, the continuous expansion of the scope of application of European financial

law begs the question as to the form of the ‘European financial rule’. The critical

underlying question is not whether general or detailed regulations are required. In the

author’s opinion, European legislators, under the current conditions, must cover both

levels; should they focus on just general regulations, leaving specialisation to the

Member States, the margin for regulatory arbitrage132

would be significant, and thus

the primary objective which, as mentioned above, is achieving the maximum possible

financial integration would be undermined. Moreover, exercising regulatory

intervention based on general principles and provisions, leaves national legislators

considerable room for discretion, leading to a diversity of rules in different Member

States or legal uncertainty if general principles are not specified.

On the contrary, the critical question concerns the level to which detailed regulations

shall be adopted, all the more so since the applicable institutional framework offers

alternatives. In particular, according to Article 202 TEC, the Council was allowed to

authorise the European Commission to adopt implementing measures ensuring the

specialisation of and (conditional) amendment to the rules adopted, in the case of

European financial law, exclusively through the co-decision procedure by the

European Parliament and the Council.

132

“Regulatory arbitrage” is the incentive for financial intermediaries to set up in those

countries that offer the most relaxed regulatory (including tax) framework.

62

Exercise of the said implementing powers conferred on the European Commission,

were, of course, subject to requirements set by the Council, whose content is directly

affected by the European Parliament’s interventions, aimed at ensuring the best

possible institutional balance between these three EU institutions.

Until early 2000, the Council had made limited use of its discretion to confer

implementing powers on the European Commission. Moreover, also taking into

account the need to manage the constantly growing volume of legislative material to be

adopted in order to enable the deepening of European financial integration as well as

the more and more technical nature of relevant provisions, the Council activated the

conditions for establishing a special procedure facilitating the process of conferring

implementing powers on the European Commission. In this context the “Lamfalussy

process” was adopted. The “Lamfalussy process” is not a novelty in the process of

issuing legal acts under European financial law, but contains proposals facilitating

initiatives by the Council, together with the European Parliament, so that the adoption

of detailed regulations increasingly becomes a competence of the European

Commission.

At the same time, enhanced cooperation between national supervisory/regulatory

authorities in the financial sector was institutionally established, but – contrary to what

applies to monetary policy – the institutional structure of the European financial

sector’s supervision was governed by the principle of fragemenation.

63

B. The process for issuing legal acts of European Financial Law prior to

the adoption of the Lamfalussy Committee proposals

1. The EU bodies’ basic legal acts

For the most part, provisions of secondary European financial law can be found in

Directives and, to a much lesser extent, in Regulations (hereinafter, where necessary,

referred to as “basic legal acts”). As far as the sources of European banking law (as

well as most other branches of European financial law) are concerned, it is striking that

they do not include a single Regulation. Until November 1993, such basic legal acts

were being issued by the Council,133

and thereafter jointly by the European Parliament

and the Council, pursuant to the co-decision procedure under Article 251 of the

TEC.134

European financial law provisions can also be found, to a limited extent, in

legally non-binding Recommendations of the European Commission, issued pursuant

to Article 211 of the TEC.

2. The regulatory comitology procedure135


Pursuant to the provision of the third point of Article 202 TEC (point a),136

in issuing

basic legal acts, the Council should137

confer implementing powers on the European

Commission, namely powers to take implementing measures through the issuance of

Regulations or Directives, in view of the implementation138

of the rules established in

the said basic legal acts.139

This provision applied to all categories of basic legal acts

133

According to the original numbering of the TEC’s articles, the legal basis was provided by

ex Article 189.

134 According to the provisions of paragraph 4 of Article 105 TEC, since 1999, as part of the

issuance of many of the legal acts under European financial law, EU institutions were under the

obligation to request the opinion of the European Central Bank.

135 This procedure is analysed in detail as it constitutes the basis for proper understanding of the

“Lamfalussy process” for issuing legal acts under European financial law (see under C of this

chapter, below).

136 There is an equivalent provision in the last indent of Article 211 TEC: European

Commission powers also include those conferred on it by the Council for the implementation of

the rules laid down by the latter. What is indeed striking is that the overwhelming majority of

bibliographic references on the matter are based on the analysis of Article 211 (and the

European Commission’s powers), rather than Article 202 (and the Council’s powers).

137 See Wichard (1999), p. 1667. This obligation was conditional on the provision of the third

sentence of the third indent of Article 202 TEC, according to which, the Council might also

reserve the right, in specific cases, to exercise directly implementing powers itself, without

conferring them on the European Commission.

138 Regarding the extent of the meaning of the term “implementation”, which is not defined, see

Wichard (1999), p. 1667, with further references to the relevant ECJ case-law.

139 Regarding the assignment of implementing powers by the Council to the European

Commission, see, inter alia, Blumann (1988), Wichard (1999), pp. 1667-1671, and Zbinden (1999), pp. 155-159.

64

issued by the Council, including those issued jointly by the European Parliament and

the Council, in accordance with the abovementioned co-decision procedure.140

The European Commission’s regulatory power was always based on authorisation by

the Council, included in the basic legal act. In accordance with this act, the European

Commission was authorised to lay down rules of law relevant to the basic legal act,

that as also setting forth the extent of its implementing powers. In this way, it was

possible to make a distinction between:

• the general principles of a regulated issue, that should always be included in

the basic legal acts, and

• the detailed application rules of the said general principles, that might be

outlined in the European Commission’s implementing measures.

Moreover, the Council had the power to set terms regarding the exercise of

implementing powers conferred on the European Commission,141

according to

principles and rules it laid down by virtue of its own Decision, that must be taken

unanimously following the European Commission’s proposal and the European

Parliament’s opinion.142

In this context (and also with a view to limiting various

categories of procedures that had been developed regarding the exercise of

implementing powers on the part of the European Commission), in 1987, the Council

issued Decision 87/373/EEC.143

This Decision was repealed in 1999, by Decision 1999/468/EC144 (see just below,

under 2.2), as amended in July 2006 by Decision 2006/512/EC145 (see section D in this

140

See Wichard (1999), p. 1670. The fact that conferring implementing powers on the

European Commission was a competence of the Council, even in cases where the basic legal act

from which it emanated was issued pursuant to the co-decision procedure, had become a main

point of confrontation between the European Parliament and the Council (see Wichard (1999),

p. 1671, and Zbinden (1999), p. 158). This confrontation was highlighted on the occasion of

the Lamfalussy process adoption, as will be explained in more detail below (under C).

141 Article 202 TEC, third indent, second sentence.

142 Ibid., Article 202 TEC, third indent, fourth sentence.

143 Council Decision 87/373/EEC “laying down the terms for the exercise of implementing

powers conferred on the Commission” (OJ L 197, 18.07.1987, p. 33-35). The fourth sentence

of the third indent of Article 202 TEC (mentioned under footnote 146) served as the legal basis

for this Decision (as well as later decisions mentioned below). For more details on the

provisions of this Decision, see Wichard (1999), pp. 1669-1670, Zbinden (1999), pp. 155-159,

and van den Bergh, Pearson and Smits (2001), Chapter 10, pp. 56-57.

144 Council Decision 1999/468/EEC “laying down the procedures for the exercise of

implementing powers conferred on the Commission” (OJ L 184, 17.07.1999, pp. 23-26).

According to the recitals of this Decision, which was issued as a result of the political

agreement reached at the 1996 Intergovernmental Conference (IGC) and included in the

relevant Declaration attached to the Amsterdam Treaty, the amendments were deemed

necessary with a view to:

• laying down specific criteria regarding the selection of the individual comitology

procedures,

• simplifying the procedures for the exercise of implementing powers conferred on the

European Commission,

• ensuring the European Parliament’s enhanced involvement in the procedures, when the

basic instrument conferring implementing powers on the European Commission is

adopted pursuant to the co-decision procedure,

65

Section). Decision 1999/468/EC was then repealed in 2011 by Regulation (EU) No 182/2011 of the European Parliamnet and of the Council.

2.2 The provisions of Council Decision 1999/468/EC on the regulatory comitology

procedure

Decision 1999/468/EC stipulated four (4) procedures for adopting implementing

measures on the European Commission’s part. One of those applied to European

financial law was the regulatory comitology procedure,146

which should be followed147

for the adoption of implementing measures falling into two categories, each

encompassing:148

(a) implementing measures of general scope designed to apply the149

“essential

provisions” of a basic legal act.150

(b) implementing measures designed to adapt151

or update “non-essential

provisions” of a basic legal act, according to what was specified therein.

• ensuring the European Parliament’s right to information on the implementing powers

conferred on the European Commission, and the work of regulatory committees, and

• improving information to the public concerning comitology procedures.

145 Council Decision 2006/512/EC amending Decision 1999/468/EC laying down the

procedures for the exercise of implementing powers conferred on the Commission, OJ L 200,

22.07.2006, pp. 11-13.

146 Ibid., Article 5, The other three procedures were:

• the advisory procedure (Article 3),

• the management procedure (Article 4), and

• the safeguard procedure (Article 6).

147 The obligation to follow this procedure was set forth in recital 7 of Decision 1999/468/EC.

148 Ibid., Article 2, first paragraph, point (b), second sentence. This distinction wass of particular

importance in the application of the provisions of Article 5a, Council Decision 1999/468/EC,

that was established by virtue of Council Decision 2006/512/EC. See below, in section D of

this chapter.

149 In the author’s opinion, the term “apply” means “specify”.

150 Decision 1999/468/EC, Article 2, first paragraph, point (b), first sentence. It should be noted

that the meaning of the term “essential provisions” has not in any way been specified, nor has a

precedent been established by the ECJ.

151 Special focus should be placed on the exact definition of the meaning of “adaptation” and, in

particular, whether the amendment of “non-essential provisions” of the basic legal act came

under such “adaptation”, up until the issuance of Council Decision 2006/512/EC, which

explicitly regulated the matter for those basic legal acts issued through co-decision. In the

author’s opinion, the term should have been extensively interpreted, since amendment of

provisions in this category (contrary to “essential provisions”) did not seem to be prohibited,

while, at the same time, there is no other legal basis enabling the amendment thereof through

implementing measures. See below, in section D of this chapter.

66

One can conclude that the European Commission was not authorised to adopt

implementing measures bringing about amendments to “essential provisions” of a

basic legal act. In 2006, this matter, which is not at all disputed in the bibliography,

was also resolved by law, by means of Council Decision 2006/512/EC, second

paragraph of Article 1, whereby recital 7a (last indent) was introduced to Decision

1999/468/EC, stipulating that “the essential elements of a legislative act may only be

amended by the legislator on the basis of the Treaty”.

In the context of the regulatory comitology procedure, the European Commission did

not act independently but was assisted in its work by a “regulatory committee”

composed of the representatives of the member states and chaired by a representative

of the Commission,152

who had no voting right.153

The regulatory committee’s duty,

which, contrary to what its name might suggest, had no independent regulatory

power,154

consisted in expressing an opinion on the draft submitted by the European

Commission regarding the implementing measures to be taken.155

The content of this

opinion, which had to be delivered within the time limit, laid down by the chairman

according to the urgency of the matter,156

had a decisive influence on further progress

towards the adoption of implementing measures. More specifically:

(a) Should the regulatory committee agree with the European Commission’s draft

implementing measures, these implementing measures could be adopted with only one

reservation.157

When the basic legal act was issued by co-decision (such as, for instance,

in the case of legal acts of European financial law), the draft implementing measures

should concurrently be submitted to the European Parliament, which examined

whether there the implementing powers under the basic legal act were exceeded. If the

European Parliament issued a resolution indicating they were indeed exceeded, the

European Commission was obliged to re-examine the draft implementing measures

and then:

• submit a new draft to the regulatory committee, or

• continue the procedure,158

or finally

• submit a Regulation or Directive proposal to the European Parliament, on the

basis of Article 251 TEC.159

152

Decision 1999/468/EC, Article 5, para. 1.

153 Ibid., Article 5, para. 2, last sentence.

154 See Wichard (1999), p. 1669.

155 Decision 1999/468/EC, Article 5, para. 2, first and second sentences. The opinion is made

by qualified majority (ibid., Article 5, para. 2, third sentence).

156 Ibid., Article 5, para. 2, second sentence.

157 Ibid., Article 5, para. 3.

158 Use of these two options was also a function of the time in which the European Parliament

submitted its Resolution, in relation to the time when the regulatory committee delivered its

opinion.

159 Decision 1999/468/EC, Article 5, para. 3, with reference to article 8. See also paras. 5-6 of

the Agreement between the European Parliament and the Commission (2000) “on the

application details of decision 1999/468/EC (…)”.

67

(b) On the other hand, if the regulatory committee did not agree with the

implementing measures draft, or did not deliver an opinion, then the following

procedure was followed, actively involving the Council, and also, partly, the European

Parliament. More specifically:

(ba) The European Commission was obliged to submit, without delay, a proposal

to the Council concerning the implementing measures that needed to be taken, and

inform the European Parliament accordingly.160

(bb) In this case as well (as in (a), just above), the European Parliament should be

called upon to express an opinion whether this proposal is in excess of the

implementing powers stipulated in the basic legal act, and communicate its position to

the Council.161

(bc) Taking the European Parliament’s position into account, the Council could act

by qualified majority on the European Commission’s proposal, within a period

prescribed in the basic legal act, which in no case could exceed three months from the

date of referral to the Council.162

In this context:

• if within that period the Council had indicated by qualified majority that it

opposed the proposal, the Commission should re-examine it; it could submit an

amended proposal, re-submit its proposal to the Council, or present a

legislative proposal on the basis of Article 251 of the TEC,163

• on the contrary, if on the expiry of that period the Council had neither adopted

the proposed implementing act nor indicated its opposition, the proposed

implementing measures would be adopted by the Commission.

Decision 1999/468/EC also set forth the European Commission’s obligation to provide

regular information to the European Parliament on the regulatory committees’

proceedings.164

In this context, it was deemed necessary to safeguard that the European

Parliament:

• received agendas for regulatory committee meetings,

• received draft measures submitted to the regulatory committees on the

application of provisions of the basic legal acts adopted by co-decision,

• received the results of voting, summary records of the meetings, and lists of

the authorities and organisations, to which designated Member State

representatives at the regulatory committees belonged, and

• was kept informed whenever the Commission submitted to the Council

measures or proposals for implementing measures under review.

160

Ibid., Article 5, para. 4.


162 Ibid., Article 5, para. 6, first sentence. In all legal acts constituting sources of European

financial law where the regulatory comitology procedure was followed, the prescribed period

was always at least three months.


164 Ibid., Article 7, para. 3. See also paras. 1-4 of the abovementioned Agreement between the

European Parliament and the Commission (2000).

68

2.3 Application of the regulatory comitology procedure to European financial law

Contrary to other sectors of European law, regulatory comitology procedure was

applied very restrictively in the case of European financial law. Specifically:

(a) First of all, it is worth pointing out that until the Lamfalussy process was

implemented (see below, under C), there had not been a single case of implementing

measures concerning the application of a basic legal act’s “essential provisions”, since

the Council had not offered such authorisation to the European Commission in any

basic legal act.

(b) Moreover, there was also very limited use of this procedure in adopting

implementing measures adapting or updating “non-essential provisions” of a basic

legal act. In the framework of this limited use, the following committees operated as

regulatory committees, according to the provisions of various legal acts-sources of

European financial law:165

• on banking, the Banking Advisory Committee,166

• on capital markets, the Securities Contact Committee,167

• on collective investments in transferable securities, the UCITS Contact

Committee,168

and

• on insurance, reinsurance and occupational pensions, the Insurance

Committee.169

165

These committees also had advisory roles (see European Commission (2000)).

166 As regards the setting-up, composition and duties of this committee, see European

Commission (2000), pp. 5-10, and van den Bergh, Pearson and Smits (2001), Chapter 10, pp.

26-38.

167 As regards the setting-up, composition and duties of this committee, which had the most

restricted regulatory power in the financial system, see European Commission (2000), pp. 36-

38.


Commission (2000), pp. 39-40.


Commission (2000), pp. 22-26. It is also noted that the regulatory comitology procedure was

also followed in other branches of European financial law, such as the law for prevention and

combating of financial crime in the financial system. The fact that only the abovementioned

three sectors are specifically pointed out is due to the fact that only those were affected by the

Lamfalussy process (see just below, under C).

69

C. The “Lamfalussy process”

1. The necessity to establish a special procedure regarding the issuing of legal acts in the EU securities markets legislation

In 1999, the European Commission issued a Communication, in the form of a White

Paper, on the Financial Services Action Plan (FSAP).170

This initiative was designed to

record legislative initiatives that needed to be taken by EU institutions until 2004, to

further strengthen the European financial integration, in view of the fact that the

Monetary Union had already been operational since 1 January 1999.

One of the FSAP’s main pillars was the adoption of measures to speed up procedures

on single European capital market integration,171

where numerous shortages had been

detected, as well as important delays in the adoption of the legal acts under issue. In

this framework, a reasonable concern was raised, whether it would, inter alia, also be

necessary to amend procedures on the issuance, by EU bodies, of legal acts under EU

securities markets legislation, and the effective integration of their provisions by

Member States.

In view of the above, the ECOFIN Council, in its session of 17 July 2000, decided to

set up a seven-member committee made up of prominent personalities of the financial

sector, known as the Committee of Wise Men or the “Lamfalussy Committee” (after

the surname of its chairman, Baron Alexander Lamfalussy).172

This committee was

assigned with the task of preparing a report that would:173

• evaluate the (then) current conditions on the application of the EU securities

markets legislation,

• evaluate the way in which the procedure for issuing legal acts falling under

EU securities markets legislation can give an optimum response to

developments in the markets, and

• submit proposals on adapting the applicable procedures, in order to ensure,

both the uniform application of the European regulatory framework’s

provisions in all Member States, taking market developments into account,

and cooperation among national supervisory/regulatory174

authorities.175

170

See: europa.eu.internal_market/finances/docs/actionplan.

171 Already since 1999, with the introduction of the euro as the single European currency, the

single capital market became a major priority among EU institutions. This was due to the

consideration that, within a single currency environment, conditions had greatly improved for

further consolidation of national capital markets, with the elimination of currency risk for

investments, and investors being able to compare the performance of listed companies on the

basis of one single currency unit denominator, thus contributing to the further enhancement of

market liquidity. Regarding the impact of the introduction of the euro on European capital

markets, see Galati and Tsatsaronis (2003) and Freixas et al. (2004).

172 Among his other capacities in the international and European financial system, it is reminded

that Lamfalussy served as Chairman of the European Monetary Institute throughout its

operation from 1994 to 1998.

173 The content of the mandate that the ECOFIN Council gave to the Lamfalussy Committee,

has been published as Appendix I to the original report of the committee, attached to its final

report.

174 As far as capital markets are concerned, supervisory authorities are usually regulatory

authorities as well, since, according to the legislation governing their operation, they also have

regulatory powers.

70

On 15 February 2001, the Lamfalussy Committee submitted the “Final Report of the

Committee of Wise Men on the Regulation of European Securities Markets”.176

Chapter I of the report177

included an analysis of the reasons for amending the (thus far

applicable) procedure on issuing legal acts of EU securities markets legislation

Specifically, the Lamfalussy Committee reached the conclusion that the experience

gained from the procedure until the early 2000s, highlighted four (4) major

shortcomings:178

(i) it was too slow, as the required actions for adoption of basic legal acts and

transposition of their provisions into national law, were quite time-

consuming, in some instances exceeding ten years,179

(ii) it was too rigid, and therefore the European regulatory framework could not

react speedily enough to constantly changing market conditions, since any

change required the amendment of the basic legal act according to the time-

consuming co-decision procedure,180

(iii) it produced ambiguity, which resulted in major differences upon integration

of national public orders, and

175

This mandate indirectly suggests that at that time (and maybe even today, at the time of

completion of this study), the creation of a single European supervisory authority for either the

capital market only or for the entire financial sector had not been a key political priority. On the

other hand, the committees of national supervisory/regulatory authorities which, according to

what will follow in this Chapter, were set up on the basis of proposals of the Lamfalussy

Committee, served as the model for the creation of supranational supervisory authorities in the

EU.

176 Before that, on 9 November 2000, the Committee had submitted the “Initial Report of the

Committee of Wise Men on the Regulation of European Securities Markets”, which was the

subject of extensive consultation. Neither the initial nor the final report have been officially

published. Both reports are included in a single document, available at the website address:

http://ec.europa.eu/internal_market/ecurities/lamfalussy/index_en.htm. Hereinafter this report

will be referred to as the “Lamfalussy Report”.

177 Lamfalussy Report (2001), pp. 9-18.

178 Ibid., pp. 13-15.

179 The most striking example is Directive 2004/25/EC of the European Parliament and Council

“on takeover bids”, which was adopted 15 years after the initial proposal had been submitted

by the European Commission.

180 As mentioned above (in section B under 2.1), according to the regulatory comitology

procedure, the European Commission had (and still has) the power to issue implementing

measures adapting or updating “non-essential provisions” of a basic legal act, assisted by a

regulatory committee, provided that it is authorised by the Council through this basic legal act.

Consequently, the lack of flexibility was not the result of a lack of legal basis in EU law for the

amendment of the basic legal acts’ technical provisions. On the contrary, it resulted from the

fact that EU institutions did not make de facto extended use of this possibility, since the

regulatory comitology procedure was activated on very few occasions.

71

(iv) it failed to distinguish between general principles and detailed

implementing rules, and, as a result, basic legal acts were too detailed in

their provisions, and thus could not be amended quickly.181

2. The Lamfalussy Committee proposals

2.1. General remarks

2.1.1. In brief

The Lamfalussy Committee’s proposals are presented in Chapter II of its final

Report182

and are:

• the adoption of a conceptual framework of overarching principles (see below

under 2.1.2),

• the establishment of a special procedure comprising four (4) levels on the

issuance by EU bodies of legal acts under EU securities markets legislation,

and the application of their provisions by Member States (see below under

2.1.3),

• the setting up of an Inter-Institutional Monitoring Group (see below under

2.1.4), and

• review of the Lamfalussy process in 2004 (see below under 2.1.5).

2.1.2. Adoption of a conceptual framework of overarching principles

Initially, the committee proposed the adoption of a conceptual framework of

overarching principles governing the elaboration of all EU securities markets

legislation provisions and sources, including a list of principles, such as:

• maintaining confidence in the operation of European securities markets,

• respecting the principles of subsidiarity and proportionality, and

• promoting competition.183

181

Hence, according to the regulatory comitology procedure, the European Commission also

had the power to issue general scope implementing measures for the application of a basic legal

act’s “essential provisions”.This failure to distinguish powers was not due to the lack of a

regulatory framework, but to the non-activation of the possibilities already set out in the

applicable regulatory framework as far as the issuance of legal acts is concerned. On the other

hand, in both of the abovementioned cases, the question why the possibilities provided by the

regulatory framework were not activated is completely different, especially if one takes into

account the extensive use of such possibilities in other sectors of European law. However, this

matter goes beyond the scope of this study.


183 Ibid., p. 22.

72

2.1.3. Establishing a special, four-level procedure

The second proposal of the Lamfalussy Committee, making up the corpus of its report,

referred to the establishment of a special procedure regarding the issuance by EU

bodies of legal acts under EU securities markets legislation, and the application of their

provisions by Member States, on the basis of a four-level approach, which, in essence,

further specialises the regulatory comitology procedure and is based on the following

four points: framework principles, implementing measures, cooperation between

supervisory/regulatory authorities, and correct implementation of EU legislation (for

more details, see below, under 2.2).184

In order to implement this procedure, the Report

proposed the setting-up of two committees:

(a) The first was the European Securities Committee (hereinafter referred to as

“ESC”), with the following conditions:

(aa) It should be made up of high-level Member States representatives, chaired by

a European Commission representative.185

(ab) Its duties would include:186

• acting as a securities regulatory committee, in the framework of the

regulatory comitology procedure, pursuant to the provisions of Council

Decision 1999/468/EC,

• advising the European Commission on legal acts adopted either at Level 1

or Level 2 of the Lamfalussy process (according to what is described in

detail under 2.2.1 and 2.2.2, below), and

• advising the European Commission on the content of the mandate to the

Committee of European Securities Regulators (CESR) for the elaboration

of draft implementing measures to be adopted under Level 2 of the

Lamfalussy process (according to what is detailed below under 2.2.2).

(b) The second was the Committee of European Securities Regulators (hereinafter

referred to as ‘CESR’),187

with the following conditions:188

(ba) It should be made up of the heads of the competent national authorities for

securities regulation/supervision designated by each Member State.

(bb) Its duties would include:

• elaborating the European Commission’s draft implementing measures, in

the context of the Lamfalussy process Level 2 (see under 2.2.2, below ),

and

• implementing all that is stipulated under Lamfalussy process Level 3 (as

detailed under 2.2.3, below).

184

Ibid., pp. 22-40.

185 Ibid., pp. 30-31.

186 Ibid., p. 29.

187 The Lamfalussy Report uses the name “European Securities Regulators Committee” (ESRC).

However, it was later decided that the committee would be called “Committee of European

Securities Regulators” (or CESR, a better sounding acronym), so the final term was considered

more advisable.


73

2.1.4. Setting up the Inter-Institutional Monitoring Group

The Lamfalussy Committee also proposed the setting up of an Inter-Institutional

Monitoring Group made up of representatives from the Council, the European

Commission and the European Parliament, along with two or three independent

members. According to the proposal, this Group would monitor on an ongoing basis

the effectiveness of the proposed special procedure, in accordance with the above.189

2.1.5. Review of the Lamfalussy process

Consistent with the second recommendation, the last proposal concerned the need to

review the proposed procedure in 2004, taking into account the experience

accumulated from its implementation.190

2.2. Specifically: the four levels of the Lamfalussy process191

2.2.1. Level 1192

On Level 1, the Lamfalussy process made no material changes in the previously

applicable procedure regarding the issuing of the basic legal acts constituting the

sources of European financial law, as described above (under section B). Regulations

and Directives would still be issued by the European Parliament and the Council

according to the co-decision procedure, always following a legislative initiative by the

European Commission193

With a view to speeding up the legislative process, enhancing adaptability in case of

changed conditions, and safeguarding the necessary distinction between general

principles and detailed application rules, the Lamfalussy Committee proposed that the

basic legal acts of Level 1 should constitute “framework Regulations” or “framework

Directives”.194

This means that such legal acts should:

• include “framework principles” of the regulated subject, namely the

overarching principles of political importance, or – according to the

terminology of Council Decision 1999/468/EC – the “essential elements”

governing the regulatory intervention’s scope,195

and

189

Ibid., pp. 40-41.

190 Ibid., p. 41.

191 On this, see Ferran (2004), pp. 61-74 and 99-107, Lastra (2006), pp. 334-341,

Hadjiemmanuil (2006), pp. 815-818, and Sousi-Roubi (2007), pp. 24-29.


193 It is obvious that amendment of this procedure would necessitate amendment of the TEC

itself.

194 In the author’s opinion, this is the correct meaning of the phrase “new types of Directives or

Regulations should be developed in the securities field” (Lamfalussy Report, p. 22).

195 Ibid., p. 22. The Lamfalussy Committee proposed that distinction between “essential” and

“non-essential” provisions should be performed separately for each individual case in the text of

the basic legal act (ibid., p. 24). This proposal was accepted by both the Stockholm European

Council (see under 3.1, below) and by the European Parliament (under 3.2).

74

• accurately define the nature and extent of implementing measures to be

adopted at Level 2, which concern either the application of essential

provisions of the basic legal act or the adaptation or updating of its non-

essential provisions.196

Given that this was available even before the publication of the Lamfalussy Report

under the provisions of Decision 1999/468/EC (as stated above in section B, under 2),

this proposal was, in essence, a suggestion to the legislator to make broader use of the

regulatory comitology procedure.

The purely novel elements arising from the Lamfalussy Committee proposals, with

regard to the so-called “Level 1” of the proposed procedure, were the following:

(a) The European Commission should make sure that the issuing procedure of the

basic legal acts is governed by the maximum degree of transparency. In this context, it

should:197

• proceed to open, transparent and systematic consultation with all stakeholders,

regarding the necessity of specific legislative initiatives and the content of the

proposed legal act, prior to submitting the relevant proposals,

• informally and rapidly consult with member states and their regulatory

authorities, on any proposed legislative regulation, and

• inform the European Parliament, also on an informal basis and as quickly as

possible, of the extent of implementing measures to be taken on Level 2 of the

Lamfalussy process.

(b) As mentioned above, the European Commission should be able to consult the

ESC on the content of the provisions of basic legal acts adopted on Level 1, including

the ones authorising the European Commission to adopt implementing measures.198

(c) The procedure before the European Parliament should be limited to a first

reading of the proposed Directive or Regulation, thus enabling the faster issuance of

acts (the so-called “fast-track procedure”).199

(d) Finally, a proposal was made for wider use of Regulations instead of

Directives, with a view to limiting the spectrum of differences in the application of the

EU legislation provisions by member states.200

2.2.2. Level 2201

On the so-called “Level 2”, the Lamfalussy process introduced an important novelty to

the regulatory comitology procedure, both as regards:

• the adoption of implementing measures for the application of essential

provisions of the EU securities markets legislation’s basic legal acts, and

196

Ibid., pp. 22-24.

197 Ibid., p. 25.

198 Ibid., p. 29.

199 Ibid., p. 26.

200 Ibid., pages 14 and 26. For more details, see Ferran (2004), pp. 70-71.

201 Ibid., p. 28-36.

75

• the issuing of implementing measures adapting or updating their non-essential

provisions, the nature and extent of which had been defined in Level 1.

The novelty consisted in that at the initial stage of the procedure for the adoption of

implementing measures, apart from the regulatory committee (namely the ESC),

according to the provisions of paras. 1 and 2 of Article 5 of Decision 1999/468/EC, it

also involved the CESR (made up of the member states’ supervisory/regulatory

authorities), to which it assigned specific tasks.202

Specifically:203

(a) Having the exclusive right of legislative initiative, the European Commission,

after consulting with the ESC (which at this stage operates as an advisory and not as a

regulatory committee), should seek the CESR’s contribution to elaborate implementing

measures with respect to the matters set forth in the Level 1 basic legal act, and set a

specific time schedule for work completion.

(b) The CESR should elaborate draft implementing measures and consult with

market stakeholders, consumers and end-users. Then, it should submit the final

proposals to the European Commission after taking into consideration any remarks

submitted within the framework of the consultation procedure.

From this point of the procedure onwards, the Lamfalussy Committee proposals

coincide with the procedure set forth in Article 5 of Council Decision 1999/468/EC, as

described above in section B (under 2.2).

2.2.3. Level 3204

The most decisive novelty proposed by the Lamfalussy Committee was the

establishment of the so-called “Level 3”. On this level of the procedure, national

supervisory/regulatory authorities regarding transferable securities should be entrusted

by the CESR with the task of coordinating uniform application by all Member States of

the provisions of legal acts adopted on Levels 1 and 2. In this context, the CESR was

called upon to issue guidelines that are not legally binding.205

Moreover, it was

proposed that the CESR should have the power:

• to issue explanatory recommendations and set common standards on the

issues not covered by EU legislation,

• to compare and review the Member State regulatory practices, thus ensuring

the effective application thereof, and setting best practices, and

• to prepare periodical reports on the Member State regulatory procedures and

practices, communicating the results to the Commission and the ESC.

202

This approach brought to the fore the particular role that the supervisory/regulatory

authorities of the financial sector were (and still are) de facto playing, due to their expertise,

with respect to shaping the regulatory framework.

203 Lamfalussy Report (2001), pp. 28-29 and 36.

204 Ibid., pp. 37-39.

205 In this framework, it was proposed that the CESR should be empowered to enact European

“soft” law rules.

76

2.2.4. Level 4206

Finally, Level 4 proposed the strengthening of initiatives required both by the

European Commission and by member states, for the timely and correct

implementation into national law of all the provisions of legal acts adopted in Levels 1

and 2 of the procedure, according to the above.

3. Application of the Lamfalussy Committee proposals

3.1. The position of the European Council and of involved EU bodies (except for the European Parliament)

On a political level, the Lamfalussy report was immediately, fully and unreservedly

adopted both by the ECOFIN Council, during its Stockholm meeting on 23 March

2001,207

and by the Stockholm European Council on 23 and 24 March 2001,208

which

also issued the relevant Resolution “on more effective securities market regulation in

the European Union”.209

Indeed, in this European Council meeting, the European

Commission undertook two commitments concerning the implementation, on its part,

of the regulatory comitology procedure on transferable securities:

• If the European Parliament found that the submitted draft implementing

measures exceed the basic legal act’s authorisation, the European

Commission would thoroughly review the draft, taking the Parliament’s

position into account as much as possible, and substantiate its further

position;210

• In matters that proved to be particularly sensitive, in order to reach a balanced

solution on implementing measures adopted in the area of transferable

securities, the European Parliament would refrain from objecting to the

opinions prevailing in the Council as to the appropriateness of the said

measures.211

The European Commission had a prompt and positive reaction, and in June 2001

issued two Decisions (2001/528/EC 212 and 2001/527/EC 213 ) establishing the two

committees proposed in the final Lamfalussy Committee report, namely:214

206

Lamfalussy Report (2001), p. 40.

207 See at: europa.eu.int/comm/internal_market/en/finances/mobil/01-memo105.htm

208 See at: europa.eu.int/european_council/conclusions/index_en.htm.

209 See at: ue.eu.int/ueDocs?cms_Data/docs/pressData/en/ec/00100-r1.%20ann-r1.en1.html.

210 Stockholm European Council Resolution, point 5, second sentence.

211 Ibid., point 5, third sentence.

212 Commission Decision 2001/528/EC of 6 June 2001 establishing the European Securities

Committee, OJ L 191, 13.7.2001, pp. 45-46.

213 Commission Decision 2001/527/EC of 6 June 2001 establishing the Committee of

European Securities Regulators, OJ L 191, 13.7.2001, pp. 43-44. It is worth mentioning that

these Decisions, as well as subsequent ones adopted in 2004 (see under 4, below) were not

based on any specific article of the TEC, but on the Treaty in general.

214 Regarding the composition, function and powers of these committees, see Ferran (2004), pp.

75-84, and Avgerinos (2003), pp. 95-98.

77

• the European Securities Committee, which entered into operation on 7 June

2001,215

and

• the Committee of European Securities Regulators,216

which also became

operative on the same date, respectively.217

3.2 The European Parliament’s position

Contrary to the two abovementioned bodies, the European Parliament adopted the

procedure with a time lag of approximately one year, but the Lamfalussy report

contained special provisions safeguarding its role in the framework of its

application.218

This was the result of strong reservations expressed by MEPs (who are

opposed anyway to the applicable status of conferring implementing powers upon the

European Commission), founded on the threat of the institutional balance in issuing

EU legal acts being upset.

Finally, the European Parliament approved the procedure on 5 February 2002 by virtue

of the Resolution “on the implementation of the financial services legislation”, while

shortly before the Resolution was published, the then European Commission President,

Romano Prodi, made an explicit Declaration before the European Parliament plenary,

stating that the European Commission would not utilise the implementing powers

conferred on it in a manner that would affect the institutional balance.

In this Resolution, the European Parliament submitted its remarks on the application of

the Lamfalussy process, i.e. it requested that:

• the European Parliament be represented at ΕSC meetings under observer

status,219

• the European Commission make the same commitment vis-à-vis the

Parliament as the one undertaken vis-à-vis the Council at the Stockholm

European Council (under 3.1),220

• the (abovementioned) European Commission President’s statement be

included in the recitals of all basic legal acts issued, in the field of the EU

securities markets legislation pursuant to the Lamfalussy process,221

215

Decision 2001/528/EC, Article 6. This committee succeeded the abovementioned (section B,

under 2.3) Securities Contact Committee.

216 Just like with the ESC, this Committee’s name refers to “securities”, namely stocks and

bonds markets, being the main financial instruments traded on capital markets. The supervisory/

regulatory authorities making up the CESR were not only responsible for the securities markets,

but also for the derivatives markets. In this regard, the name “Committee of European Capital

Markets Regulators” would be more appropriate in the author’s view.

217 Decision 2001/527/EC, Article 8. Cooperation among the member-states’ national

supervisory/regulatory authorities was already established as early as 1985, with the setting up

of the High Level Securities Supervisors Committee”, see European Commission (2000), pp.

33-35. Indeed, in 1997 it was further strengthened within the Forum of European Securities

Commissions, also known as “FESCO”, see European Commission (2000), pp. 41-43.

218 Lamfalussy Report (2001), pp. 30, 35-36.

219 European Parliament Resolution point 9.

220 Ibid.,point 12.

221 Ibid.,point 14.

78

• in the event of a divergence of opinions between the three institutions

regarding any implementing measure, an informal trilateral dialogue should be

initiated between their representatives, thus ensuring a balanced and mutually

acceptable agreement,222

and

• a “sunset clause” introduced to all basic legal acts stipulating that after a period

of four years following their adoption, the European Parliament and the

Council should have the authority to review the extent of implementing powers

conferred on the European Commission.223

4. Extension of the Lamfalussy procedure to other branches of European financial law

Appreciating that contribution of the Lamfalussy process to shaping the EU securities

markets legislation had been positive, the Ecofin deemed it would be advisable to

extend its implementation in other branches of the European financial law, and

notably:

• the banking sector,

• the insurance, reinsurance and occupational pensions sector, and

• the sector for collective investments in transferable securities.

This proposal, however, met with new objections on the part of the European

Parliament that were explicitly expressed in November 2002, in a new Resolution “on

the financial regulatory intervention, supervision and stability”. Said Resolution

contained all the reservations that the body had, at times, expressed regarding the

comitology procedure, in general, and laid down a clause for adoption of the

Lamfalussy process extension, namely the amendment of Council Decision

1999/468/EC, giving the European Parliament the same rights as the Council, in

requesting the amendment or in opposing the issue of the European Commission’s

draft implementing measures (“call-back clause”).224

Yet, the Ecofin, in its session of 3 December 2002, called upon the European

Commission to adopt the appropriate regulations. In response to this request, on 5

November 2003, the European Commission225

submitted a “package of measures” into

six (6) new Decisions, extending the Lamfalussy process as follows:226

222

Ibid.,point 16.

223 Ibid.,point 17. This proposal was accepted and such a clause was included in all EU

securities markets legislation adopted after 2003, conferring on the European Commission the

power to adopt implementing measures.

224 European Parliament Resolution no. 4. This clause was partly accepted and in 2006 led to

the amendment of Council Decision 1999/468/EC (see section D of this chapter below).

225 The delay in the adoption of thse decisions, for approximately one year, was the result of

consultation with the European Parliament on the amendment of Council Decision

1999/468/EC, aimed at the establishment of the European Parliament’s above “call-back

clause”.

226 Meanwhile, in 2002, article 21 of Directive 2002/87/EC of the European Parliament and of

the Council “on the supplementary supervision of credit institutions, insurance undertakings

and investment firms in a financial conglomerate (…)”, OJ L 035, 11.2.2003, p. 1-27, enacted

79

(a) Firstly, there was a provision for the creation of two (2) new committees in the

banking sector:

• the European Banking Committee,227

which started operating on 13 April 2005,

when Directive 2005/1/EC of the European Parliament and the Council

(mentioned below) entered into force228

stipulating its substitution for the

abovementioned (section B, under 2.3.) Banking Advisory Committee, and

• the Committee of European Banking Supervisors, which assumed its duties on

1 January 2004.229

(b) Respectively, there was a provision for the creation of two (2) new

committees in the insurance, reinsurance and occupational pensions sectors:

• the European Insurance and Occupational Pensions Committee”,230

which also

started operating on 13 April 2005, and would substitute for the

abovementioned (section B, under 2.3.) Insurance Committee,231

and

• the Committee of European Insurance and Occupational Pensions

Supervisors,232

which started operating on 24 November 2003.233

(c) Moreover, the two above committees in the sector of transferable securities

(namely the ESC and the CESR) acquired extended duties so as to also cover collective

investments in transferable securities.234

the Financial Conglomerates Committee, as yet another regulatory committee in the financial

system, responsible for supervision matters of these groups.

227 Commission Decision 2004/10/EC of 5 November 2003, establishing the European

Banking Committee, OJ L 3, 7.1.2004, p. 36-37, article 1.

228 Ibid., Article 5.

229 Commission Decision 2004/5/EC of 5 November 2003, establishing the Committee of

European Banking Supervisors, OJ L 3, 7.1.2004, p. 28-29, article 8. Moreover, cooperation

between the member-states’ banking supervisory authorities was also effected as follows:

• since 1972, with the “Groupe de Contact” (see European Commission (2000), pp. 14-

16), and

• since 1998, with the “Banking Supervision Committee” (see European Commission

(2000), pp. 11-13).

230 Commission Decision 2004/9/EC of 5 November 2003 establishing the European Insurance

and Occupational Pensions Committee, OJ L 3, 7.1.2004, pp. 34-35, Article 1.


232 Commission Decision 2004/6/EC of 5 November 2003, establishing the Committee of

European Insurance and Occupational Pensions Supervisors, OJ L 3, 7.1.2004, pp. 30-31.

Cooperation between national supervisory authorities in the insurance sector had already been

informally established since 1957, in the framework of the Conference of Insurance Supervisors

of the member-states of the European Communities, which has now been abolished. See

European Commission (2000), pp. 27-29.

233 Decision 2004/6/EC, Article 8.

234 Commission Decisions 2004/7/EC and 2004/8/EC (OJ L 3, 7.1.2004, p. 32, and OJ L 3,

7.1.2004, p. 33), bringing about the necessary amendments to Decisions 2001/527/EC and

2001/528/EC. In this context, the ESC also substituted for the powers of the abovementioned

UCITS Contact Committee (section B, under 2.3.).

80

The decisions establishing the three Committees were repealed and replaced in 2009

by Commission Decisions 2009/77/EC (CESR), 2009/78/EC (CEBS) and 2009/79/EC

(CEIOPS).235

Finally, in March 2005, the European Parliament and the Council issued Directive

2005/1/EC “(...) in order to establish a new organisational structure for financial

services committees”,236

bringing about the required amendments to sectoral Directives

in European financial law that were affected by the Lamfalussy process extension, thus

enabling new regulatory and advisory committees to substitute for previous ones.

Table 3

The Lamfalussy Process

Level 1 Level 2 Level 3

Type of legal act

Basic legal act Implementing measures Recommendations/

Guidelines

Legislator European Parliament/

Council

European Commission CEBS/CESR/CEIOPS

Supporting

mechanism

EBC/ESC/EIOPC

(as advisory

committees)

• EBC/ESC/EIOPC (as

advisory and

regulatory committees)

• CEBS/CESR/CEIOPS

(as advisory

committees)

235

OJ L 25, 29.1.2009, pp. 18-32.

236 OJ L 79, 24.3.2005, pp. 9-17.

81

D. The regulatory comitology procedure with scrutiny

1 Introductory remarks

In July 2006, the Council issued Decision 2006/512/EC, which brought about two

material amendments to Decision 1999/468/EC:237

(a) The most significant amendment consisted in the establishment of a new

category of procedures with respect to the exercise of implementing powers conferred

on the European Commission, namely the regulatory comitology procedure “with

scrutiny”. This procedure, whereby the European Parliament acquires an enhanced role,

compared to the one it played in the “basic” regulatory comitology procedure, should

be followed provided the following two (2) conditions apply:238

• the basic legal act has been issued according to the co-decision procedure,

• the implementing measures seek to amend “non-essential provisions” of a

basic legal act; the term “amend” includes, but is not limited to, either

removing certain non-essential provisions or complementing them with the

addition of new non-essential provisions.239

Consequently, this new procedure should not apply to the adoption of implementing

measures concerning the application of “essential provisions” of a basic legal act.

Such measures that specify the essential provisions of a basic legal act are still issued

under the basic regulatory comitology procedure.

(b) Moreover, Article 7 of Decision 1999/468/EC was amended to ensure that the

European Parliament would receive better information on the work of committees.

2 The provisions of Council Decision 2006/512/EC on the regulatory comitology procedure with scrutiny

2.1 The basic procedure

The regulatory comitology procedure with scrutiny was activated in the same manner

as the basic procedure (according to the above section B, under 2.2), with the European

Commission submitting draft implementing measures to the “regulatory procedure

with scrutiny committee”. This committee, which had the same composition as a

regulatory committee, was called upon to submit an opinion on the draft.240

237

These amendments were the result of the European Parliament’s opposition to extend the

Lamfalussy process, according to the above (section C, under 4), with a view to satisfying its

request for increased powers in the framework of the comitology procedure.

238 Decision 2006/512/EC, Article 1, para. 5, whereby article 2 of Decision 1999/468/EC was

complemented with the new para. 2 (see recital 3 in Decision 2006/512/EC).

239 In Section B (subsection 2.2), of this chapter the concern was raised whether the term

“adaptation” of a basic legal act’s non-essential provisions also included the amendment thereof,

and the author’s position thereon was positive. This matter was resolved by virtue of Decision

2006/512/EC, as to basic legal acts issued according to the co-decision procedure, in which

case the amendment of non-essential provisions would require application of the regulatory

comitology procedure with scrutiny

240 Decision 1999/468/EC, Article 5a, paras 1 and 2. In view of the above, all financial sector

regulatory committees (namely FCC, ESC, EBC, and EIOPC) could also operate as “regulatory

procedure with scrutiny committees”.

82

The procedure outlined below was subsequently followed, varying depending on the

content of the opinion expressed by the regulatory procedure with scrutiny committees.

In more detail:

(a) Contrary to the basic regulatory comitology procedure, even if the European

Commission’s draft implementing measures coincided with the opinion of the

regulatory procedure with scrutiny committee, they would not be directly adopted by

the Commission, but the following procedure would be followed:241

(aa) The European Commission should, without delay, submit the draft

implementing measures to the European Parliament and the Council for scrutiny.

(ab) Both the European Parliament, deciding by majority of its members, and the

Council, deciding by qualified majority, could oppose the adoption of the draft

implementing measures by the European Commission, and substantiate such

opposition, provided that they deemed that the draft:

• exceeded the implementing powers provided for in the basic legal act,

• was not compatible with the purpose or content of the basic legal act, or

• did not respect the principles of subsidiarity or proportionality.

Two alternatives opened up at this stage of the procedure:

• if, within a time limit of three months from submission of the draft, the

European Parliament or the Council had expressed their opposition thereupon,

the European Commission should not adopt the implementing measures, but

could either submit amended draft implementing measures to the regulatory

procedure with scrutiny committee, or present a legislative proposal to the

European Parliament or the Council, on the basis of article 251 of the TEC,

• in contrast, if upon expiry of the above time-limit, neither the European

Parliament, nor the Council had expressed any opposition to the draft

implementing measures, these could be adopted by the European Commission.

(b) If the draft implementing measures were not in accordance with the opinion of

the regulatory procedure with scrutiny committee, or even lacking such an opinion, the

following procedure should be observed, also varying depending on the terms of the

basic regulatory comitology procedure, as follows:242

(ba) The European Commission should, without delay, submit to the Council a

proposal for implementing measures to be adopted, and communicate it to the

European Parliament.

(bb) Within two months from such submission, the Council should act on the

proposal, by qualified majority. In this context:

• if, within this time limit, the Council had opposed the draft implementing

measures by qualified majority, these should not be adopted; in this case, the

European Commission would be entitled to either submit an amended proposal

to the Council, or present a legislative proposal to the European Parliament or

the Council, on the basis of ex Article 251 TEC,

241

Ibid., Article 5a, para. 3.

242 Ibid., Article 5a, para. 4.

83

• if the Council intended to adopt the proposed implementing measures, it

should submit them to the European Parliament, without delay,

• if the Council failed to express an opinion within the above two-month time

limit, the European Commission should submit, without delay, the

implementing measures to the European Parliament for scrutiny.

(bc) In the two latter cases, the European Parliament, deciding by majority of its

members, could oppose the adoption of implementing measures, within a time-limit of

four months from the moment it had received the proposal, if it deemed that those:

• exceeded the implementing powers stipulated in the basic legal act,

• were not compatible with the purpose or content of the basic legal act, or


In this context:

• if, within the above time-limit, the European Parliament had expressed its

opposition to the proposed implementing measures, the European Commission

should not adopt them, but could either submit amended draft implementing

measures to the regulatory procedure with scrutiny committee, or present a

legislative proposal to the European Parliament or the Council, on the basis of

Article 251 TEC,

• if, upon expiry of the above time-limit, the European Parliament had expressed

no opposition to the draft implementing measures, these could be adopted by

the Council or the European Commission, where appropriate.

2.2 An alternative procedure in emergency cases

Paragraph 6 of Article 5a of Decision 1999/468/EC also established an alternative

regulatory comitology procedure with scrutiny.243

This procedure should be activated:

• when a basic legal act stipulated that, when due to imperative grounds of

urgency, it was not possible to meet the deadlines of the regulatory comitology

procedure with scrutiny (as presented above), and

• on condition that the draft implementing measures coincided with the opinion

of the regulatory procedure with scrutiny committee.

In such a case, the following applied:

(a) The European Commission should adopt and immediately implement the

implementing measures, with the obligation to communicate them to the European

Parliament and the Council.

243

Moreover, according to the provisions of paragraph 5, Article 5a of this Decision, by way of

derogation from paras 3 and 4, a basic legal act could – in duly substantiated exceptional

circumstances ‒provide for the amendment of the time-limits stipulated in paras 3c, 4b and 4e

of Article 5a of the Decision, as follows:

• be extended by an additional month when justified on the complexity of the measures, or

• be curtailed, where justified on the grounds of efficiency.

84

(b) Within one month from the above communication, the European Parliament,

by qualified majority of its members, or the Council, by qualified majority, could

oppose the implementing measures adopted by the European Commission, duly

substantiating this opposition, if they deemed that those:

• exceeded the implementing powers stipulated in the basic legal act,

• were not compatible with the purpose or content of the basic legal act, or


(c) If the European Parliament or the Council had opposed those measures, the

European Commission was obliged to drop them.

85

E. The proposals of the de Larosière Group on the future of financial

supervision in the European Union


1.1 The content of the European Commission’s mandate to the “de Larosière Group”

The scale and intensity of the recent international financial crisis244

have shown, as one

should reasonably expect, the need to review the then existing regulatory and

supervisory framework governing financial integration in the EU. The European

Commission assigned the task of investigating the appropriate means to attain the

objective of re-adjusting the provisions of the currently applicable European financial

law pertaining to the supervision of financial firms established in the EU to a special,

high-level, group of experts, chaired by the French national and former central banker

Jacques de Larosière,245

known as the High-Level Group on Financial Supervision in

the EU” (hereinafter the “de Larosière Group”).246

The Group was asked to submit specific proposals for strengthening the European

financial system’s supervisory framework, and specifically consider the following

three (3) aspects:247

• how the supervision of European financial institutions and markets should

best be organised to ensure the prudential soundness of institutions, the

orderly functioning of markets and thereby the protection of depositors,

insurance policy-holders and investors,

• how to strengthen European cooperation on financial stability oversight, early

warning mechanisms and crisis management, including the management of

cross-border and cross-sectoral risks, and

• how supervisors in the EU’s competent authorities should cooperate with

other major jurisdictions to help safeguard financial stability at the global

level.

1.2 Structure of the “de Larosière Report”

The de Larosière Group submitted its report (hereinafter the “Report” or the “de

Larosière Report”)248

on 25 February 2009. The Report is structured in four (4)

chapters:

244

On the causes of the crisis see, inter alia, articles by Kiff and Mills (2007), Borio (2008), pp.

1-13, European Central Bank (2008c), Eichengreen (2008), and Swoboda (2008).

245 De Larosière served as Managing Director of the International Monetary Fund (1978-1987),

Governor of the Central Bank of France (Banque de France, 1987-1993), and President of the

European Bank for Reconstruction and Development (EBRD, 1993-1998).

246 Press Release, High Level Expert Group on EU financial supervision to hold first meeting on

12 November 2008, available at: ec.europa.eu/rapid/pressreleasesAction.do?reference=IP/08/

1679&format=HTML&aged=0&language=ENguiLanguage=en.

247 The content of the mandate assigned to the de Larosière Group is cited in Annex I to the

report submitted by the Group (see the following footnote).

248 The High-Level Group on Financial Supervision in the EU, Chaired by Jacques de Larosière,

Report, Brussels, 25 February 2009. The Report is available at the website address:

ec.europa.eu/commission_barroso/president/pdf/statement_20090225_ en.pdf.

86

(a) Chapter one, entitled “Causes of the Financial Crisis”, analyses the causes of

the current international financial crisis.249

(b) Chapter two, entitled “Policy and Regulatory Repair”, contains proposals (in

the form of recommendations) on the improvements to the existing regulatory

framework that were deemed necessary in order to strengthen existing rules, on the one

hand, and fill all the regulatory gaps that have been identified due to the crisis, on the

other.250

(c) Chapter three, entitled “EU Supervisory Repair”, addresses the re-adjustment

of the supervisory framework in the European financial system.251

The content of the

Report’s third chapter is the main scope of the present chapter and will be analysed at

length below.

(d) Finally, Chapter four, entitled “Global Repair” examines the adjustments

needed to to be done to the financial system’s global architecture, placing emphasis on

strengthening the competences that should be assigned in this regard to the Financial

Stability Board and the International Monetary Fund.252

2. The two proposals of the “de Larosière Report” on the re-adjustment of the supervisory framework in the European financial system

2.1. Introductory remarks

As just mentioned, the case for a re-adjustment of the supervisory framework in the

European financial system is dealt with in the third chapter of the de Larosière Report.

It initially identifies and analyses the weaknesses revealed, according to the de

Larosière Group, amidst the recent financial crisis as far as the supervision of the

European financial system is concerned.253

Within this “diagnostic framework”254

the Report proposes the adjustments that needed

to take place in the relevant provisions of the European financial law in force. In this

respect, the Report states that: “this chapter (…) proposes both short-term and long-

erm changes”.255

Consequently, it offered two key proposals:

249

Ibid., Chapter I, paras. 6-37 (pp. 7-12).

250 Ibid., Chapter II, paras. 38-143 (pp. 13-37).

251 Ibid., Chapter III, paras 144-218 (pp. 38-58). The examinination of this issue was the main

rationale behind the assignment of the Report to the de Larosière Group, which is not

coincidentally called, as already mentioned, “Group on Financial Supervision in the EU”.

252 Ibid., chapter IV, paras 219-257 (pp. 59-68). Regarding the financial system’s current

international architecture as well as the role that the Financial Stability Forum and the IMF

already play therein, see Giovanoli (2010).

253 Ibid., chapter III, section II (“Lessons from the crisis: what went wrong?”), paras. 152-162.

The previous section I of chapter III of the Report (“Introduction”, paras. 144-151) contains

introductory remarks on the definition and content of the components of the financial system’s

supervision, micro- and macro-prudential supervision (paras. 145-147 and 149-150), as well as

the existing synergies between them (para. 148). There is also special reference to the “limits”

of exercising supervision in the financial system within an economic system operating based on

free market principles (para. 151).

254 Ibid., para. 163, first sentence.

255 Ibid., para. 144, second sentence.

87

• a first proposal with a short-term implementation horizon (see below, under

2.2), and

• a second one, with a long-term implementation horizon (under 2.3).

2.2. The short-term proposal


The first proposal is at the core of Chapter III of the de Larosière Report, with regard to

strengthening the effectiveness of the supervision of the European financial system. It

is the result of the option not to establish, at least under the current circumstances, any

supranational supervisory authority of the financial system in the EU,256

and has two

components. According to the Report: “Τhere are two elements (towards a new

structure to make European supervision more effective): strengthening the quality of

both national supervision and European supervision”.257

In particular:

(a) The first component is strengthening the quality of the supervision exercised at

European level, by setting up a European System of Supervision and Crisis

Management of the financial system,258

which, in turn, has two parts:

(aa) Regarding the first part, i.e. the “European system of supervision”, the

proposal recommends the establishment of two new bodies at European level, one for

macro-prudential supervision and another for micro-prudential supervision.

The main features of this system, which is at the very centre of the “short term”

proposal, are detailed below, in this section of the chapter, under 2.2.2-2.2.4.

(ab) As regards the part on a “European system of crisis management”, the

Report merely proposes that a series of initiatives which primarily concern the rules

based on which it deems that crisis must be managed (particularly with regard to the

reorganisation and winding-up of credit institutions) and not the authorities exercising

the relevant policies.

The Report is dealing with the proposals on the two parts of this system in an

asymmetrical manner. Without a doubt, the main objective of the proposals made in

the chapter of the Report in question, is the elaboration of the supervisory part (which,

as mentioned above, was the content of the Group’s mandate). This results from the

following:

(i) First of all, the Report’s relevant proposals are comparatively the most

analytical and structured ones.

(ii) Moreover, although reference to a “European system of supervision and crisis

management” is made merely in the heading of section ΙΙΙ, chapter ΙΙΙ of the Report,

proposals on “crisis management” are included in section IV which refers to the

schedule of actions and includes further reference to chapter II (on regulatory re-

adjustment).

256

Ibid., para. 218 (see also under 2.3 of this chapter’s section).


258 Ibid., chapter III, section III (“What to do? Building a European System of Supervision and

Crisis Management”), paras. 167-189.

88

To the author’s opinion, the term “European system of supervision and crisis

management” is used in an effort to demonstrate the close relation, at European level,

between the financial system’s supervision, the rules according to which supervision is

exercised (i.e. prudential regulation) and the crisis management mechanisms.

According to paragraph 192 of the Report:

“Regulation, supervision and crisis management/resolution arrangements are

intertwined. They form a continuum. There is no point in converging supervisory

practices, if the basic financial regulations remain fragmented. And it will be

impossible to revamp the organisation of European supervision, without clarity as to

how a crisis, should it break-out, will be managed and resolved by the competent

authorities”.

Besides, this is the reason why the proposals contained in the Report concern all the

three “complementary” components for ensuring the stability of the financial

system.259

(b) The second component of the “short term” proposal for strengthening

supervision of the European financial system is the concurrent strengthening of the

quality of supervision exercised by national supervisory authorities, for which the

proposals suggest that they should continue to exist.

The Report’s relevant proposals are presented below, under 3.2 of this section.

2.2.2 Specifically: the two bodies of the “European system of supervision”

The proposal of the de Larosière Report, on setting up a “European system of supervision” for the financial system (as part of the short-term planning), is based on

the establishment of two (2) new bodies at European level, and allocating thereto

distinct (albeit closely linked) tasks:

• one body should be responsible for macro-prudential supervision of the

financial system, and

• the other should be responsible for micro-prudential supervision.

Paragraph 148 of the Report marks the link between these two dimensions: “Macro-

prudential supervision cannot be meaningful unless it can somehow impact on

supervision at the micro-level; whilst micro-prudential supervision cannot effectively

safeguard financial stability without adequately taking account of macro-level

developments”.

2.2.3 The European Systemic Risk Council

According to the proposal, the first body should be responsible for matters concerning

macro-prudential supervision of the European financial system, where the Report finds

that the supervisory framework in force shows the most weaknesses. Paragraph 173 of

the Report provides the rationale for establishing such a body:

“A key lesson to be drawn from the crisis (…) is the urgent need to upgrade macro-

prudential supervision in the EU for all financial activities”.260

259

Ibid., para. 193.

260 Ibid., para. 153.

89

This body is called the European Systemic Risk Council (hereinafter the “ESRC”). It

is proposed to operate within the ESCB, substitute for the work of the ESCB’s Banking

Supervision Committee,261

and receive administrative support by the ECB.

In order to fulfil its mission for macro-prudential supervision of the financial system in

the EU, the Report proposes that the ESRC should be entrusted with the following four

(4) tasks to:

• form judgments and make recommendations on macro-prudential policy,

• issue risk warnings,

• compare observations on macro-economic and prudential developments, and

• give directions on these issues.262

In this framework, the Report suggests that the ratione materiae scope of macro-

prudential supervision shall cover the financial stability analysis, the development of

early warning systems to signal the emergence of risks and vulnerabilities in the

financial system, macro-stress testing exercises to verify the degree of resilience of the

financial sector to specific shocks and propagation mechanisms with cross-border and

cross-sector dimensions, and the definition of reporting and disclosure requirements

relevant from a macro-prudential standpoint.263

In order for the ESRC to effectively perform its tasks, the Report suggests that two (2)

main conditions must be met:

• a proper flow of information between the ESRC and national supervisors of

the financial system in the EU, and

• the establishment of two macro-prudential warning systems for imminent

risks to the financial system.

2.2.4 The European System of Financial Supervision (ESFS)

The second body proposed to be established should be responsible for matters of

micro-prudential supervision, a field in need of significant strengthening, according to

the Report. Paragraph 183 (first sentence) of the Report provides the rationale for

establishing such a body: “After having examined the present arrangements and in

particular the cooperation within the level 3 committees, the Group considers that the

structure and the role bestowed on the existing committees are not sufficient to ensure

financial stability in the EU and all its member states.”

This body is called the European System of Financial Supervision (hereinafter

“ESFS”). The system should operate outside of the ECB, be decentralised, and consist

of three (3) new Authorities that will gradually be established at European level, with

the transformation of the abvementioned “Lamfalussy Committees”. The three

Authorities will be the following:

261

On the composition and tasks of this Committee, see European Commission (2000), pp.

11-12.

262 De Larosière Report, para. 177, third sentence.

263 Ibid., para. 168.

90

• the European Banking Authority, with the participation of representatives

from national banking supervisors,

• the European Securities Authority, with the participation of representatives

from national securities supervisors, and

• the European Insurance Authority, with the participation of representatives

from national private insurance and reinsurance supervisors.264

According to the Report, the ESFS should have a largely decentralised structure, fully

respecting the proportionality and subsidiarity principles of the Treaty.265

Existing national supervisors should continue to operate alongside the three

Authorities.266

The Report expressly notes that the ESFS will not be entitled to

intervene to the choices member states make regarding the institutional structure of the

financial system in their territory.267

It also explicitly mentions that allocation of tasks

between the European Authorities and national supervisors should be made according

to the principle of subsidiarity.268

The Report proposes that the ESFS should have a broad scope of tasks. Given that the

Report deems that they are better performed at EU level, these tasks mainly comprise

the following,:269

• coordinate the implementation of common, high-level supervisory standards,

• guarantee strong cooperation with other supervisors, and

• guarantee that the interests of host supervisors are properly safeguarded.270

Specifically, in addition to all the current functions of Level 3 Committees,271

the

European Supervisory Authorities (ESAs) will, according to the Report, also perform

tasks relating to the seven (7) issues mentioned below, i.e. systemically important,

cross-border financial service suppliers, specific EU-wide institutions, regulatory

intervention, supervisory standards and practices, macro-prudential supervision, crisis

management, and international matters.272

As regards actions necessary for setting up this body, the proposal suggests that this

should be taken under to a specific time-schedule, in two stages, as detailed below in

this section under 3.

264

Ibid., para. 194.


266 Ibid., para. 184, third sentence, and para. 207, first sentence.

267 Ibid., para. 189.




271 Ibid., para. 206.

272 Ibid., para. 208, second sentence, sub-paragraphs (i-vii), respectively.

91

It is noteworthy that this option emanates, inter alia, from a position explicitly

formulated in the Report, according to which, contrary to macro-prudential supervision,

micro-prudential supervision of the European financial system must not be assigned to

the ECB.273

Among the arguments in favour of this option, the author believes that two

are the major concerns regarding the possibility of the ECB becoming a supranational

authority (also) competent for exercising micro-prudential supervision of the European

financial system:

(a) The first concern is of substantial nature and relates to whether it is

appropriate for a monetary authority, like the ECB, to operate also as a supervisory

authority, due to the possible existence of conflicts of interest. The possibility of the

existence of such conflicts, is indeed the one that has led numerous states around the

world (and the majority of EU member states) to resort to the separation of the

monetary function from the financial supervisory function in their jurisdictions.274

(b) The second concern relates to an institutional issue. Specifically, according to

the provision of para. 6 of Article 127 TFEU:275

“The Council may, acting

unanimously on a proposal from the Commission and after consulting the ECB and

after receiving the assent of the European Parliament, confer upon the ECB specific

tasks concerning policies relating to the prudential supervision of credit institutions

and other financial institutions with the exception of insurance undertakings”.

This provision, which is carried over verbatim in Article 25.2 of the Statute of the

ESCB and of the ECB,276

provides for the possibility of the ECB operating in the

future as a supranational supervisory authority of the financial system within the EU,

in correspondence to its role as the single monetary authority.277

If the provision of para. 6 Article 127 was to be activated, the ECB could be assigned

with the authority of exercising micro-prudential supervision, not only over credit

institutions, but also over other categories of financial service providers. The exception

for insurance undertakings is, however, explicit.

273

Ibid., para. 146.

274 Indeed, although in the course of history, micro-prudential banking supervision has been the

main responsibility of central banks in many countries (with the exception of certain central

European states), but in the past few years, more and more countries around the world assign

banking supervision to independent authorities, not connected with the central bank. For a

detailed presentation of the arguments for and against the principle of separation between a

central bank’s monetary and supervisory powers, see Goodhart and Schoenmaker (1993), pp.

333-413.

275 OJ C 321E, 29.12.2006, pp. 37-187 (consolidated version, 2006).

276 OJ C 115, 9.5.2008, pp. 230-250 (consolidated version 2008). Protocol No 4.

277 See Lastra (2006), pp. 298-299, Chalmers, Hadjiemmanuil, Monti, and Tomkins (2006)

pp. 824-825, and, for a more detailed analysis, Smits (1997), pp. 355-360.

92

Consequently, the ECB could not constitute a supervisory authority for certain

financial conglomerates that are systemically important on a pan-European level,278

including banks and insurance undertakings, except, of course, if there was to be an

amendment of the provision of para. 6, Article 127.279

2.3. The long-term proposal

The second, equally important and much more radical (if fully implemented) proposal

of the Report, which is, in any case, subject to lengthy examination, is described in

section V of chapter III of the Report.280

It consists in the task of “investigating the

possibility” of transforming the ESFS into a system which should rely on only two

European Authorities, according to the “functional approach” model of the institutional

structure of financial supervision.281

The proposal suggests that this investigation should be performed by reviewing the

modus operandi of the ESFS no later than three (3) years from its entry into

operation.282

The two Authorities, proposed to be established, should have the following tasks:283

• The first Authority should be responsible for banking and insurance prudential

supervision issues, as well as any other issue which refers to financial stability.

Establishing such an Authority could result in more effective supervision of

financial conglomerates which include banks and insurance companies (as

mentioned above).284

• The second Authority should be responsible for conduct of business and

market issues, horizontally across the entire financial system.285

In this context, the Report specifies that there must be an assessment of the necessity

for wider regulatory powers of horizontal implementation to be assigned to such

Authorities (without, however, determining the content thereof).286

278

On the definition, features, alternative organisational structures and supervisory standards of

these conglomerates, see Dierick (2004), pp. 6-26.

“Systemically important” should mean those conglomerates that have a commercial presence,

through subsidiaries and/or branches, in a critical number of EU’ Member States.

279 This should also come in direct opposition with the existing practice in most EU member

states that have adopted the “full consolidation of supervisory authorities approach”.

280 De Larosière Report, chapter III, section V (“Reviewing and possibly strengthening the

European System of Financial Supervision”), paras. 215-218.

281 Regarding this approach and its alternatives, see Group of Thirty (2008). The Netherlands

have adopted this approach.

282 De Larosière Report, para. 215.


284 Ibid., para. 216, third sentence.


286 Ibid., para. 217.

93

In essence, this proposal paves the way for establishing supranational supervisory

authorities of the EU financial system.287

In any event, the de Larosière Group,

underlines in its Report the implementation difficulties of such an endeavour:288

“Concerning one idea, that often appears, suggesting the unification of all supervisory

activities for cross-border institutions at the pan-EU level, the Group considers that

this matter could only be considered if there were irrefutable arguments in favour of

such a proposal. The complexities and costs entailed by such a proposal (which should

result in a two-tier supervisory system, one for cross-border institutions and one for

domestic institutions), its political implications and the difficulty of resolving cross-

border burden-sharing are such that the Group has doubts of it being implemented at

this juncture.”

It is, however, pointed out that transition to a regime of European supranational

supervisory authorities of the financial system, could become more viable, should the

EU decide to move towards greater political integration.289

287

On this subject see, inter alia, Lastra (2006), op. cit., pp. 324-328, with extensive further

references.

288 De Larosière Report, para. 218, first and second sentences.


94

TABLE 4

Overall review of the de Larosière Report proposals with regard to

strengthening the effectiveness of supervision in the European financial system

I. The short-term proposal

Two (2) components:

A. Strengthening the quality of supervision conducted at

European level – Creation of a “European system of supervision

and crisis management”

B. Strengthening

the quality of

supervision

conducted by national

supervisory

authorities

Two (2) parts:

1. European system of supervision

2. European system of

crisis management

Establishment of two (2) European bodies:

(a) The European Systemic Risk

Council: a body for “macro-prudential

supervision” (immediately)

(b) European System of Financial

Supervision: a body for the “micro-

prudential supervision” based on the

operation of three European Authorities

(in two stages)

• European Banking Authority

• European Securities Authority

• European Insurance Authority

Strengthening the

regulatory framework on

the reorganisation and

winding-up of credit

institutions

Initiatives taken by

Member States,

Level 3

Committees and the

European

Commission

II. The long-term proposal:

Establishment of two (2) European Authorities for micro-prudential supervision:

• one Authority responsible for banking and insurance prudential supervision

issues, as well as any other issue relating to financial stability,

• one Authority responsible for conduct of business and market issues,

horizontally across the entire financial system

95

3. The gradual process of establishing the European System of Financial Supervision (ESFS)

3.1 Overall examination


With regard to establishing the ESFS which would require important institutional,

legislative and operational changes to the existing supervisory framework of the

European financial system,290

as well as the broadest possible political consensus,291

the Group proposed a two-stage process:292

• stage I to last until end-2010 (see under 3.1.2, below), and

• stage II to run in 2011-2012 (under 3.1.3).293

3.1.2 Stage I

As regards stage one (2009-2010: “Preparing for a European System of Financial

Supervision”), the de Larosière Report proposed five (5) categories of action:

(a) First of all, EU institutions should immediately start the necessary legislative

work on consensus-building to transform the Level 3 Committees (i.e. CEBS, CESR,

and CEIOPS) into the three European Authorities of the financial system.294

(b) Special importance is also placed on the establishment and operation, by end-

2009 at the latest, of “colleges of supervisors” for all systemically important, cross-

border financial service suppliers in the EU (notably banks, of which there are at least

50).295

In this framework, the following are proposed:

• by mid-2009, the level 3 Committees should submit proposals so as to

accurately define the colleges’ clear supervisory norms,296

and

290

De Larosière Report, para. 190, first sentence.


292 Ibid., para. 191.

293 Ibid., chapter III, section IV (“The process leading to the creation of a European System of

Financial Supervision”), paras 194-214, includes the majority of the proposals on the

composition, tasks and governance of the ESFS.

294 Ibid., para. 194.

295 Ibid., para. 186, first sentence, and para. 203, second sentence. The establishment of such

colleges required the amendment of Directive 2006/48/EC of the European Parliament and of

the Council “relating to the taking up and pursuit of the business of credit institutions (recast)”

(OJ L 177, 30.6.2006, pp. 1-200), which has been achieved by virtue of Directive 2009/111/EC.

296 Ibid., para. 203, third sentence. In this context, the CEBS has already prepared an initial

report presenting the practices already applied or developed by supervisors of large, cross-

border European banking groups with regard to cooperation in the context of the functioning of

colleges of supervisors. See CEBS (2009): Good Practices on the functioning of colleges of

supervisors for cross-border banking groups, April, available at: www.cebs.org/getdoc/2d057

c7c-da56-4f7e-a575-ed58cbcba1fe/College-Good-Practices-Paper_2April-2009.apsx.

96

• to strengthen the composition of colleges, with the participation of

representatives from the secretariats of the level 3 Committees, as well as ECB

observers.297

(c) It is also proposed that initiatives should be taken up, at both national and

European level, to ensure enhanced prudential supervision at national level. Relevant

actions concern:

• on the one hand upgrading the quality of supervision exercised by national

supervisory authorities, which, as already mentioned, constitutes the second

component of the proposal to strengthen the effectiveness of supervision in the

European financial system (see below, under 3.2.1), and

• on the other hand, strengthening the level of convergence of supervisory

responsibilities and sanctioning powers of national supervisory authorities

(under 3.2.2).

(d) The fourth category of actions concerns the strengthening of the level 3

Committees (see below, under 3.3).

(e) Finally, it is proposed that initiatives should be taken up to achieve the

following objectives in relation to the other two “complementary” components,

through which stability of the financial system is sought to:298

• strengthen the degree of harmonisation of the European financial law rules,

based on which regulatory intervention is exercised in the financial system (see

below, under 3.4.1), and

• strengthen the crisis management mechanisms, notably by adopting the

appropriate European company and bankruptcy law rules (under 3.4.2).

3.1.3 Stage II

Stage two of the process establishing the ESFS (2011-2012: “Establishing the

European System of Financial Supervision”) is proposed, according to the de Larosière

Report, as the stage of completion of the initiatives launched in stage I and not

completed therein. In particular:

(a) The beginning of this stage must be the completion of the process for

conversion of Level 3 Committees into European Authorities, as mentioned above,299

and the finalisation of the tasks thereof.300

(b) As far as crisis management at this stage is concerned, EU institutions should

adopt the abovementioned (under 1.2 (e)) rules of the European company and

bankruptcy law.301

297

Ibid., para. 186, second sentence.

298 Regarding the definition of “complementarity” of these components, see above in this

section of this chapter, under 2.2.1.


300 Ibid., paras 206-211.


97

3.2 Initiatives on strengthening supervision at national level

3.2.1 Upgrading the quality of supervision exercised by national supervisory

authorities

The de Larosière Report makes it a key priority to upgrade the quality of supervision

exercised in the European financial system via the proper strengthening of national

supervisory authorities, which should take place during stage one. A plethora of means

are proposed in order to attain this objective, to be used, where appropriate, by

Member States, Level 3 Committees and the European Commission.302

In more detail:

(a) Initially, the Report suggests the following Member State actions to:303

• align national supervisors’ competences and powers (or those of the single

national supervisor, if the full consolidation approach is adopted) to the

specifications of the most effective financial supervisory system in the EU,304

• increase the remuneration of staff employed by national supervisors,

• facilitate exchanges of personnel between the private sector and national

supervisory authorities, and

• ensure that all national supervisory authorities implement a modern and

attractive personnel policy.

These proposals have arisen from the realisation that the crisis has revealed serious

weaknesses in the functioning of certain supervisory authorities partly as a result of

inadequate staffing.305

Nevertheless, the Report expressly points out that obviously the

crisis cannot be mainly attributed to this parameter.306

(b) According to the Report, Level 3 Committees are called upon to take two

actions:

• primarily, they need to cater for upgrading training and exchange of personnel,

with a view to creating a strong European “supervisory culture”;307

• secondarily, they need to prepare the modalities for an appropriate, legally

binding mechanism that will enable the initiation of the necessary actions by

EU law-making institutions and supervisory and monetary authorities, when

the ESRC identifies risks in the financial system based on the early warning

system for risks.308

302

Ibid., para. 195, first sentence.


304 The author is concerned as regards the criteria that Member States themselves can use to

make such an assessment, considering that the latter should be processed by Level 3

Committees, based on comparative information.




308 Ibid., para. 197.

98

(c) Finally, the European Commission should carry out, in cooperation with Level

3 committees, an examination of the degree of independence of national supervisors.309

This examination should lead to concrete recommendations for improvement,

including the ways in which national supervisory authorities are funded.310

3.2.2 Strengthening the level of convergence of supervisory responsibilities and

sanctioning powers of national supervisory authorities

The de Larosière Report also highlights the need for EU institutions to take up

initiatives to ensure a greater degree of convergence:

• both in relation to the supervisory responsibilities of national supervisors,311

• as well as in relation to their sanctioning power.312

This proposal stems from the discovery that existing derogations in these two fields

among member states remain significant.313

In relation to this issue, the following should be pointed out:

(a) At the European Commission’s request, the CEBS issued a comparative report

on the tasks and powers of its member-supervisors, immediately after publication of

the de Larosière Report (March 2009).314

(b) In February 2009, the CESR315

issued an equivalent, albeit very restricted in

content, report on the tasks and powers of its member-supervisors, specifically arising

from the adoption of Directive 2004/39/ΕC of the European Parliament and of the

Council “on markets in financial instruments (…)”.316

309

Regarding the definition and content of the independence of supervisory authorities, and the

differences to the definition and content of the independence of monetary authorities, see

footnote No 10 of the Report, with further references to the relevant work of the Basel

Committee on Banking Supervision, the International Organisation of Securities Committees,

IOSCO, and the International Association of Insurance Supervisors (IAIS). On the composition

and work of these international fora, see, inter alia, Giovanoli (2010).


311 Ibid., para. 201, fifth to seventh sentence.

312 Ibid., para. 201, first to fourth sentence.

313 Ibid., para. 160.

314 CEBS (2009): “Mapping of supervisory objectives and powers, including early intervention

measures and sanctioning powers”, Review Panel, 47, available at: www.cebs.org/

getdoc/f7a4d0f8-5147-4aa4-bb5b-28b0e56c1910/CEBS-2009-47-Final-Report-on-Supervisory-

powers)-.aspx.

315 CESR (2009): “CESR Report on the mapping of supervisory powers, supervisory practices,

administrative and criminal sanctioning regimes of Member States in relation to the Markets in

Financial Instruments Directive (MiFID)”, CESR/08-220, February, available at:

www.cesr.eu/popup2.php?id=5569.

77 OJ L 145, 30.4.2004, pp. 1-44.

99

3.3 Initiatives regarding the strengthening of level 3 Committees

Another equally important proposal of the de Larosière Report is the further

strengthening of Level 3 Committees, in view of their evolution into European

Authorities, as mentioned above. According to the proposal, this objective should be

implemented by strengthening the Committees in the following four (4) directions:317

3.3.1 Strengthening the budget

Firstly, the Report proposes strengthening the Committees’ budget, thus enabling them

to make the necessary upgrading in their human resources. It presents the lack of

economic (and consequently, human) resources, as one of the main factors preventing

the Committees from fully performing their supervisory powers, taking also into

account the workload from their regulatory work.318

3.3.2 Full development of the “peer review process”

The second proposal concerns the full development of the “peer review process”, so

that it can evolve into a “binding mediation process”. The Report places a great deal of

importance on this process, as it estimates that it is a major element in consolidating

confidence among national supervisory authorities. This notably applies in view of the

operation of financial service providers through branches in host member states, on the

basis of the operating license issued by the competent authorities in the home Member

State, pursuant to the mutual recognition principle.319

Note that a mediation mechanism has already been established for Level 3 Committees

by virtue of European Commission Decisions in 2009, but it lacks binding character.320

3.3.3 Strengthening the tasks

The Report also proposes redefining (including expanding) the Committees’ tasks and

priorities, thus enabling them to take up initiatives for identifying problems and

submitting proposals for their resolution. According to the Report, lack of relevant

powers is one of the factors that led to the Committees’ failure to promptly respond

while the crisis was developing.321

317

De Larosière Report, para. 202. See para. 166 (third sentence) of the Report, showing that

the necessity of this strengthening has been indicated by the Level 3 Committees themselves.

318 Ibid., para. 161. See above in section A of the chapter, under 1.

319 De Larosière Report, paras 156-158, stating as an example the case of Icelandic credit

institutions during the crisis, which operated through branches in host member states with

inadequate supervision by the competent Icelandic authorities being the home Member State.

320 Regarding the CEBS, see article 4 (para. 1, item a) of Decision 2009/78/EC, and Article 4.3.

(last sentence) of the CEBS’s statute, available online at: www.c-ebs.org/Aboutus/CEBS

Charter.aspx.


100

Note that according to the joint application of the provisions of Article 2 of CEBS

Decision 2004/5/ΕC and Article 4 of its original statute (as applicable until it was

amended in 2008), the tasks of CEBS pertained to:

• advising the European Commission, especially with regard to the preparation

of plans for executive measures in banking activities,

• contributing to the consistent application of EU legislation and the

convergence of national supervisory practices,

• promoting the cooperation between competent supervisory authorities, and

• monitoring and assessing the development of banking systems and

international supervisory trends.

The other two Level 3 Committees had equivalent tasks.

The new Decision 2009/78/ΕC of the Commission has already placed greater emphasis

on the “supervisory” tasks of the CEBS since:

• on the one hand, the means of implementation of the (partly repformulated)

task were further specified, i.e. strengthening cooperation between competent

supervisory authorities and encouraging the convergence of Member State

supervisory practices and approaches (Article 4), and

• on the other hand, contribution to developing new supervisory standards was

established as a new task (Article 5).

Similar apply to the other two Level 3 Committees.

3.3.4 Establishing the principle of qualified majority and further strengthening of

cooperation

Finally, the proposal suggested further strengthening of the work of the Committees by

establishing the qualified majority principle in their decision making process, and

further strengthening and standardising cooperation between them.

It should be noted that the qualified majority principle had already been established

for Level 3 Committees, by virtue of the European Commission’s 2009 Decisions on

decision-making relating to these Committees’ tasks, if consensus could not be reached

among Committee members.322

Cooperation between the three Committees has already

been in place since 2005, with the signing of the Joint Protocol on Cooperation,

amended on 8 December 2008.323

322

Regarding CEBS, see Article 14 (first subparagraph) of Decision 2009/78/EC, and Article

5.6 of its Statute.

323 CESR/08-1001, CEBS 2008 232, CEIOPS 3L3-20-08: Joint Protocol on Cooperation

between CESR, CEBS and CEIOPS, December 2008, available at: www.c-ebs.org/Cross-sector-

cooperation.aspx.

101

3.4 Initiatives in relation to the other components for ensuring financial system stability

3.4.1 Strengthening the degree of harmonisation of rules under which regulatory

intervention is exercised in the financial system

Apart from individual proposals included in Chapter II of the de Larosière Report on

the necessary re-adjustment of the currently applicable European financial law,

regarding the rules according to which regulatory intervention is exercised in the

financial system, Chapter III stresses the need for a greater degree of harmonisation of

these rules. Consequently, the proposal suggests that European Institutions and Level 3

Committees should initiate a determined and concerted effort to equip the EU financial

sector with a consistent set of core rules on exercising regulatory intervention, by the

beginning of 2013.324

To this end, and with the objective of creating and applying a set of harmonised, yet

not identical,325

key rules of European financial law, the Report proposes the

identification and removal of key differences in national legislation transposing those

Directives that constitute the sources of European financial law,326

arising from:

• either exceptions, derogations or additions upon the initiative of national

legislators, and

• ambiguities contained in the legal acts themselves.327

In this context, the work of Level 3 Committees will consist in identifying existing

differences and submitting proposals to the European Commission on possible

amendments to the rules included in the main legal acts issued by the European

Parliament and the Council, as well as the executive measures issued by the

Commission.328

This matter has already concerned EU institutions since 2005, but has not yet been

adequately addressed. Specifically, the European Commission’s White Paper

“Financial Services Policy 2005-2010”329

regarding the policy that should be pursued

in the 2005-2010 period with a view to further strengthening the European financial

integration process contains, inter alia, specific proposals to improve the regulatory

intervention process in the financial system.

In this context, the Commission suggests that in order for Member States to properly

and effectively implement established regulations and timely transpose them in their

national legislations (which does not appear to be the case, at least not to a

satisfactory extent), it is necessary to establish a process of ongoing consultation with

Member States, with a view to monitoring developments, ensuring proper transposition,

and avoiding regulatory additions or “gold-plating”.330

324

De Larosière Report, para. 198, first sentence.



327 Ibid., para. 199, first sentence. The Report suggests that the European Commission should

initially concentrate its efforts on key problems (ibid., para. 199, second sentence).


329 COM (2005) 629 final, available at: http://www.eur-lex.europa.eu/LexUriServ/LexUriServ.

do?uri=com:2005:0629.

330 Ibid., section 2.3.

102

3.4.2 Strengthening risk management mechanisms

Finally, the de Larosière Report refers to the need to immediately strengthen risk

management mechanisms. In this context, the proposal suggests that specific rules

under European company and insolvency law with regard to the reorganisation and

winding-up of financial service providers should be elaborated at stage I, aiming at:

• a more effective and cost-efficient way of addressing crises in the future,331

and

• securing an equal and high level of protection to all depositors, investors and

policy-holders (in private insurance), as well as ensuring conditions of

competitive equity between financial service providers and among individual

financial sectors.332

Contrary to what applies to prudential supervision over credit institutions, even after

Directive 2001/24/ΕC of the European Parliament and of the Council on “the

reorganisation and winding up of credit institutions”333

was adopted, the principle of

minimum harmonisation of national provisions concerning reorganisation measures

and winding-up procedures for credit institutions has still not been established in

European banking law. This is due to major differences in Member State legislations

that existed at the time of finalisation of this Directive (which continue to exist)

The review procedure of this Directive started in 2007, following a relevant ECOFIN

decision (in October), which assigned the European Commission with the task of

submitting a relevant proposal for a European Parliament and Council Directive. The

main axes of this review follow the lines of the de Larosière Report’s proposals. In any

case, the anticipated proposal for a Directive had not been submitted until the time this

study was completed.



333 OJ L 125, 5.5.2001, pp. 1-23.

103

F. Legal acts: the impact of the Lisbon Treaty

105

SECTION 3

The role of the European Banking Authority within the European System of Financial Supervision

A. The European System of Financial Supervision (ESFS): an overall

examination

1. The sources of the new institutional framework and their legal basis

1.1 The sources

On 24 November 2010, the European Parliament and the Council adopted as a matter

of urgency, within an (admittedly) extremely short period of time,334

three (3)

Regulations establishing the three so-called “European Supervisory Authorities” to

strengthen the efficiency of micro-prudential supervision of financial service providers

in the European Union (hereinafter collectively referred to as the “Authorities” or the

“three Authorities”):

• the European Banking Authority (hereinafter the “ΕΒΑ”), pursuant to

Regulation (EC) No 1093/2010,335

• the European Insurance and Occupational Pensions Authority (hereinafter

“EIOPA”), pursuant to Regulation (EC) No 1094/2010,336

and

• the European Securities and Markets Authority” (hereinafter “ESMA”),

pursuant to Regulation (EC) No 1095/2010.337

For the purpose of concurrently establishing a specific legal framework on the macro-

prudential oversight of the financial system, for the first time at European level, the

following legal acts were also adopted:

334

Note that the Regulation proposals had been issued by the European Commission on 23

September 2009, accompanied by an impact assessment document (SEC(2009) 1234,

23.9.2009). Regarding the content of the above proposals (which underwent a number of

changes while examined by the European Parliament and the Council), see Louis (2010), Recine and Teixeira (2010) and Tridimas (2011), pp. 801-803.

335 Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24

November 2010 establishing a European Supervisory Authority (European Banking Authority),

amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC, OJ L

331, 15.12.2010, pp. 12-47.


November 2010 establishing a European Supervisory Authority (European Insurance and

Occupational Pensions Authority), amending Decision No 716/2009/EC and repealing

Commission Decision 2009/79/EC, OJ L 331, 15.12.2010, pp. 48-83.


November 2010 establishing a European Supervisory Authority (European Securities and

Markets Authority), amending Decision No 716/2009/EC and repealing Commission Decision

2009/77/EC, OJ L 331, 15.12.2010, pp. 84-119.

106

• on the same date, Regulation (EC) No 1092/2010 of the European Parliament

and of the Council establishing a European Systemic Risk Board (hereinafter

the “ESRB”),338

and

• on 17 November, Regulation (EC) No 1096/2010 of the Council conferring

specific tasks upon the European Central Bank (hereinafter the ‘ECB’)

concerning the functioning of the ESRB.339

These Regulations converted the proposals of the de Larosière Report of February

2009 into rules.

1.2 The legal basis of the sources

(a) The legal basis for the first four abovementioned Regulations is Article 114

TFEU (Article 95 TEC).340

This choice, which was necessary mainly because of the

scope of the tasks and powers conferred upon the ESRB and the Authorities, 341

demonstrates the special significance of these bodies within the European Union’s

(hereinafter the “Union” or the “EU”) institutional system, notably in comparison to

the clearly lower importance of, respectively, the “Lamfalussy Committees” in the

Community’s institutional system, in the context of which a legal framework for

macro-prudential oversight of the financial system did not even exist.

(b) On the other hand, the legal basis for Regulation (EU) No 1096/2010 is

paragraph 6 of Article 127 TFEU (Article 105, para. 6 TEC), which, indeed, was

activated for the first time after it was laid down with the Maastricht Treaty.342

According to the provisions of the sixth paragraph of Article 127 TFEU, specific tasks

may be conferred on the ECB “concerning policies relating to the prudential

supervision of credit institutions and other financial institutions”, including micro-

prudential supervision,343 “with the exception of insurance undertakings”. This is the

reason why this article has been named the “sleeping beauty article” (the ECB being

the “sleeping beauty”).

338

Regulation (EU) No 1092/2010 of the European Parliament and of the Council of 24

November 2010 on European Union macro-prudential oversight of the financial system and

establishing a European Systemic Risk Board, OJ L 331, 15.12.2010, pp. 1-11.

339 Council Regulation (EU) No 1096/2010 of 17 November 2010 “conferring specific tasks

upon the European Central Bank concerning the functioning of the European Systemic Risk

Board”, OJ L 331, 15.12.2010, pp. 162-164.

340 Regarding this choice, see Louis (2010), p. 149. In relation to the EBA Regulation, see also

recital 17

341 On the tasks and powers of the EBA, similar for the other two Authorities as well, see

section B, paragraph 3 in this chapter, below.

342 For an analysis of the provisions of this Article (as in force according to the TEC, because

the Lisbon Treaty has brought about changes in the relevant decision making process), see,

indicatively, Smits (1997), pp. 355-360, and Louis (2007), pp. 162-164.

343 It is clear that the authors of Article 105 para. 6 TEC had this dimension of prudential

supervision clearly in mind, since at the time, there was no talk of the need for macro-prudential

oversight (and, in general, macro-prudential policies) over the financial system.

107

The de Larosière Report did eliminate the possibility of the ECB becoming a body

exercising micro-prudential supervision in the European financial system, but pointed

out, however, that the tasks conferred on the ECB should concern the macro-

prudential oversight of the financial system.344 Consequently:

• the adopted Regulations fully reflect the Report’s proposals;

• in the area of micro-prudential supervision of financial service providers, the

ECB still has the (limited) tasks conferred upon it by way of Article 127, para.

5 TFEU (Article 105, para. 5 TEC),345

• Regulation (EU) No 1096/2010 conferred upon the ECB specific tasks

concerning the operation of the ESRB, with the reasoning that, given its

experience on relevant issues, the ECB can make a significant contribution to

the effective macro-prudential oversight of the Union’s financial system,346

and

• Article 127, para.6 TFEU was rightly selected as its legal basis.347

2. Composition of the ESFS - obligation to cooperate

2.1 Composition of the ESFS

2.1.1 The components of the ESFS

The three Authorities, which, as mentioned above, are mainly responsible in the area of

micro-prudential supervision of financial services providers operating in the EU

Member States,348

along with the ESRB,349

which is responsible for the macro-

prudential oversight of the European financial system, constitute the so-called

“European System of Financial Supervision” (hereinafter the “ESFS”).

Neither the de Larosière Report nor the European Commission (in its Regulation

proposals) have included the ESRB in the ESFS, although they recognised the existing

correlation between the macro-prudential oversight of the financial system and the

micro-prudential supervision of financial service providers. The solution was provided

344

De Larosière Report (2009), paras. 167-172.

345 For an analysis of the provisions of this Article (as applicable, according to the TEC), see,

indicatively, Smits (1997), pp. 338-355.

346 Regulation (EU) No 1096/2010, recital 7.

347 Consequently, despite the fact that the “sleeping beauty article” was activated, this was only

in part and not with respect to the micro-prudential supervision of financial service providers

(while, of course, at the same time, all its other tasks remained intact).

348 As will be explained in detail below (B 3), the scope of tasks and powers of the three

Authorities does, however, extend beyond micro-prudential supervision.

349 The “European Systemic Risk Committee” proposed by the de Larosière Report, was

renamed to “European Systemic Risk Board”, possibly following the renaming of the

“Financial Stability Forum” to “Financial Stability Board” (on this, see Recine and Teixeira (2010), p. 16).

108

by the ECOFIN Council, which proposed that the ESRB be included in the ESFS, in

order to formalise this correlation.350

Components of the ESFS are also:

• the Joint Committee of European Supervisory Authorities (hereinafter the

‘Joint Committee’), which analyses in detail under 2.1.2 below, and

• the competent or supervisory authorities of member states, as laid down in the

legislative acts referred to in Article 1, para. 2 of the Regulations

establishing the Authorities (hereinafter the ‘Regulations establishing the

Authorities’ or the ‘establishing Regulations’).351

Therefore, the ESFS is a new constellation in European law, with no legal personality.

It is a term introduced so as to provide an overall description of its components, as is

the case with the European System of Central Banks (hereinafter the ‘ESCB’) in the

field of the European monetary union.352

2.1.2 Specifically: the Joint Committee

The Joint Committee is governed by the provisions of Articles 54-57 of the

establishing Regulations. It is a joint body of the three Authorities, and is, primarily,

composed of their Chairperson.353

The term “joint body” does not appear in Articles 54-57 of the establishing

Regulations. It only appears in the title of Chapter VI “Joint Bodies (“Gremien” in

German, “organes” in French) of the European Supervisory Authorities”, which

refers to the Joint Committee (Section 1) and the Board of Appeal (Section 2). Whether

the Joint Committee and Board of Appeal can be considered ‘organs’ is open to

interpretation. But as will be argued under B 2, below, it would be correct to claim

that the EBA and the other Authorities indeed have organs, one of which is the Joint

Committee, common for all three.

The Joint Committee serves as a forum to ensure cross-sectoral consistency between

the three Authorities, notably concerning issue-areas where tasks and powers have

been conferred on all three Authorities regarding financial service providers falling

within their scope, more specifically:

• financial conglomerates,

• accounting and auditing,

350

On this, see recital 6c of the ECOFIN proposal for a regulation of 2 September 2010

(Interinstitutional File: 2009/0140(COD)). The Council also opted to exclude the European

Commission from participation in the ESFS.

351 Regulation 1092/2010, Article 1, para. 3, and Regulations (EU) No 1093/2010, 1094/2010

and 1095/2010, Article 2, para. 2. Note that most provisions are identical in the establishing

Regulations of all three Authorities, indeed in the same article. To avoid repetitions, this section

of the study shall only make reference to Regulation (EU) No 1093/2010 on the EBA.

352 On this, see Smits (1997), pp. 92-93, and Häde (1999), p. 1164, who refers to a

“Sammelbezeichnung”.

353 Regulation (EU) No 1093/2010, Article 55, para. 1.

109

• micro-prudential analyses of cross-sectoral developments, risks and

vulnerabilities for financial stability,

• retail investment products,

• measures combating money laundering, and

• information exchange with the ESRB and developing the relationship between

the ESRB and the Authorities.354

2.1.3 The pillars of the ESFS

Considering the above, the ESFS has two pillars:355

(a) The first pillar is macro-prudential oversight of the European financial system,

assigned to the ESRB.

(b) The second pillar is micro-prudential supervision of financial service

providers operating in EU Member States. With regard to this pillar, the ESFS is an

integrated “network of national and European supervisory authorities”,356

on three

levels, with the participation of:

• the national authorities of Member States responsible for the micro-prudential

supervision of financial service providers (including the “colleges of

supervisors”, established for banking groups by virtue of Directive

2006/48/EC and composed of national competent authorities),357

• the three European Authorities, with the abovementioned national authorities

being represented in the primary organ thereof (the Board of Supervisors; on

this, see B 1.2, below), and

• the Joint Committee, composed of the Chairpersons of the three Authorities.

2.2 The purpose of the ESFS

The purpose of the ESFS is defined both in Regulation (EU) No 1092/2010

establishing the ESRB (see point (a) below), and in the Regulations establishing the

Authorities (see point (b), below), using a different, in any case, wording. In more

detail:

354

Regulation (EU) No 1093/2010, Article 54, para. 2. The cooperation between CEBS, CESR

and CEIOPS, which was informal in nature, was based on a 2005 Joint Protocol of Cooperation

(CESR 05-405, CEBS 05-99, CEIOPS-3L3-01/05,“Joint Protocol on Cooperation between

CESR, CEBS and CEIOPS”, November 2005).

355 On this, see Recine and Teixeira (2010), p. 21, who refer to a “two-pillar structure”.

356 Regulation (EU) No 1093/2010, recital 9, first sentence.

357 Colleges of supervisors were established, as already mentioned, by Article 1, point 33 (new

Article 131a), of Directive 2009/111/EC of the European Parliament and of the Council,

amending Directive 2006/48/EC.

110

(a) Regulation (EU) No 1092/2010 uses a general wording to define the purpose

of the ESFS: “ensure the supervision of the Union’s financial system”.358

In this

provision, the term ‘supervision’ must be understood lato sensu, namely as covering

both macro-prudential oversight of the financial system, which, as mentioned above, is

the mission of the ESRB (the operation of which is governed by the abovementioned

Regulation’s provisions),359

and micro-prudential supervision of financial service

providers.

(b) On the contrary, the wording in the establishing Regulations is evidently more

precise. However, it is also a partial wording, as it focuses on the objectives of the

three Authorities (on this, see under A 3.1, below), without making any reference to the

ESRB. More specifically, Article 2 of each of these Regulations stipulates that the

“main objective” of the ESFS (without, however, making any reference to a secondary

objective) is “to ensure that the rules applicable to the financial sector are adequately

implemented.”360

This objective of the ESFS is specified in the establishing Regulations, since they

stipulate that adequate implementation of the rules applicable to the financial sector

(namely the European financial law, primarily enactedby the European Parliament and

the Council through the issuance of legislative acts according to the ordinary legislative

procedure) is aimed at satisfying two policy demands:361

(i) The first is safeguarding financial stability of the European financial system,

obviously with a view to avoiding the occurrence of financial crises, like the recent

international one (2007-2009), which was the catalyst for the creation of the ESFS.

(ii) The second is to ensure:

• on the one hand, public confidence in the financial system, which was

seriously shaken during the recent crisis,362

and

• on the other, sufficient protection for consumers of financial services, which

demonstrates the involvement of the ESFS in the field of protecting the

economic interests of consumers of financial services.

In the author’s opinion, protection of consumers of financial services is one of the

objectives of the three abovementioned Authorities (on this, see para. 3.1 below) and

one of their tasks, specifically regulated363

(and this is the first time this happens, as no

such tasks had ever been conferred upon the Lamfalussy Committees), but is not

included in the objectives of the ESRB, as no such provisions exist in the latter’s

establishing Regulation. In this regard, the relevant reference in Article 2 is not

accurate to refer to the ESFS in its entirety, a fact that reinforces our initial remark that

the wording mostly focuses on the work of the Authorities.

358

Regulation (EU) No 1092/2010, Article 1, para. 2.

359 Regulation (EU) No 1093/2010, Article 3, para. 1, first sentence.


361 Regulation (EU) No 1093/2010, Article 2, para. 1, sentence b, in-finem.

362 As Swoboda points out (2008, section Ι, in finem) in relation to the recent financial crisis:

“The current turmoil is not only a liquidity and a solvency crisis (sic), it is much more: a severe

and rapidly spreading confidence crisis that reflects a meltdown of trust in our financial system

and institutions, private and public (sic).”.

363 Regarding the related task of the EBA, see under B 3.3, below.

111

2.3 Obligation to cooperate between the ESRB and the Authorities

The provisions of paragraph 3 of Article 2 of the Regulations establishing the

Authorities lay down the obligation for regular and close cooperation both with the

ESRB and between the Authorities themselves, through the Joint Committee. The aim

of this cooperation is twofold:

• to ensure cross-sectoral consistency of their operations, and

• to develop common positions on cross-sectoral issues, including the

supervision of financial conglomerates.

Moreover, paragraph 4 of the same Article stipulates that this cooperation must take

form according to the “principle of sincere cooperation” established by Article 4, para. 3 (first subparagraph) TEU,

364 “with trust and full mutual respect, in particular in

ensuring the flow of appropriate and reliable information between them”. The same

provision is included verbatim in Regulation (EU) No 1092/2010 on the establishment

of the ESRB (Article 1, para. 4).

3. The three Authorities: general provisions

3.1 The objective of the Authorities

Apart from defining the key objective for the ESFS (according to paragraph 2.2

above), the establishing Regulations also set a specific purpose for the Authorities. The

mark is given in recital 8 which stresses the need to upgrade the role of the Lamfalussy

Committees, since: “The Union has reached the limits of what can be done within their

context.” This upgrade seeks to ensure that:

• there are mechanisms in place enabling national supervisory authorities to

arrive at the best possible supervisory decisions for cross-border financial

institutions;365

• there is sufficient cooperation and information exchange between national

supervisory authorities;

• joint action by national authorities is not hindered by the complex patchwork

of regulatory and supervisory requirements in Member States;

• Member States and national supervisory authorities do not seek national

solutions as a response to problems at EU level; and

• the Union’s legal acts are interpreted in a uniform manner across Member

States.

The objective of the Authorities is made more specific in Article 1 (para. 5) of the

establishing Regulations, whereby, the objective of the three Authorities is

“to protect the public interest by contributing to the short-, medium- and long-term

stability and effectiveness of the financial system, for the Union economy, its citizens

and businesses.”366

364

OJ C 83, 30.3.2010, pp. 13-45 (consolidated version). On this provision of the TEU, see

Lenz (2010).

365 For a detailed definition of the term “financial institutions”, see details in B 2.2.2, below.

366 Regulation (EU) No 1093/2010, Article 1, para. 5, first subparagraph, first sentence.

112

Indeed, this is the first time (to the author’s knowledge) that a legal act concerning the

European financial system makes reference to the concept of “protecting the public

interest”.367

In this context, the Authorities are called upon to contribute to:

• improving the functioning of the internal market, including, in particular, a

sound, effective and consistent level of regulatory intervention and

supervision;

• ensuring the integrity, transparency, efficiency and orderly functioning of

financial markets;

• strengthening international supervisory coordination;

• preventing regulatory arbitrage and promoting equal conditions of

competition;

• ensuring the taking of credit, investment, insurance and other risks are

appropriately regulated and supervised; and

• enhancing customer protection.368

In order to achieve the above, the following implementation means were put into place:

• helping ensure the consistent, efficient and effective application of the

legislative acts referred to in Article 1 (para. 2) of the establishing

Regulations, whose scope is the main scope of action thereof (with regard to

EBA, see details in B.2 below);

• fostering convergence in micro-prudential supervision;

• providing opinions to the European Parliament, the Council and the

Commission, and

• undertaking economic analyses of the markets,

according to the tasks and powers conferred upon the Authorities (as regards the EBA,

see details in B 3, below).369

3.2 The Authorities as successors to the Lamfalussy Committees and as “European Supervisory Authorities” (ESAs)

3.2.1 The Authorities as successors to the Lamfalussy Committees

As of 1 January 2011, when the relevant Regulations entered into effect and pursuant

to the proposals of the de Larosière Report, the three Authorities succeeded and

replaced the three Lamfalussy Committees, as follows:

367

The concept of public interest (national or EU) shall be defined by the Authorities, and,

should the need arise, it will be scrutinised by the Court of Justice of the European Union.

368 Regulation (EU) No 1093/2010, Article 1, para. 5, first subparagraph, second sentence.

369 Ibid., Article 1, para. 5, second subparagraph.

113

• the EBA is the legal successor of the CEBS,370

• ESMA is the legal successor of the CESR, and

• EIOPA is the legal successor of the CEIOPS.

Consequently:

(a) Pursuant to the proposals of the de Larosière Report, and further to the

architecture created in 2002 following implementation of the Lamfalussy Report’s

proposals, the “sectoral approach” was preserved with regard to pan-

European institutional arrangements concerning the financial system’s micro-

prudential supervision.371

(b) The Authorities assume all the ongoing work and all the powers of the

Lamfalussy Committees. The legal acts issued by the Lamfalussy Committees are now

legal acts of the Authorities.

3.2.2 The Authorities as “European Supervisory Authorities”

The fact that micro-prudential supervision of financial service providers in the EU is

still a task of the competent national supervisors, under the explicit provisions of

Article 2, para. 5 of the Regulations and the proposals of the de Larosière Report, is a

key and material element of the European financial system’s architecture, even after

the establishment of the three Authorities. According to recital 9 (first sentence) of

Regulation (EU) No 1093/2010: “The ESFS should be an integrated network of

national and Union supervisory authorities, leaving day-to-day supervision to the

national level.”

Consequently, despite the fact that the three Authorities, are called “European

Supervisory Authorities” in the heading of their establishing Regulations, this term is

most likely used abusively and definitely not literally.372

Specifically:

(a) The Authorities, established on the basis of the Union’s law, are European and

indeed called “Union bodies” (on this, see B 1.1 below).

(b) Their tasks include, inter alia, issues concerning the micro-prudential

supervision of financial service providers operating in the EU Member States.

370

Ibid., Article 76, para. 4, first sentence. By virtue of Article 80 of the abovementioned

Regulation, Commission Decision 2009/78/EC establishing the CEBS was repealed with effect

from 1 January 2011 (similarly, Regulations applies to the Decisions establishing CESR and

CEIOPS).

On this, note that national central banks-members of the ESCB (namely those of all EU

Member States) pursue (since 1998) their cooperation in the context of the ESCB’s Banking

Supervision Committee. For more details, see European Commission (2000), pp. 11-12.

371 As regards the reasons that led to this approach being adopted (although there were

proposals for the unification of Authorities), see Louis (2010), p. 154 (point 7.10). On the issue

of creating one or more supervisory authorities for the financial system in the European Union,

see, indicatively, Lastra (2006), pp. 324-328, with further references.

372 Respectively, the CEBS was defined as an “independent advisory group on banking

supervision in the Community” (Decision 2009/78/EC, Article 1). This was also the case for

CESR and CEIOPS.

114

(c) The Authorities have regulatory powers on those issues (i.e., they are

regulatory authorities), since they have the power to issue guidelines and

recommendations (European ‘soft’ law acts), as well as decisions, in addition, of

course, to their decisive contribution (by preparing the relevant drafts) to the shaping of

regulatory and implementing technical standards issued by the European Commission

by means of delegated acts (regarding the EBA’s regulatory powers, see B 3.2 below).

(d) However, the Authorities do not have, at least initially, any micro-prudential

supervisory powers over financial service providers operating in the Union's member

states, and consequently, are not '‘supervisory authorities’ as such.373

For this reason, in

the author’s opinion, it would be more appropriate for the Authorities to be called

‘European quasi-supervisory authorities’, or ‘European supervisory bodies’.

Nevertheless, this point is made more relevant in light of two innovative elements that

suggest a tendency for gradual, albeit substantial, further strengthening of the

Authorities’ powers vis-à-vis competent national supervisors:

(i) Firstly, the EBA shall be entitled to substitute itself to the work of competent

national supervisors, if the latter do not comply with a Commission opinion or EBA

decision under the provisions of Articles 17-19 of the abovementioned Regulation (on

this, see Β 3.1.3.1 below).

(ii) Moreover, it is expected that the supervision of credit rating agencies

operating in the Union will be promptly conferred upon ESMA (and not to competent

national supervisors), according to the provisions of a Regulation of the European

Parliament and the Council to be adopted in the coming months (based on a relevant

Commission proposal),374

whereby Regulation (EC) No 1060/2009 “on credit rating

agencies” will be amended.375

Recital 5 of Regulation (EU) No 1095/2010 on the

functioning of ESMA states the following:

“The European Council, in its conclusions of 19 June 2009, (...) emphasised that the

European Supervisory Authorities should also have supervisory powers over credit

rating agencies and invited the Commission to prepare concrete proposals (...). The

Commission has already presented a Proposal for a Regulation amending Regulation

(EC) No 1060/2009 of the European Parliament and of the Council of 16 September

2009 on credit rating agencies. The European Parliament and the Council should

consider that proposal in order to ensure that (...) the European Securities and

Markets Authority will have adequate supervisory powers over credit rating agencies

(...).”

373

As regards the powers of the “supervisory” authorities (“Bankenaufsichtsbehörden”) in the

context of micro-prudential banking supervision, see Blumer (1996), pp. 43-50, and Barth,

Caprio, and Levine (2006), pp. 121-132.

374 COM(2010) 289 final, 2.6.2010.

375 OJ L 302, 17.11. 2009, pp. 1-31.

115

TABLE 5

The cooperation of national banking supervisory authorities at European

level:

from informal fora to “European (quasi-) supervisory authorities”

Banking Securities and Markets Insurance,

Reinsurance and

Pension Funds

Before adoption

of the

Lamfalussy

process:

informal

(except BSC)

GdC (Group de

Contact, 1972), and

BSC (Banking

Supervision

Committee,

European Central

Bank, 1998) (*)

HLSSC (High Level

Securities

Supervisors

Committee, 1985)

FESCO (Forum of

European Securities

Commissions, 1997)

CIS (Conference

of Insurance

Supervisors,

1957)

After adoption

of the

Lamfalussy

process:

institutionalised

CEBS (Committee of

European Banking

Supervisors, 2004),

and

BSC (*)

CESR (Committee of

European Securities

Regulators, 2001)

CEIOPS (Committee

of European

Insurance and

Occupational

Pensions Supervisors,

2004)

After

establishment

of the ESFS:

institutionalised

ΕΒΑ (European

Banking Authority,

2011), and

BSC (*)

ESMA (European

Securities and Markets

Authority, 2011)

EIOPA (European

Insurance and

Occupational

Pensions Authority,

2011)

(*) within the context of the ESCB, with the representation of national central banks (NCBs)

of all Member States (those that have adopted the euro as their currency and those with a

derogation)

116

3.3 Safeguard clause as to the fiscal responsibilities of member states

The functioning of the Authorities is demarcated by the established “safeguard clause

as to the fiscal responsibilities of member states.” In particular, Article 38 of the

establishing Regulations states that Authorities must ensure that no decision taken

pursuant to the provisions of para. 3 of Articles 18 (regarding action in emergency

situations) and 19 (regarding the settlement of disagreements between competent

national authorities) (on this, see B 3.1.3.1 below) impinges in any way on the fiscal

responsibilities of Member States.376

Regulations’ recitals clearly state the following:

“Member States have a core responsibility for ensuring coordinated crisis management

and preserving financial stability in crisis situations, in particular with regard to

stabilising and resolving individual failing financial institutions. Decisions by the

Authority in emergency or settlement situations affecting the stability of a financial

institution should not impinge on the fiscal responsibilities of Member States.”377

Where a Member State considers that a decision taken by the EBA or another

Authority impinges on its fiscal responsibilities, it may activate a process, with the

involvement of the Commission and the ECOFIN Council which:

• is different depending whether the decision has been taken on the basis of

Articles 18 or 19 of the Regulation, and

• shall be completed with the Council taking a decision on whether or not to

revoke the Authority’s decision.378

However, any abusive use of the safeguard clause by a Member State shall be

prohibited as incompatible with the internal market. This applies especially if a

decision by the Authority does not have a significant or material fiscal impact.379

376


377 Ibid., recital 50, first and second sentences.

378 Ibid., Article 38, paras 2 and 3-4, respectively. On this, note that the Council’s decision on

whether or not to revoke the EBA’s decision shall be taken by simple majority (ibid., Article 38,

para. 3, fourth subparagraph).

379 Ibid., Article 38, para. 5. As an example, recital 50 of the Regulation (fourth sentence) refers

to a reduction of income linked to the temporary prohibition of specific activities or products

for consumer protection purposes.

117

3.4 Directive 2010/78/EU as the product of the need to amend certain legislative acts falling within the Authorities' scope of action380

3.4.1 Overall examination

Directive 2010/78/EU of the European Parliament and of the Council (known as the

“Omnibus Directive”) was adopted along with the three establishing Regulations (i.e.

on 24 November 2010).381

The rationale behind the adoption of this Directive was the

need to amend certain legislative acts of the European Parliament and of the Council

which constitute sources of European financial law, and the scope of which sets out the

Authorities’ scope of action, pursuant to Article 1 (paras 2 and 3) of their establishing Regulations (regarding the EBA’s scope of action, see B 2, below). This

amendment, which was (initially) limited to eleven (11) of the above legislative acts

(Directives in particular),382

had a dual purpose:

• on the one hand, to add provisions to these legislative acts so as to incorporate

and qualify some of the tasks conferred upon the Authorities by virtue of their

establishing Regulations (see 3.4.2, below), and

• on the other hand, to meet the terms set by the TFEU regarding the

Commission’s ability to issue delegated and implementing acts on the basis of

draft technical standards developed by the Authorities, according to the

relevant powers conferred on them by the establishing Regulations (see 3.4.3)

3.4.2 Amendment of legislative acts and tasks of the Authorities

In order for the ESFS to function efficiently and for the Authorities to be in a position

to perform equally efficiently, the tasks conferred upon them pursuant to Article 8 of

the Regulations establishing the Authorities (regarding the tasks of the EBA, see B

3.1.2., below), Directive 2010/78/EU added new provisions to the abovementioned

legislative acts, so that some of these tasks be explicitly incorporated therein.

380

Further on, the phrases “legislative acts, whose scope sets out the Authorities’ scope of

action” (which is more accurate) and “legislative acts falling within the Authorities’ scope of

action” are used as equivalents.

381 Directive 2010/78/EU of the European Parliament and of the Council of 24 November 2010

“amending Directives 98/26/EC, 2002/87/EC, 2003/6/EC, 2003/41/EC, 2003/71/EC,

2004/39/EC, 2004/109/EC, 2005/60/EC, 2006/48/EC, 2006/49/EC and 2009/65/EC in respect

of the powers of the European Supervisory Authority (European Banking Authority), the

European Supervisory Authority (European Insurance and Occupational Pensions Authority)

and the European Supervisory Authority (European Securities and Markets Authority)”, OJ L

331, 15.12.2010, pp. 120-161.

The legal basis of this Directive are the articles of the TFEU that constitute the legal basis of the

Directives being amended (Articles 50, 53, paras 1, 62 and 114).

In 2011, a new Directive of the European Parliament and of the Council is expected (known as

the “Omnibus II Directive”), on the basis of a relevant Commission recommendation

(COM(2011) 8 final, 19.1.2001), whereby more amendments will be introduced to Directive

2003/71/EC and for the first time amendments to Directive 2009/138/EC (known as “Solvency

II” in insurance) concerning the powers of ESMA and of EIOPA, respectively.

382 After adoption of the abovementioned “Omnibus II Directive”, the number of amended

legislative acts will increase to twelve (12). It is, however, reasonable to expect that in the near

future all other legislative acts falling within the Authorities’ scope of action will also be

amended, accordingly.

118

The relevant amendments were performed separately for each legislative act, pursuant

to Articles 1-11 of the Directive.383

3.4.3 Amendment of legislative acts and power of the Authorities to develop draft

technical standards

3.4.3.1 Introductory Remarks

According to the provisions of Articles 10-15 of the establishing Regulations (and on

the basis of what follows in section B.3.2.2 regarding the relevant powers of the EBA),

Authorities have the power to develop draft regulatory and implementing technical

standards, to be submitted, respectively, to the European Commission for endorsement

via (namely through issuance by the Commission of):

• delegated acts, pursuant to Article 290 TFEU (on this, see 3.4.3.2, below),384

and

• implementing acts, pursuant to Article 291 TFEU (see 3.4.3.3).385

It is evident that this solution was adopted for both categories of technical standards,

because Authorities do not have the power to issue legally binding acts. Such a power

could only be conferred upon them by amendment of the TFEU, as was the case with

the ECB, which has independent power to issue legal acts based on Article 132 TFEU

(Article 110 TEC).386 According to the applicable institutional framework of the Union,

the legally binding nature of technical standards, both regulatory and implementing,

was, consequently, ensured through endorsement by the Commission of the drafts

developed by the Authorities by means of delegated and implementing acts.387

According to Articles 290 and 291 TFEU, a legislative act of the European Parliament

and of the Council may delegate to the Commission the power to adopt such acts.

Especially for delegated acts, the TFEU stipulates that such legislative acts shall also

include the ex ante and ex post restrictions on this delegation.

In view of the above and in order to enable activation, by the Authorities, of the power

to develop draft regulatory and implementing technical standards, it became necessary

to further amend the (abovementioned) legislative acts falling within the Authorities’

scope of action. These amendments were also introduced by way of Directive

2010/78/EU.

383

For instance, point 14 of Article 9 of Directive 2010/78/EU added the following sentence to

Article 42 of Directive 2006/48/EC (which come under the scope of action of the EBA,

according to what follows in B 2, below): “The competent authorities may refer to the Authority

situations where a request for collaboration, in particular to exchange information, has been

rejected or has not been acted upon within a reasonable time. Without prejudice to Article 258

of the Treaty on the Functioning of the European Union (TFEU), the Authority may, in

situations referred to in the first sentence, act in accordance with the powers conferred on it

under Article 19 of Regulation (EU) No 1093/2010.”

384 See indicatively Craig (2010), pp. 253-254 and 260-270, and Hetmeier (2010), pp. 2679-

2687.

385 See indicatively Craig (2010), pp. 254-255 and 270-282, and Hetmeier (2010), pp. 2687-

2691.

386 See indicatively Smits (1997), pp. 102-106.

387 Regulation (EU) No 2010/1093, recital 23, first sentence.

119

3.4.3.2 Elaboration of draft regulatory technical standards by the Authorities and

adoption of delegated acts by the Commission

(a) The provisions of the TFEU

According to Article 290 TFEU,388

in order for the Commission to adopt delegated

acts, the European Parliament and the Council must confer to it the relevant power by

virtue of a legislative act (pursuant to Article 289 TFEU). The Article also stipulates

that the legislative acts must also include the ex ante (see (i) below) and ex post (see

(ii) below) restrictions of this delegation. In particular:

(i) The objectives, content, scope and duration of the delegation of power shall be

explicitly defined in the legislative acts.389

In this context, it is explicitly stipulated that:

• the “essential elements” of a given issue-area shall be reserved for the

legislative act and shall not be the subject of a delegation of power,390

and

• consequently, delegated acts supplement or amend certain “non-essential

elements” of the legislative act.391

(ii) Legislative acts shall explicitly lay down the conditions to which the

delegation is subject; these conditions may be as follows:

• the European Parliament or the Council may decide to revoke the delegation,

and/or

• the delegated act may enter into force only if no objection has been expressed

by the European Parliament or the Council within a period set by the

legislative act.392

Consequently, adoption by the Commission of regulatory technical standards by means

of delegated acts on the basis of relevant drafts developed by the Authorities, requires

that the legislative acts falling within these Authorities’ scope of action provide for the

relevant delegation of power and define all restrictions on such a delegation.

In the Declaration (No 39) “on Article 290 TFEU”, annexed to the Final Act of the

Intergovernmental Conference which adopted the Treaty of Lisbon, the Conference

took note of the Commission's intention “to continue to consult experts appointed by

the member states in the preparation of draft delegated acts in the financial services

area, in accordance with its established practice”.

388

TFEU, Article 290, para. 1, first subparagraph. The term “delegated acts” is used in

paragraph 3 of this Article, while in paragraph 1, the term “non-legislative acts of general

application” is used. The two terms are synonymous.

389 Ibid., Article 290, para. 1, second subparagraph, first sentence.

390 Ibid., Article 290, para. 1, second subparagraph, second sentence.

391 Ibid., Article 290, para. 1, first subparagraph.

392 Ibid., Article 290, para. 2, first sentence. It should be noted that, in this case, it is not

necessary for both institutions to have a common position, since both revocation of the

delegation and of objection may be expressed from either one of them.

120

It is obvious that at the time this Declaration was drafted (in 2007) the Commission

expressed its intention to continue to consult with the Lamfalussy Committees. This

consultation had been enacted by the Commission Decisions establishing the

Lamfalussy Committees, in the context of the regulatory comitology procedure upon

adoption of implementing measures, according to the provisions of Article 202 TEC

(point 3, first sentence), which, according to the prevailing view (clearly supported by

the above Declaration), does not apply to delegated acts of the Commission (as

opposed to implementing acts, see 3.4.3.3(a), below).393

Consequently, in light of the conditions created with the establishment of the ESFS, the

Commission’s intention must be interpreted in the direction of continuation of

deliberations with the Authorities in elaborating delegated acts on matters of micro-

prudential supervision of financial service providers, albeit the comitology procedure

does not apply to them in the context of (the Authorities) developing draft regulatory

technical standards.394

(b) The provisions of Directive 2010/78/EU

Directive 2010/78/EU lays down the issue-areas, per amended legislative act (Articles

1-11, respectively), where:

• the power to elaborate draft regulatory technical standards has been conferred

upon the Authorities, and

• the power to endorse the above drafts by means of delegated acts has been

conferred to the Commission.

The Directive also lays down the objectives, content and scope of the delegation of

power. On the contrary, the duration of the delegation of power, as well as the

conditions it is subject to (namely the ex post restrictions), have been laid down in a

fragmented manner in Directive 2010/78/ΕΕ, and in a complete manner in the

Regulations establishing the Authorities (on this, see Β 3.2.2.1, below).

A clear example of the fragmented nature of the regulation is the fact that the duration

of the delegation of power to the Commission and the ex post restrictions thereof in

Directives 2006/48/ΕC and 2006/49/EC (which are amended by Directive 2010/78/EU

and are falling within the EBA's scope of action, on this see Β 2.2.2, below), was set in

Directive 2010/76/EU of the European Parliament and of the Council, which was

adopted on the very same day as Directive 2010/78/EC (!).

Nevertheless, this Directive does not merely set the foundations for activation of the

Authorities’ power to elaborate draft regulatory standards, but also establishes the

Authorities’ obligation to exercise it in certain cases. In this context, the Commission is

requested, by 1 January 2014, to submit to the European Parliament and the Council a

report specifying whether the Authorities have submitted the draft regulatory and

implementing technical standards provided for in this Directive, no matter “whether

the submission is mandatory or optional.”395

393

On this, see Craig (2010), pp. 260-263, with reference to arguments to the contrary.

394 Regulation (EU) No 1093/2010, recital 21, first sentence. Another noteworthy thought is the

one expressed in the second sentence, according to which it is important to take EBA’s

expertise into account as regards “standards or parts of standards that are not based on a draft

technical standard that the Authority has elaborated.”

395 Directive 2010/78/EU, Article 12.

121

3.4.3.3 Elaboration of draft implementing technical standards by the Authorities and

adoption of implementing acts by the Commission

(a) The provisions of the TFEU

According to paragraph 2 of Article 291 TFEU, where uniform conditions for

implementing “legally binding Union acts” are needed, those acts shall confer

implementing powers to the Commission, in order to adopt implementing acts.

According to this provision, the delegation of power for adoption of implementing

acts396

can be conferred upon the Commission not only by means of legislative acts of

the European Parliament and the Council (according to Article 289 TFEU), by also by

means of Commission delegated acts, since both these categories come under the

concept of “legally binding Union acts”.397

Consequently, adoption by the Commission of implementing technical standards, by

means of implementing acts on the basis of relevant drafts of the Authorities, requires

that legislative acts within these Authorities’ scope of action, or delegated acts issued

thereby, provide for the relevant delegation of power.

Finally, it is noteworthy that contrary to delegated acts, the comitology procedure, even

though modified, (still) applies to the Commission’s implementing acts. This

procedure ought to be laid down398

and was indeed laid down:

• with the provisions of a Regulation adopted by the European Parliament and

the Council according to the ordinary legislative procedure,399

• and not based on Decisions of the Council, following an opinion of the

European Parliament, as was stipulated in TEC (yet another proof of the

upgraded institutional role of the European Parliament after entry into effect

of the Lisbon Treaty).400

(b) The provisions of Directive 2010/78/EU

Directive 2010/78/EU also lays down the areas where the power to elaborate draft

implementing technical standards has been conferred upon the Authorities, and where

the power to endorse them by means of implementing acts has been conferred upon the

Commission, for each amended legislative act, separately (Articles 1-11, respectively).

The provisions of the Directive’s Article 12 (according to para. 3.4.3.2 (b), above) also

apply to draft implementing technical standards.

396

The term “implementing acts” appears in para. 4, Article 291.

397 On this, see Craig (2010), pp. 272-275.

398 TFEU, Article 291, p. 3.

399 Regulation (ΕU) No 182/2011 of the European Parliament and of the Council “laying down

the rules and general principles concerning mechanisms for control by member states of the

Commission’s exercise of implementing powers” (OJ L 55, 28.2.2011, pp. 13-18), repealing the

above mentioned (see footnote no. 72) Decision 1999/468/EC of the Council, as in force (ibid.,

Article 12).

400 TEC, Article 202, point 3, fourth sentence.

122

B. The European Banking Authority (EBA)

1. Legal status and organs

1.1 The legal status

As already mentioned in the previous section, the Εuropean Βanking Authority

(“Europäische Bankenaufsichtsbehörde” in German, “Aurorité bancaire européenne” in

French) was established by virtue of Regulation 1093/2010 of the European

Parliament and of the Council (hereinafter the ‘Regulation’, except where there is

reference to another act) and forms part of the ESFS.401

It was established on 1 January

2011402

and entered into operation on that day as the successor of the CEBS.

The ΕΒΑ, which has its seat in London (same as the CEBS),403

is a ‘Union body’,404

like the other Authorities.405

It has a legal personality406

and thus enjoys the most

extensive legal capacity accorded to legal persons under the national law of every

member state. It may, in particular, acquire or dispose of movable and immovable

property and be a party to legal proceedings.407

1.2 The organs

Contrary to the CEBS, the EBA has no members. It does, however, have five (5)

organs, specified in Article 6 of the Regulation.408

This Article of the Regulation makes no reference to organs (the title uses the term

“composition”). However, it would be correct to assume that the EBA has organs, all

the more so, since recital 52 (first sentence) reads: “A Board of Supervisors (...)

should be the principal decision-making organ of the Authority.”409

The organs of the EBA are as follows:

(a) The first organ is the Board of Supervisors, governed by the provisions of

Articles 40-44, and is composed of:

• the EBA Chairperson;

• the heads of the national public authorities competent for micro-prudential

supervision of credit institutions, be they central banks or other independent

administrative authorities, and

401

Regulation (EU) No 1093/2010, Article 2, para. 1, first sentence.

402 Ibid., Article 82, third sentence.


404 Ibid., Article 5, para. 1. The wording used (“Union body” in English, “Einrichtung der

Union” in German, “organisme de l’Union” in French) implies that the EBA is not an agency.

As regards the definition and powers of “Union agencies”, see, indicatively, Shapiro (2011).

405 On the contrary, this capacity is not attributed to the ESRB, as there is no similar provision

in Regulation (EU) No 1092/2010.



408 The functioning of these organs is governed by the provisions of (internal) decisions. See at:

http://www.eba.europa.eu/Aboutus/Legal-texts/EBA-legal-documents.aspx.

409 On this, see also Louis (2010), p. 155.

123

• one representative of the European Commission, the ECB, the ESRB, the

ESMA and the EIOPA.410

The members of the CEBS also included the national central banks (NCBs) of all EU

Member States, even those not directly involved in the micro-prudential supervision of

individual credit institutions.411

By contrast, NCBs are not represented in the EBA

Board of Supervisors. Accordingly, cooperation between all NCBs of EU Member

States takes place only within the Banking Supervision Committee of the ESCB.

(b) The second organ is the Management Board, governed by the provisions of

Articles 45-47. It has seven members and is composed of:

• the EBA Chairperson, and

• six other members of the Board of Supervisors, elected by and from the

voting members of the Board of Supervisors.412

(c) The third organ is the Chairperson (Articles 48-50), who is a full-time

independent professional,413

appointed by the Board of Supervisors,414

and representing

the EBA.415

(d) The fourth organ is the Executive Director (Articles 51-53), who is also

appointed by the Board of Supervisors after confirmation by the European

Parliament.416

The Executive Director, who is a full-time independent professional, is

in charge of managing the EBA.417

(e) Finally, the fifth organ is the Board of Appeals (Articles 58-59), which:

• as discussed above (Α 2.1.2), is a joint body of the three Authorities (just like

the Joint Committee which, however is not mentioned in Article 6),

• has six members, and

• provides expert legal advice on the legality of the EBA’s exercise of its

powers.418

410

Regulation (EU) No 1093/2010, Article 40, para. 1. Only the heads of national public

authorities competent for micro-prudential supervision of credit institutions shall have voting

rights. The Chairperson and all other members have non-voting status.

411 Decision 2009/78/EC, Article 7, para. 1, points (b) and (c).

412 Regulation (EU) No 1093/2010, Article 45, para. 1, first subparagraph. The first members

elected were the Board of Supervisors members from the Czech Republic, Finland, France,

Germany, Hungary, and Sweden.

413 Ibid., Article 48, para. 1, first subparagraph.

414 Ibid., article 48, para. 2, first subparagraph. The first Chairperson appointed is Italy’s Andrea

Enria (who in 2004-2007 had served as CEBS Secretary General), for a five-year term of office

(according to Article 48, para. 3).


416 Ibid., Article 51, para. 2. Conversely, appointment of the Chairperson does not require any

action on the part of the European Parliament which, however, may express its objection (ibid.,

Article 48, para. 2, second subparagraph). The first Executive Director appointed is Hungary’s

Adam Farkas for a five-year term of office (according to Article 51, para. 3).



124

2. Scope of action

2.1 Introductory Remarks

The EBA’s scope of action is explicitly laid down in paragraphs 2 and 3 of Article 1

of the Regulation. This is a novum compared to the CEBS, whose scope of action was

not explicitly defined, thus resulting in ambiguity in terms of task demarcation.

2.2 The main basis of the EBA’s scope of action

2.2.1 General provisions

The main basis of the EBA’s scope of action is described in paragraph 2 of Article 1 of

the Regulation. This provision lays down the following:419

(a) The EBA shall act within the powers conferred upon it, pursuant to the

provisions of Articles 8 and 9 of the Regulation (on this see Β 3.1.3, and Β 3.3

respectively, below).

(b) The EBA shall act, initially, within the scope of specific, exhaustively

indicated, legislative acts (on this see 2.2.2, below), including all legal acts (Directives,

Regulations and Decisions) based on them. The latter reference obviously applies to:

• implementing measures already adopted by the European Commission

pursuant to Article 202 TEC, and

• regulatory and implementing technical standards to be adopted by the

Commission through delegated and implementing acts, pursuant to Articles

290 and 291 TFEU, respectively.

2.2.2 The legislative acts referred to in para. 2 of Article 1 of the Regulation

The legislative acts referred to in paragraph 2 of Article 1 and within the scope of

which the EBA must act, are divided into two categories:

(a) The first category includes five (5) legislative acts of the European Parliament

and of the Council (as currently applicable) which constitute the “core” of the EBA’s

scope of action. From a systematic point of view (for each branch of European

financial law to which each category corresponds), these acts can be classified into two

sub-categories:

(aa) The first one includes three (3) of the five (5) legislative acts constituting the

main sources of European banking law:

• Directive 2006/48/EC “relating to the taking up and pursuit of the business

of credit institutions”,

• Directive 2006/49/EC “on the capital adequacy of investment firms and

credit institutions”, and

• Directive 94/19/EC “on deposit-guarantee schemes”.

419


125

The fourth Directive that constitutes a source of European banking law (Directive

2009/110/EC) is included in the EBA’s scope of action, pursuant to point (b), below.

What is striking, however, is the fact that its scope of action does not include the fifth

legislative act that constitutes a source of European banking law, namely Directive

2001/24/EC “on the reorganisation and winding-up of credit institutions”, all the

more so, since addressing banking crises (an issue-area which, inter alia, does include

the reorganisation and winding-up of credit institutions) is one of the EBA’s tasks (on

this, see 3.1.2, below).

(ab) The second subcategory includes:

• Directive 2002/87/EC “on the supplementary supervision of credit

institutions, insurance undertakings and investment firms in a financial

conglomerate”,420

and

• Regulation (EC) no. 1781/2006 “on information on the payer accompanying

transfers of funds”,421

which is a source of the European law on the protection

of the economic interests of consumers of financial services.

(b) The second category includes four (4) legislative acts of the European

Parliament and of the Council (as in force), in the context of which, the EBA has the

power to act only to the extent that their provisions are applicable:

• to credit institutions and other categories of financial institutions, as well as

• the competent authorities exercising supervision on them.422

The definition of the term ‘financial institutions’ for the application of the Regulation,

is provided in Article 4, point 1, and includes:

(i) ‘credit institutions’ as defined in Article 4(1) of Directive 2006/48/EC,

‘investment firms’ as defined in Article 3(1)(b) of Directive 2006/49/EC, and ‘financial

conglomerates’ as defined in Article 2(14) of Directive 2002/87/EC, and

(ii) especially with regard to Directive 2005/60/EC, ‘credit institutions’ and

‘financial organisations’, as defined in Article 3, points 1 and 2, of that Directive.

This category of legislative acts also includes:

• Directive 2009/110/EC “on electronic money institutions”, which is a source

of European banking law,

420

OJ L 35, 11.2.2003, pp. 1-27.

421 OJ L 345, 8.12.2006, pp. 1-9.

422 Competent authorities are set out in Article 4, point 2 as follows:

(i) competent (national) authorities as defined in Directives 2006/48/EC, 2006/49/EC and

2007/64/EC and as mentioned in Directive 2009/110/EC;

(ii) with regard to Directives 2002/65/EC and 2005/60/EC, the (national) authorities competent

for ensuring compliance with the requirements of those Directives by credit and financial

institutions (to the author’s knowledge, however, the term ‘competent authority’ does not

appear in Directive 2002/65/EC); and

(iii) with regard to deposit-guarantee schemes, (national) bodies which administer deposit-

guarantee schemes pursuant to Directive 94/19/EC, or, where the operation of the deposit-

guarantee scheme is administered by a private company, the public authority supervising such

schemes pursuant to that Directive.

126

• Directive 2005/60/EC “on the prevention of the use of the financial system

for the purpose of money laundering and terrorist financing,”423

which is a

source of European law on combating the use of the financial system for the

purpose of economic crimes,

• Directive 2002/65/EC “concerning the distance marketing of consumer

financial services (…)”,424

which is a source of European law on the

protection of the economic interests of consumers of financial services, and

• Directive 2007/64/EC “on payment services in the internal market”,425

which

is a source of the said branch of European financial law.426

2.3 The secondary bases of the EBA’s scope of action

The EBA’s scope of action has two secondary bases. Specifically:

(a) Firstly, its scope of action is extended by virtue of Article 1, para. 3,

according to which, the EBA is entitled to act:

• in the field of activities of financial institutions, payment institutions and

electronic money institutions,427

• in relation to issues not directly covered in the legislative acts referred to

above (2.2.2), (including, indicatively, matters of corporate governance,

auditing and financial reporting), provided that such actions by the Authority

are necessary to ensure the effective and consistent application of those

legislative acts.

(b) Finally, the EBA must act within the scope of any further legally binding

Union act which confers tasks on it.428

3. Tasks and powers

3.1 Overall examination

3.1.1 The structure of Chapter II of the Regulation

To fulfil its objective as defined in paragraph 5 of Article 1 of the Regulation

according to the above (Α 3.1), specific tasks and powers have been conferred upon the

EBA, defined in Chapter ΙΙ of the Regulation (Articles 8-39). This Chapter has the

following structure:

423

OJ L 309, 25.11.2005, pp. 15-36.

424 OJ L 271, 9.10.2002, pp. 16-24.

425 OJ L 319, 5.12.2007, pp. 1-36.


427 Both “payment institutions” and “electronic money institutions” are categories of regulated

firms according to European financial law. For their definition, see Article 4(4) of Directive

2007/64/EC, and Article 2(1) of Directive 2009/110/EC, respectively.

428 Regulation (EU) No 1093/2010, Article 1, para. 2, in finem.

127

(a) Article 8, para. 1, contains an exhaustive (without prejudice to article 9) list

of the tasks conferred upon the EBA (see 3.1.2, below), while para. 2 of the same article an exhaustive list of all regulatory and other powers conferred on it in order to

fulfil these tasks (see 3.1.3).

(b) Article 9 specifically refers to the EBA’s task in relation to "consumer

protection and financial services", and its related powers.

Paragraph 3.3, below, discusses the content and implementation means of this task.

(c) Finally, Articles 10-39 offer a qualified description of the Article 8 tasks (note

that the order of these articles does not follow the listing of tasks in para. 1, article 8).

3.1.2 EBA’s tasks according to Article 8, para. 1 of the Regulation

3.1.2.1 Introductory Remarks

With the exception of the task relating to consumer protection and financial services

(Article 9), all other tasks of the EBA are enumerated in the first paragraph of Article 8.

The Regulation states that, in the exercise of its tasks, the EBA shall pay particular

attention to any systemic risk429

posed by financial institutions, the failure of which

may impair the operation of the financial system or the real economy.430

It is obvious

that this provision was adopted particularly with a view to systemically important

financial institutions.431

In this respect, it should be noted that the CEBS had a much more limited range of

tasks, since they (only) concerned:

• advising the European Commission, with regard to the adoption of

implementing measures, in the context of the regulatory comitology procedure

according to the Lamfalussy process;

• contributing to the consistent application of Community legislation and the

convergence of national supervisory practices,

• promoting the cooperation between competent national supervisory

authorities, and

• monitoring and assessing the development of banking systems and

international supervisory trends.

3.1.2.2 An overview of the tasks

According to Article 8, para. 1 of the Regulation, the EBA has the following twelve

(12) tasks:

(1) Contribution to the “establishment of high-quality common regulatory and

supervisory standards and practices”.

429

On this, see recitals 15 and 16 of the Regulation

430 Ibid., Article 1, para. 5, third subparagraph.

431 Ibid., recital 15 second sentence Regarding the demarcation of the definition of systemically

important financial institutions (known as ‘SIFIs’), see Huertas and Lastra (2011), pp. 255-

258.

128

The content and implementation means of this task are discussed in more detail in

paragraph 3.2 below.

(2) Contribution to the "consistent application of legally binding Union acts". By

way of indication, the implementation means of this task are:

• ensuring consistent, efficient and effective application of the legislative acts

referred to in article 1, para. 2 of the Regulation, according to the provisions

of Article 17 of the Regulation and without prejudice to the powers of the

European Commission pursuant to Article 258 TFEU (former article 226 of

the TEC) for ensuring compliance of member states with Union law;432

• taking action in emergency situations, namely in case of adverse

developments, which may seriously jeopardise the orderly functioning and

integrity of financial markets or the stability of the financial system, according

to the provisions of article 18 of the Regulation;

• assisting the settlement of disputes between competent authorities, according

to the provisions of Articles 19 and 20;433

• ensuring a coherent functioning of colleges of supervisors, according to the

provisions of Article 21;

• contributing to the creation of a “common supervisory culture” among

competent authorities, according to the provisions of Article 29;

• preventing financial institutions from resorting to “supervisory arbitrage”,

choosing to be established in the member state with the relatively most

favourable micro-prudential supervisory regime, and

• ensuring the most efficient and consistent micro-prudential supervision of

financial institutions by the competent authorities.

(3) Stimulation and facilitation of the delegation of tasks and responsibilities

among competent authorities, according to Article 28 of the Regulation.

(4) Close cooperation with the ESRB, according to the provisions of Article 36 of

the Regulation (and para. Α 2.3, above), in particular:

• by providing the ESRB with the necessary information for the achievement of

its tasks, and

• by ensuring a proper follow up to the warnings and recommendations of the

ESRB.

(5) Organisation and conduct of peer reviews (“vergleichende Analysen” in

German) of competent authorities, according to the provisions of Article 30 of the

Regulation. In order to strengthen the cohesion of supervisory results, in performing

this task, the EBA has the power to issue guidelines and recommendations (on this, see

3.2.3 below), and must create best practices.

432

Ibid., Article 1, para. 4. Regarding the provisions of the above TFEU Article, see Borchardt

(2010a).

433 The cases, on which a mechanism for settling disputes between competent national

authorities can be applied, were set out, by means of Directive 2010/78/EU, in the legislative

acts amended by this Directive, thus coming under the Authorities’ scope of action.

129

(6) Monitoring and assessment of market developments in the area of its

competence, including where appropriate trends in credit, in particular, to households

and SMEs, according to the provisions of Article 32 of the Regulation.

On this, note that the provisions of para. 2 of this article constitute the basis for the

organisation and coordination of Europe-wide “stress tests”.434

(7) Undertaking economic analyses of markets to inform the discharge of its

functions.

(8) Fostering depositor and investor protection, by contributing to strengthening

the European system of deposit-guarantee schemes, according to the provisions of

Article 26 of the Regulation.

(9) Contribution to the following:

(i) consistent and coherent functioning of colleges of supervisors, according to the

provisions of Article 21,

(ii) monitoring, assessment and measurement of systemic risk, according to the

provisions of Articles 22 through 24, and

(iii) development and coordination of “recovery and resolution plans”,435

• providing a high level of protection to depositors and investors

throughout the Union,

• developing methods for the resolution of failing financial institutions,

and

• assessing the need for appropriate financing instruments, according to

the provisions of Articles 25 and 26.436

434

The EBA has already planned the first stress test which will be completed by the end of June

2011. The CEBS had also conducted stress tests in 2009 and 2010.

435 The term “resolution” (“Abwicklung” in German, “résolution des défaillances” in French),

which does not appear (yet) in any Union legislative act that constitutes a source of European

financial law, is used to include all the measures for addressing the problems arising from the

exposure of systemically important financial institutions to insolvency, without initiating

bankruptcy proceedings (in order to avoid spillover effects), or resorting to bailout measures by

the State budget. Regarding this issue-area, which is still ongoing, and is part of the measures of

macro-prudential regulatory intervention for addressing the cross-sectoral dimension of the

systemic risk in the financial system, see indicatively Claessens, Herring and Schoenmaker (2010), Avgouleas, Goodhart and Schoenmaker (2010), as well as individual contributions to

the collective volume Lastra (2011, editor). Especially on the concept and content of the term

"resolution", see Huertas and Lastra (2011), pp. 258-267.

The initiatives that the European Commission has undertaken to date in relation to this issue are

described in its Communication of 20 October 2010: “An EU Framework for Crisis

Management in the Financial Sector” (COM(2010) 579 final), based on which, the

Commission is expected to issue, in 2011, a proposal for a legislative act of the European

Parliament and of the Council (available at: http://ec.europa.eu/internal_market/bank/docs/

crisis-management/framework/com2010_579_en.pdf). See in more detail below, in chapter 8 of

the present study, under B 3.

436 In the author’s opinion, point (i) of Article 8 should not include a reference to Article 26

(which concerns the European system of deposit-guarantee schemes), but rather Article 27

(which concerns the relevant European system of bank resolution and funding arrangements).

130

(10) Fulfilment of any other specific tasks set out in this Regulation or in other

legislative acts, including, but not limited to:

• Article 31 regarding the EBA’s general coordination role between competent

authorities, and

• Article 33 regarding the EBA’s international relations.

(11) Publication on the Authority’s website (www.eba.europa.eu) and regular

updating of information relating to its field of activities, more particularly, within the

area of its competence, on registered financial institutions, in order to ensure that

information is easily accessible by the public.

(12) Taking over, as appropriate, all existing and on-going tasks from CEBS.

3.1.3 EBA’s powers according to Article 8, paragraph 2 of the Regulation

Extensive powers have been assigned to the EBA in order to accomplish its objective

and the tasks mentioned above. These powers are enumerated in article 8, para. 2, of

the Regulation, and from as systematic viewpoint, can be divided into two categories:

• regulatory powers (see 3.1.3.1, below), and

• other powers (see 3.1.3.2, below).

3.1.3.1 Regulatory powers

The EBA’s regulatory powers, with a much wider spectrum than those of the

CEBS, include the following:

(1) Elaboration of draft regulatory technical standards, according to the provisions

of Articles 10-14 of the Regulation (see details in Β 3.2.2.1, below).

(2) Elaboration of draft implementing technical standards, according to the

provisions of Article 15 (see Β 3.2.2.2, below).

(3) Issuance of guidelines and recommendations, according to the provisions of

Article 16 (see Β 3.2.3, below).

(4) Issuance of recommendations addressed to national competent authorities in

the event of a breach of Union law (Article 17, para. 3).

(5) Elaboration-g of decisions addressed to national competent authorities in the

following two (2) cases:

• when action is needed in emergency situations (Article 18, para. 3), and

• to settle disputesbetween national competent authorities in cross-border

situations (Article 19, para. 3).

(6) Taking decisions addressed to financial institutions in the following three

cases:

• in case of breach of Union law (Article 17, para. 6).

• when action is needed in emergency situations (Article 18, para. 4), and

131

• to settle disagreements between national competent authorities in cross-border

situations (Article 19, para. 4).437

The EBA exercises this power without prejudice to the relevant powers of the

European Commission, in accordance with Article 258 TFEU for ensuring Member

State compliance with Union law, and in the event that a competent authority has not

complied with the Commission’s official opinion (in the former case) or with a

decision of the EBA (in the other two).

It is evident that, in this context, the EBA obtains the very important power of

conducting work in place of national competent authorities. This is possibly the singly

most important innovation that the new regulatory framework has introduced.

(7) Provision of opinions to the European Parliament, the Council or the European

Commission, in accordance with the provisions of Article 34 (see 3.2.4, below).

3.1.3.2 Other powers

The EBA’s other three (3) powers are:

• the collection the necessary information concerning financial institutions,

according to Article 35 of the Regulation;

• the development of common methodologies for assessing the impact that the

characteristics of, and procedures for, the provision of financial services might

have on the financial situation of financial institutions and on consumer

protection; and

• the provision of a centrally accessible database of registered financial

institutions in the area of its competence, where specified in the legislative

acts of its scope of action.438

3.2 In more detail: contribution to the establishment of high-quality, common regulatory and supervisory standards and practices

3.2.1 Overall examination

Contribution to the establishment of high-quality, common regulatory and supervisory

standards and practices, appears at the top of the list in Article 8 of the Regulation, and

is possibly the most important task of the EBA. By way of indication, Article 8

enumerates the following implementation means:

• development of draft regulatory and implementing technical standards (see

3.2.2, below),

• issuing of guidelines and recommendations (see 3.2.3), and

• provision of opinions to Union institutions (see 3.2.4).439

437

The EBA decisions (points (e) and (f)), which can be contested before the Court of Justice of

the European Union (on this, see Β 4.4, below), are governed by the provisions of Article 39

(“decision-making procedures”) of the Regulation.

438 This power is the implementation means of the eleventh abovementioned task.

439 In the author’s opinion, paragraph 1 of Article 8 of the Regulation wrongly mentions (and is

subsequently wrongly translated in all other languages) that the EBA provides opinions to “the”

132

3.2.2 The power to develop draft regulatory and implementing technical standards

3.2.2.1 Regulatory technical standards

(a) Introductory Remarks

According to the above, one of the powers of the EBA is the development of draft

regulatory technical standards, according to the provisions of Articles 10-14 of the

Regulation. The EBA shall define the content of the drafts on the basis of the

restrictions set in Article 290 TFEU (according to Α 3.4.3.2 (a), above), as further

qualified in Article 10 of the Regulation.

Regulatory standards are used as a means to creating a “single rulebook” 440

(“einheitliches Regelwerk”, “recueil réglementaire unique”) for European financial law,

whose sources come within the scope of action of EBA and the other Authorities. In

this respect, recital 22 of the Regulation states the following: “There is a need to

introduce an effective instrument to establish harmonised regulatory technical

standards in financial services to ensure, also through a single rulebook, a level

playing field and adequate protection of depositors, investors and consumers across the

Union. As a body with highly specialised expertise, it is efficient and appropriate to

entrust the Authority, in areas defined by Union law, with the elaboration of draft

regulatory technical standards, which do not involve policy choices.”

(b) The Regulation’s provisions

The Regulation’s (very thorough) provisions in this issue-area can be summarised as

follows:

(ba) First of all, as mentioned earlier (under Α 3.4.3.2(a)), in order for the

Commission to issue regulatory technical standards by means of an EBA draft, the

legislative acts within the EBA’s scope of action should provide for the relevant

delegation of power (according to paragraph 2, Article 1 of the Regulation).441

Moreover, the content of these standards, and of the EBA’s drafts, is restricted by these

legislative acts.442

The issue-areas in which the Commission has the power to issue regulatory technical

standards by means of delegated acts (and, consequently, where the ΕΒΑ has the

power to develop drafts for these standards, so as to ensure consistent harmonisation of

these areas), along with the objectives, content and scope of the delegation, were

defined in the following Articles of Directive 2010/78/EU:

• Article 2 in relation to Directive 2002/87/EC,

• Article 8 in relation to Directive 2005/60/EC,

Union institutions, given that according to Article 34, opinions shall be provided to only some

of those.

440 This term has been used in relevant literature with different meanings. However, the

common point of all approaches is the maximum possible harmonisation of European financial

law. On this, see Moloney (2010), pp. 1355-1361.

441 Regulation 2010/1093, Article 10, para. 1, first subparagraph, first sentence.

442 Ibid., Article 10, para. 1, second subparagraph (on this, see Article 290 of the TFEU, para. 1,

second subparagraph, first sentence).

133

• Article 9 in relation to Directive 2006/48/EC, and

• Article 10 in relation to Directive 2006/49/EC.

Consequently, in relation to the other five (5) legislative acts within its scope of action

(on this, see B 2.2.2, above), the EBA does not have (at least not yet) the power to

develop draft regulatory (and/or implementing) technical standards.

(bb) The Regulation defines that the regulatory technical standards are technical

and do not imply strategic decisions or policy choices.443

This provision qualifies the

abovementioned (under Α 3.4.3.2(a)) provision of Article 290 TFEU, according to

which delegated acts supplement or amend certain “non-essential elements” of a

legislative act.

(bc) From a procedural viewpoint, the EBA submits draft regulatory technical

standards for endorsement to the Commission 444

(within a time-limit set in the

abovementioned legislative acts), which must immediately forward them to the

European Parliament and the Council.445

The detailed provisions on the endorsement of

such standards, primarily point out that the Commission:

• shall decide whether to endorse a draft regulatory technical standard of the

EBA, within 3 months of receipt thereof,446

and

• may not change the content of a draft without prior coordination with the

EBA.447

(bd) The regulatory technical standards shall be adopted by means of Regulations

or Decisions of the European Commission (Directives are thus excluded), they shall be

published in the Official Journal of the European Union and enter into force on the date

stated in the abovementioned legislative acts.448

Therefore, as already detailed,

regulatory technical standards are not legal acts of the EBA, but of the Commission, in

accordance with Article 290 TFEU.

(be) If the EBA has not submitted a draft regulatory technical standard within the

time-limit set out in the abovementioned legislative acts, the Commission is entitled to

set a new time-limit.449

If the EBA does not submit a draft within this time-limit either,

the Commission may exceptionally adopt a regulatory technical standard by means of a

delegated act without a draft from the EBA.450

(bf) As already mentioned, Article 290 TFEU stipulates that the legislative acts

according to which the power to issue delegated acts is conferred upon the

Commission, must clearly define, inter alia, the duration of the delegation and the

conditions to which this delegation is subject. In the Regulation, these issues were

regulated collectively as follows:

443

Regulation (EU) No 1093/2010, Article 10, para. 1, second subparagraph.

444 Ibid., Article 9, para. 1, first subparagraph, second sentence.

445 Ibid., Article 10, para. 1, fourth subparagraph.

446 Ibid., Article 10, para. 1, fifth subparagraph.

447 Ibid., Article 10, para. 1, eighth subparagraph.



450 Ibid., Article 10, para. 3, first subparagraph a. This provision was obviously established as a

“safety net” and one could reasonably consider that it will not be activated.

134

• Article 11 (para. 1, first sentence) stipulates that the power to adopt

regulatory technical standards shall be conferred on the Commission for a

period of 4 years;

• Article 12 lays down the terms, according to which the European Parliament

or the Council may revoke this power; and

• Article 13 regulates the power of the European Parliament or the Council to

object to a specific regulatory technical standard.

3.2.2.2 Implementing technical standards

(a) As already mentioned (in Α 3.4), apart from the draft regulatory technical

standards, the EBA may develop draft implementing technical standards, also endorsed

by the Commission by means of implementing acts pursuant to Article 291 TFEU, in

the areas specifically set out in the legislative acts falling into its scope of action (in

accordance with Article 1, para. 2 of the Regulation).451

Implementing technical

standards:

• just like regulatory ones, are technical in nature and do not imply strategic

decisions or policy choices, while

• their content is to determine the conditions of application of both the

legislative acts mentioned above, as well as of delegated acts.452

The areas where the Commission has the power to issue implementing technical

standards by means of implementing acts and, consequently, where the ΕΒΑ has the

power to develop drafts of these standards, are defined in the above mentioned Articles

2 and 8-10 of Directive 2010/78/EU.

(b) As in the case of regulatory technical standards, the EBA shall submit its draft

implementing technical standards for endorsement to the Commission,453

which will

then immediately forward them to the European Parliament and the Council.454

Likewise, the implementing technical standards shall be adopted by means of

Commission Regulations or Decisions, they shall be published in the Official Journal

of the European Union and shall enter into force on the date stated in the above

legislative acts.455

The Regulation contains further detailed provisions with regard to

the endorsement procedure of these standards.456

451

Ibid., Article 15, para. 1, first subparagraph, first sentence.

452 Ibid., Article 15, para. 1, first subparagraph, second sentence.

453 Ibid., Article 15, para. 1, first subparagraph, third sentence.



456 Ibid., article 15, para. 1, subparagraphs b and d-g, and para. 2-3.

135

3.2.3 The power to issue guidelines and recommendations

According to Article 16 of the Regulation, the EBA has the power to issue guidelines

and recommendations in areas not governed by regulatory or implementing technical

standards.457

The objective of those legal acts are:

• to establish consistent, efficient and effective supervisory practices within the

ESFS, and

• to ensure the common, uniform and consistent application of Union law.458

Their addressees are either competent authorities or financial institutions.459

These acts, forming part of the European ‘soft’ law,460

do not initially have a legally

binding character.461

Competent authorities and financial institutions must, however,

make every effort to comply with the provisions of those guidelines and

recommendations.462

In this context, the following regulations were established, which are stricter than the

ones applicable to the respective acts of the CEBS, also based, following amendment

of its Rules of Procedure in 2008, on the ‘comply or explain’ principle.463

In more

detail:

(a) Within 2 months of the issuance of a guideline or recommendation, each

competent authority shall confirm whether it intends to comply with that guideline or

recommendation.464

(b) In the event that a competent authority does not comply or does not intend to

comply, it shall inform the EBA, stating its reasons.465

In that case, the EBA:

• shall publish the fact (giving the competent authority early notice of this), and

• may also decide, on a case-by-case basis, to publish the reasons provided by

the competent authority for not complying with a particular guideline or

recommendation.466

457

The CEBS also had the power to issue standards under paragraph 4.3 of the CEBS Rules of

Procedure (2008); in practice, however, it only issued recommendations.


459 Ibid. On the contrary, in the context of the functioning of CEBS, recommendations were

only addressed to financial institutions, rather than competent authorities.

460 On the definition of the European soft law, see Chalmers, Hadjiemmanuil, Monti, and

Tomkins (2006), p. 137-140, and Craig and de Bứrca (2008), pp. 86-87. On the definition of

soft law in international law in general, see indicatively Boyle and Chinkin (2007), p. 211-229.

461 On this matter, see the Grimaldi case of the CJEC (C-322/88, ECR (1989), p. 4407 et seq.,

especially the paragraph on the degree to which recommendations of European bodies are

binding for national courts, which can apply pro rata to all acts of European soft law, and the

report of the European Parliament of 2007 “on institutional and legal implications of the use of

�soft law� instruments” (Α6-0259/2007, final, 28.6.2007).

462 Regulation (EU) No 1093/2010, Article 16, para. 3, first subparagraph.

463 CEBS Rules of Procedure (2008), para. 5.7.

464 Regulation (EU) No 1093/2010, article 16, para. 3, second subparagraph, first sentence.

465 Ibid., Article 16, para. 3, second subparagraph, second sentence.


136

(c) In the report submitted a nnually to the Board of Supervisors according to

paragraph 5 of Article 43 of the Regulation, the EBA shall inform the European

Parliament, the Council and the Commission of the guidelines and recommendations

that have been issued:

• stating which competent authority has not complied with them, and

• outlining how it intends to ensure that the competent authority concerned will

follow its recommendations and guidelines in future.467

(d) Finally, if required by a given guideline or recommendation, financial

institutions must also report, in a clear and detailed way, whether they comply with

such a guideline or recommendation.468

3.2.4 The power to provide opinions to Union institutions

The EBA’s power to issue opinions is defined in Article 34 of the Regulation,

including one general and one specific provision:

(a) First of all, the EBA may provide opinions to the European Parliament, the

Council and the Commission on all issues related to its area of competence. The EBA

shall provide opinions upon a request from a Union institution, or on its own

initiative.469

In the context, the recitals of the Regulation refer to the EBA as an

“independent advisory body to the European Parliament, the Council, and the

Commission”.470

(b) A special provision was established in the area of prudential assessments of

mergers and acquisitions of credit institutions that:

• fall within the scope of Directive 2006/48/EC, as amended by Directive

2007/44/EC of the European Parliament and of the Council “... as regards

procedural rules and evaluation criteria for the prudential assessment of

acquisitions and increase of holdings in the financial sector�,471

and

• according to that Directive, require consultation between competent

authorities from two or more member states.

In this case, the EBA may, on application of one of the competent authorities

concerned, issue and publish an opinion,472

having the power to collect all necessary

information, according to Article 35 of the Regulation.473

467


468 Ibid., Article 16, para. 3, fourth sentence.


470 Ibid., recital 45.

471 OJ L 247, 21.9.2007, pp. 1-16.

472 Regulation (EU) No 1093/2010, Article 34, para. 2, first sentence. The opinion shall not

cover cases relating to the criteria set out in Article 19a, para. 1, point (e) of Directive

2006/48/EC.

473 Ibid., Article 34, para. 2, third sentence.

137

TABLE 6

Procedure for the issuance of legal acts which constitute the sources of European financial law after the entry into operation of the ESFS(*)

Level 1 (*):

legally binding acts

Level 2 (*):

legally binding acts

Level 3 (*):

non-legally binding acts (soft law)

Type of legal

act

Legislative acts

falling within the

Authorities’ scope of

action (Article 289

TFEU)

Regulatory technical

standards by means

of delegated acts

(Article 290 TFEU)

Implementing

technical standards

by means of

implementing acts

(Article 291 TFEU)

Guidelines and

recommendations

(Regulations

establishing the

Authorities)

Body issuing

the legal act

European Parliament

and Council (with the

ordinary legislative

procedure)

European

Commission

European

Commission ΕΒΑ/ΕSMA/EIOPA

(according to the

scope of action)

Assistance to

the issuing of

a legal act

EBC/ESC/EIOPC

(**) (as advisory

committees)

ΕΒΑ/ΕSMA/EIOPA (as opinion-giving

bodies)

ΕΒΑ/ΕSMA/EIOPA (elaborating draft

technical standards)

ΕΒΑ/ΕSMA/EIOPA (elaborating draft

technical standards)

EBC/ESC/EIOPC (as

regulatory

committees) (***)

(*) Reference to these “three levels” depicts the wording that was used (without any explicit legal basis) in the

Lamfalussy Report

(**) European Banking Committee, European Securities Committee, European Insurance and Occupational

Pensions Committee

(***) According to the comitology procedure (Regulation (EU) No 182/2011).

138

3.3 In more detail: contribution to the protection of financial services consumers

According to Article 9 of the Regulation, EBA’s tasks also include “promoting

transparency, simplicity and fairness in the market for consumer financial products or

services across the internal market.” The implementation means of this task include,

indicatively:

• collecting, analysing and reporting on consumer trends;

• reviewing and coordinating financial literacy and education initiatives by the

competent authorities;

• developing training standards for the financial system, and

• contributing to the development of common disclosure rules.474

In this context, the EBA has the following obligations and powers:475

(a) It shall monitor new and existing financial activities and may issue guidelines

and recommendations with a view to promoting the safety and soundness of markets

and convergence of regulatory practice.

(b) It may also issue warnings in the event that a financial activity poses a serious

threat to the objectives laid down in Article 1 (para. 5) of the Regulation (see Α 3.1,

above).

(c) The EBA shall establish, as an integral part thereof, a “Committee on financial

innovation”, bringing together all relevant competent national supervisory authorities.

The Committee’s work shall include:

• achieving a coordinated approach to the regulatory and supervisory treatment

of new or innovative financial activities and products (e.g. consumer or

mortgage credit banking products), and

• providing advice for the EBA to present to the European Parliament, the

Council and the Commission.

(d) The EBA may temporarily prohibit or restrict (by means of ‘injunction’

procedures) certain financial activities that threaten the orderly functioning and

integrity of financial markets or the stability of the whole or part of the financial

system in the Union:

• in the cases specified and under the conditions laid down in the legislative acts

referred to in Article 1 (para. 2) of the Regulation, or

• if so required, in the case of an emergency situation in accordance with and

under the conditions laid down in Article 18.

It may also assess the need to prohibit or restrict certain types of financial activity and,

where there is such a need, inform the European Commission in order to facilitate the

adoption of any such prohibition or restriction.

474


475 Ibid., Article 9, paras 2 and 5, respectively.

139

Consequently, the EBA does not only address the issue-area of protecting consumers’

financial interests, but also that of promoting their right to training (namely two of the

three axes of Union policy in the area of protecting consumers, according to Article

169 TFEU (Article 153 TEC) .

4. Integration in the European Union’s institutional framework


In light of all the above, the EBA has been endowed with a significant range of tasks

and has a significant role to play, along with ESMA and EIOPA, notably in terms of

creating an important subset of European financial law and implementing its provisions

in Member State domestic legal orders. In view of the above, it was necessary to lay

down some provisions ensuring the fullest possible integration in the Union’s

institutional framework. Such provisions concern:

• the various aspects of independence of the EBA, its bodies and their members

(see 4.2 below),

• the EBA’s obligation to accountability vis-a-vis the European institutions and

other bodies (see 4.3), and

• the judicial review of the EBA’s decisions (see 4.4).

It should also be noted that the EBA is governed by the provisions of primary and

secondary European legislation on:

• combating fraud, corruption and any other illegal activity, according to the

provisions of Article 66 of the Regulation (application to the EBA of the

provisions of Regulation (EC) No 1073/1999 of the European Parliament and

of the Council “concerning investigations conducted by the European Anti-

Fraud Office (OLAF)”476

),

• privileges and immunities, according to the provisions of Article 67

(application to the ΕΒΑ and its staff, of Protocol No 7) “on the privileges

and immunities of the European Union” annexed to the TEU and the TFEU),

• the processing of personal data, according to the provisions of Article 71

(application of Directive 95/46/EC “on the protection of individuals with

regard to the processing of personal data (…)”477

and Regulation (EC) 45/2001 “on the protection of individuals with regard to the processing of

personal data by the Community institutions and bodies (…)”,478

both acts of

the European Parliament and of the Council), and

476

OJ L 136, 31.5.1999, pp. 1-7. According to para. 2 of Article 66, the EBA must also accede

to the interinstitutional agreement “concerning internal investigations by OLAF” (OJ L 136,

31.5.1999, pp. 15-19).

477 OJ L 281, 23.11.1995, pp. 31-50.

478 OJ L 8, 12.1.2001, pp. 1-22.

140

• the access to documents, according to the provisions of Article 72

(application of Regulation (EC) 1049/2001 of the European Parliament and

of the Council “regarding public access to European Parliament, Council

and Commission document”"479

), with a view to ensuring transparency of

operation.

4.2 Independence of the ΕΒΑ480

4.2.1 Institutional independence

(a) The institutional independence of the EBA is principally predicated on the

general clause of Article 1, para. 5 (in finem) of the Regulation, according to which:

“When carrying out its tasks, the Authority (EBA) shall act independently and

objectively and in the interest of the Union alone.”

(b) Chapter III of the Regulation on the organs of the EBA, contains more specific

provisions. Specifically, Article 42 of the Regulation lays down the institutional

independence of the Chairperson and of the Board of Supervisors, as follows: “When

carrying out the tasks conferred upon it by this Regulation, the Chairperson and the

voting members of the Board of Supervisors shall act independently and objectively in

the sole interest of the Union as a whole and shall neither seek nor take instructions

from Union institutions or bodies, from any government of a Member State or from

any other public or private body. Neither member states, the Union institutions or

bodies, nor any other public or private body shall seek to influence the members of the

Board of Supervisors in the performance of their tasks".481

The Regulation includes similar provisions on the institutional independence of:

• the members of the Management Board (Article 46),

• the EBA Chairperson (Article 49),

• the EBA Executive Director (Article 52), and

• the members of the Board of Appeal (Article 59, paras 1 and 6).

The consolidation of the EBA’s institutional independence is an important element of

its overall independence, notably in the context of performing its task of organising

and conducting “peer reviews” of competent authorities (Article 30), and of its

general coordinating role between competent authorities (Article 31) (on this, see B

3.1.2.2, above).482

479

OJ L 145, 31.5.2001, pp. 43-48.

480 The classification of the various aspects of independence is following closely that firstly

adopted (and now widely accepted) by Louis (1989), pp. 25-28, in relation to the ECB.

481 The content of this provision is particularly similar to that of Article 130 TFEU on the

institutional independence of the ECB, the National Central Banks (NCBs)-members of the

ESCB, and the members of the decision-making organs in those bodies. Regarding the content

of the provisions of this article (as in force according to article 108 of the TEC which has not

been amended), see indicatively Häde (1999), and Lois (2007), pp. 173-175.

482 On this, see Louis (2010), p. 155.

141

4.2.2 Financial independence

The financial independence of the EBA is ensured by the provisions of Article 62 (para. 1) of the Regulation.

483 This Article stipulates that the revenues of the

autonomous budget of the EBA which, for this purpose, is considered (and so are the

other two Authorities) as a “European body” in accordance with Article 185 of

Council Regulation (EC, Euratom) No 1605/2002 “on the Financial Regulation

applicable to the general budget of the European Communities”,484

shall consist of the

following:

• obligatory contributions from the national public authorities competent for the

the micro-supervision of financial institutions;

• a subsidy from the Union, entered in the General Budget (Commission

Section),485

and

• any fees paid to the Authority in the cases specified in the relevant instruments

of Union law.

4.2.3 Personal independence

The Regulation contains special provisions regarding the personal independence of the

EBA’s Chairperson and Executive Director. Specifically:

(a) According to para. 5, Article 48, the Chairperson may be removed from office

only by the European Parliament, following a decision of the Board of Supervisors.

(b) Besides, according to para. 5, Article 51, the Executive Director may be

removed from office only upon a decision of the Board of Supervisors.

According to the author’s opinion, however, in both cases this personal independence

is limited, as no special criteria are defined for the European Parliament and Board of

Supervisors, respectively, to take the relevant decisions. The opposite applies to

members of the Board of Appeal, who may be removed from office upon decision of

the Management Board only if found guilty of serious misconduct.486

4.2.4 Operational independence

According to the above (in B 3), regarding the powers assigned to the EBA to perform

its tasks, one can reasonably claim that its operational independence is granted.

483

On this, see also recital 59 of the Regulation.

484 OJ L 248, 16.9.2002, pp. 1-48.

485 According to the provisions of Article 8.3 of its Rules of Procedure, the CEBS was entitled

to accept contributions or financing from third parties, including Community institutions, but

only for specific purposes.


142

4.3 Accountability of the ΕΒΑ

According to Article 3 of the Regulation, the ΕΒΑ is accountable to the European

Parliament and the Council (and so are the other two Authorities and the ESRB). There

is no further qualification of this accountability as to implementation means, save for

paragraph 5 ofArticle 43, which states that the Board of Supervisors shall transmit the

annual report of the EBA to the above institutions, as well as the Commission, the

Court of Auditors and the European Economic and Social Committee by 15 June each

year.

4.4 Judicial review of the decisions of the EBA

The EBA’s decisions (according to B 3.1.3.1, above) and its failure to take decisions,

when obliged to do so, are subject to judicial review, according to Article 61 of the

Regulation. In particular:

(a) Proceedings may be brought before the Court of Justice of the European

Union, in accordance with Article 263 TFEU, contesting a decision taken by the

Board of Appeal or, in cases where there is no right of appeal before this Board, a

decision taken by the EBA (and the other Authorities).487

Proceedings against decisions

of the EBA may be instituted by Member States, Union institutions and any natural or

legal person.488

On this, it must be pointed out that according to Article 60, para. 1, of the Regulation,

and irrespective of instituting any court proceeding, any natural or legal person,

including competent authorities, may appeal against a decision of the ΕΒΑ, which is

addressed to that person, or against a decision which, although in the form of a

decision addressed to another person, is of direct and individual concern to that

person. The Board of Appeal shall be competent to decide upon this appeal.489

(b) In the event that the EBA is under an obligation to act and fails to make a

decision, proceedings for failure to act may be brought before the Court of Justice of

the European Union in accordance with Article 265 TFEU.490

In both cases, the EBA shall be required to take the necessary measures to comply with

the judgement of the Court of Justice of the European Union.491

487


488 Ibid., Article 61, para. 2. For an analysis of the provisions of Article 263 TFEU, see,

indicatively, Borchardt (2010b).

489 Ibid., Article 60, para. 2, second subparagraph.

490 Ibid., Article 61, para. 3. For an analysis of the provisions of Article 265 TFEU, see

indicatively Borchardt (2010b).


143

C. Concluding remarks

In view of the above, a synopsis of the key changes introduced with the establishment

of the ESFS in 2010 and its entry into operation since January 2011, pursuant to the

proposals of the de Larosière Report, is as follows:

(a) The establishment of the Lamfalussy Committees, in the early 2000s,

constituted a novum in the context of the rule-making procedure for European financial

law, aimed, through the regulatory framework, at achieving financial integration in the

European Union. These Committees also significantly contributed to the convergence

of supervisory standards and practices in the financial system and the promotion of

cooperation among competent national supervisors. The outbreak, however, of the

recent financial crisis revealed the limits of their capabilities.

(b) The ΕΒΑ, being the successor of the CEBS and a component of the ESFS, has

a clearly more important role in ensuring the stability of the European banking system

than that of its “predecessor”, the CEBS, extending beyond the area of micro-

prudential supervision, especially during crisis situations. It has been entrusted with

extensive tasks and broader powers. Meanwhile, the EBA (contrary to the CEBS) has

also been entrusted with tasks and powers in the field of protecting financial services

consumers. Similar realisations apply to the other two Authorities.

The vital requirement for the immediate future is the degree of effectiveness both in the

performance of tasks and powers by the EBA (and the other Authorities), and in the

cooperation between all the ESFS components (including national competent

authorities). This remark is mostly made taking account of the fact that:

• the EBA will exercise regulatory powers conferred upon it in an environment,

in which many (extremely important) legislative acts that fall within its scope

of action are under review,

• cooperation between supervisory authorities is not enough to resolve such

complex problems, like the ones revealed during the recent failure of the

international investment bank, Lehman Brothers.492

(c) Although significant regulatory powers have been conferred upon the EBA

(and the other Authorities), the main corpus of European banking law and other

branches of European financial law still stems (pursuant to TFEU provisions) from

legislative acts of the European Parliament and of the Council, as well as from

delegated acts (the TFEU’s innovation in terms of EU legal acts) and implementing

acts of the European Commission in the form of regulatory or implementing technical

standards, respectively, that are elaborated with a significant contribution from the

ΕΒΑ (and the other Authorities) (through the development of relevant drafts).

Furthermore, considering that the current micro-prudential supervision of financial

institutions is still exercised by national competent authorities, even after the

establishment of the ESFS, there is still asymmetry between:

• creating a regulatory framework (“financial regulation”) to govern the content

of micro-prudential supervision, primarily performed at Union level, and

492

For a detailed analysis of this case, see, indicatively, Claessens, Herring and Schoenmaker (2010), pp. 42-46.

144

• exercising micro-prudential supervision (“financial supervision”), performed

at national level.493

To be sure, operation of the ESFS seeks to strengthen both Union dimensions,

primarily the first dimension by attempting to create a “single rulebook” (by means of

regulatory technical standards), but essentially the second dimension as well, with the

ΕΒΑ (and the other Authorities) exercising the tasks and powers conferred upon them.

(d) The tasks and powers of the ECB in the area of micro-prudential supervision

of financial service providers operating in the European Union, are still defined on the

basis of the provisions of Article 127, para. 5 TFEU. Conversely, it is directly

involved in the functioning of the ESRB, which is now a pan-European body for

macro-prudential oversight of the European financial system.

(e) In literal terms, the ΕΒΑ has not become a European supervisory authority of

the EU banking system, in accordance with the relevant proposal of the de Larosière

Report which was politically adopted. Note, however, that the de Larosière Report

included a second recommendation (for the medium-term) to investigate the possibility

of transforming the three Authorities into a system which would rely on only two

European Authorities, mainly in accordance with the “functional approach” model on

the institutional structure of the financial system’s micro-prudential supervision.494

A proposal was made to conduct such an investigation by reviewing the way the ESFS

operates no later than three (3) years after its entry into operation, but concurrently

noted the difficulties in carrying out such an endeavour. In any event, this is not

included in the current political priorities of the Union’s institutions.

493

Regarding the situation before the establishment of the ESFS, Lastra (2006, p. 298, with

reference to Thygesen) characteristically notes: “There is an inevitable tension in the current

EU structure: a national mandate in prudential supervision, combined with a single European

currency and a European mandate in the completion of the single market in financial services”.

494 Regarding this approach and its alternatives, i.e. the “sectoral approach” and “full integration

approach” of the financial system’s supervisory authorities), see Group of Thirty (2008), pp.

49-50.

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SECTION 4

The sources of European Banking Law

A. The status quo

1. Introduction

The provisions of European banking law can be found in three (3) categories of legal

acts:

• legislative acts of the European Parliament and the Council (see under 2

below),

• implementing measures as well as delegated and implementing acts of the

European Commission (under 3), and

• acts of soft law (under 4).

2. Legislative acts

The main source of European banking law (as well as of the other branches of

European financial law) are legislative acts, 495 exclusively in the form of Directives,496

issued by the European Parliament and the Council according to the ordinary

legislative procedure laid down in Article 294 TFEU. As of June 2011, the legislative

acts (a term which corresponds to that of the “basic” legal acts according to the Treaty

on the Establishment of the European Community (hereinafter the “TEC”)497

which

constitute the sources of European banking law include the following:

(a) The first (and propably the most importnant) legislative act which constitutes a

source of European banking law is Directive 2006/48/EC "relating to the taking up

and pursuit of the business of credit institutions".498

This act, widely known under the

acronym ‘CRD’ has already been amended several times by the following Directives of

the European Parliament and of the Council:

495

The term ‘legislative acts’ is defined in Article 289, para. 3 TFEU as legal acts adopted:

• either by the ‘ordinary legislative procedure’ defined in Article 294 TFEU (ibid.,

Article 289, para. 1), which corresponds to the co-decision procedure of Article 251

TEC, or

• by the ‘special legislative procedure’ (ibid., Article 289, para. 2).

On this, see Craig (2010), pp. 252-253 and 255-260, and Hetmeier (2010), pp. 2675-2679 (for

Article 289), and pp. 2698-2707 (for Article 294).

496 The practice of EU institutions to mainly issue Directives, rather than Regulations is founded

on the provisions of Protocol No 2 “on the application of the principles of subsidiarity and

proportionality”, annexed to the TEU and the TFEU. This approach prevailed due to the

pressures on the part of Member States to preserve the principle of subsidiarity and use the form

of legal acts (namely Directives) which would provide them with the greatest possible

flexibility during the transposition of European law provisions into their national legal orders.

497 OJ C 321Ε, 29.12.2006, pp. 37-187 (consolidated version).

498 OJ L 177, 30.6.2006, pp. 1-200.

146

• Directive 2007/44/EC “amending Council Directive 92/49/EEC and

Directives 2002/83/EC, 2004/39/EC, 2005/68/EC and 2006/48/EC as regards

procedural rules and evaluation criteria for the prudential assessment of

acquisitions and increase of holdings in the financial sector”,499

• Directive 2009/110/EC, to be examined under (ae) below,

• Directive 2009/111/EC “amending Directives 2006/48/EC, 2006/49/EC

and 2007/64/EC as regards banks affiliated to central institutions, certain own

funds items, large exposures, supervisory arrangements, and crisis

management”500

(known as ‘CRD II’), and

• Directive 2010/76/EU “amending Directives 2006/48/EC and 2006/49/EC as

regards capital requirements for the trading book and for re-securitisations,

and the supervisory review of remuneration policies” (known as ‘CRD III’).501

(b) The second legislative act is Directive 2006/49/EC “on the capital adequacy

of investment firms and credit institutions”.502

This act has also been amended by the

last three abovementioned Directives, by which Directive 2006/48/EC was amended.

(c) The third legislative act is Directive 2001/24/EC “on the reorganisation and

winding up of credit institutions”.503

(d) The fourth legislative act is Directive 94/19/EC “on deposit-guarantee

schemes”,504

which was amended in 2009 by Directive 2009/14/EC “on deposit-

guarantee schemes as regards the coverage level and the payout delay”.505

Note that all these Directives, the main provisions of which will be shortly examined in

this Section (under B) and in more detail in Chapter Two this study, are currently

under complete review. On this, see just below under B.

(e) The major amendement introduced by Directive 2009/110/EC “on the taking

up, pursuit and prudential supervision of the business of electronic money institutions,

the amendment of Directives 2005/60/EC and 2006/48/EC and repealing Directive

2000/46/EC”,506

was to ensure that electronic money institutions are not considered to

be credit institutions anymore.

Neverhteless, credit institutions continue to be allowed to issue electronic money and

to carry on such activities at European level, subject to the principle of mutual

recognition and to the comprehensive prudential regulatory framework applying to

them under the provisions of European banking law, as in force.507

499

OJ L 247, 21.9.2007, pp. 1-16.

500 OJ L 302, 17.11.2009, pp. 97-119.

501 OJ L 329, 14.12.2010, pp. 3-35.

502 OJ L 177, 30.6.2006, pp. 201-255.

503 OJ L 125, 5.5.2001, pp. 15-23.

504 OJ L 135, 31.5.1994, pp. 5-14.

505 OJ L 68, 13.3.2009, pp. 3-7.

506 OJ L 267, 10.10.2009, pp. 7-17.

507 Directive 2009/110/EC, Article 1, para. 1 (a).

147

(f) Finally, it is the author’s opinion that Directive 2004/39/EC “on markets in

financial instruments (…)”,508

widely known by the acronym ‘MiFID’, constitutes a

source of European banking law as well, since several of its provisions also apply to

credit institutions, despite the fact that it is mainly a source of European capital

markets law.

3. Implementing measures – delegated and implementing acts

(a) European banking law provisions are also found, even though to a very limited

extent (especially if compared to European capital markets law), in Regulations and

Directives of the European Commission. Under the TEC, these were containing

implementing measures, under powers conferred upon the Commission by a basic legal

act, which are adopted according to the regulatory comitology procedure, usually (but

not exclusively) in the framework of the so-called “level-2” of the Lamfalussy

procedure.

(b) Under the TFEU, the Commission has the right to adopt in the context of

European banking law delegated and implementing acts, upon powers conferred upon

it by “legally binding Union acts”, in the form of regulatory and implementing

technical standards. As of June 2013, the Commission has not issued any technical

standards, even though a lot is the pipeline for the next months.

4. Acts of soft law

(a) Finally, a source of the European banking law in force are also the guidelines

and recommendations issued by the Committee of European Banking Supervisors

(“CEBS”) in the context of the so-called “level-3” of the Lamfalussy procedure (to the

author’s opinion, the main novum of this procedure), and constituting European soft

law.509

Through its standards and guidelines, CEBS was seeking to specify the

provisions of basic legal acts and implementing measures, with a view to achieving

their common implementation and consistent application by member states throughout

the EU.

(b) Since January 1, 2011, the issuance of guidelines and recommendations is a

power of the European Banking Authority (“EBA”), which succeded the CEBS.

508

OJ L 145, 30.4.2004, pp. 1-44.

509 On this concept, see Chalmers, Hadjiemmanuil, Monti, and Tomkins (2006), p. 137-140.

148

B. Classification of the provisions of the sources

1. General overview

From a systematic point of view, the provisions of the legal acts which constitute the

sources of European banking law need to be classified in two categories:

(a) The first category contains the provisions applying to EU credit institutions

(see below, under 3). These are further classified into two sections:

(i) The first section contains provisions on the materialisation of negative

financial integration as applied to credit institutions (see below, under 2.1).

(ii) The second section contains provisions on positive financial integration as

applied to credit institutions, which should be further be classified in two groups:

• those pertaining to the rules according to which regulatory intervention is

exercised in the banking sector (under 2.2.1), and

• those pertaining to the authorities and schemes competent for the exercise of

this intervention (under 2.2.2).

It is worth mentioning in this context that neither European banking nor European

monetary law contain any rules on the lender of last resort function either of national

central banks (NCBs) or of the European Central Bank.510

(b) The second categoty contains the provisions applying to branches and

subsidiary credit institutions of non-EU credit institutions established and incorporated,

respectively, in the EU (under 3).

2. Provisions of European banking law applying to EU credit institutions

2.1 Provisions on negative financial integration

The first concern of EU legislators in order to establish a single banking market was to

ensure that EU credit institutions are granted the freedom of establishment, by

branching, and the freedom to provide services in other member states (the “host

member states”) than that in which they are incorporated and have been authorised (the

“home member state”). These freedoms have been materialised by application of the

principle of mutual recognition of the authorisation provided by the competent

authorities of the home member state of these credit institutions, by virtue of which the

relevant national legislative and/or administrative restrictions were lifted.511

Accordingly, as of January 1st, 1993, any credit institution authorised by the competent

authorities of the home member state, where its registered office and its head office are

located, is allowed, according to a specific procedure controlled by the competent

supervisory authorities of the home member state, to conduct activities and provide

financial services in host member states either by branching out or by way of providing

services without being subject:

510

On this, see the various contributions in Goodhart (editor, 2000), and Lastra (2006), p.

303-307.

511 On the concept of mutual recognition, see Walker (2007), p. 301-316.

149

• either to the requirement to obtain authorisation by the competent authorities

of the host member state, which are also not allowed to examine the

conditions of the authorisation of the credit institution concerned by the

competent authorities of the home member state, or

• in the case of branching out, to the requirement to submit an endowment

capital.512

The principle of mutual recognition applies to banking and payment services provided

by credit institutions,513

as well as investment services (including ancillary ones) and

investment activities provided and conducted, respectively, by them.514

On this aspect, see in more detail chapter 4, below.

2.2 Provisions on positive financial integration

2.2.1 Provisions on the rules according to which regulatory intervention is

implemented

In order to contribute to the preservation of the European banking system’s stability,

European banking law contains provisions pertaining to the harmonisation of the

member states’ national laws with regard to the authorisation and micro-prudential

supervision of credit institutions, as well as the operation of deposit-guarantee schemes.

On the contrary, there is still no harmonisation at EU level of the rules pertaining to the

reorganisation measures and winding-up proceedings of credit institutions, mainly

because the differences in the judicial systems of member states are still significant.515

In particular:

(a) Specific conditions are laid down for the granting and withdrawal of

authorisation of credit institutions, as well as the pursuit of their business.516

The

relevant provisions are based on the principles of minimum (as to the level) and full (as

to the extent) harmonisation.

On this aspect, see in more detail chapter 5, below.

(b) The micro-prudential regulation of credit institutions is based on provisions

concerning:

• capital adequacy requirements against exposure to credit, market and

operational risks,

512

Directive 2006/48/EC, articles 16 and 23-28, with reference to Annex I thereof, and

Directive 2004/39/EC, articles 31-35 (except article 31, paras. 2-4, and article 32, paras. 2-6

and 8-9 which are covered by Directive 2006/48/EC), with reference to Annex I, Sections A

and B, thereof. See, indicatively, Fernandez-Bollo et Tabourin (2007), p. 102-105, Sousi-

Roubi (1995), p. 120-157, and Staikouras and Gabrielides (2008), p. 55-70.

513 Directive 2006/48/EC, Annex I. See Fernandez-Bollo et Tabourin (2007), p. 94-95.

514 Directive 2004/39/EC, Annex I, Sections A and B.

515 The relevant Directive 2001/24/EC contains, in this respect, only provisions of private

international law (articles 20-32). See Wessels (2006), p. 82-102.

516 Directive 2006/48/EC, articles 6-15 and 17-22, and Directive 2004/39/EC, articles 11, 13

and 14. See Sousi-Roubi (1995), p. 100-120, Staikouras and Gabrielides (2008), p. 41-54,

and Fernandez-Bollo et Tabourin (2007), p. 96-98.

150

• the reporting and quantitative limitation of large exposures,

• the quantitative limitation of qualified holdings held outside the financial

sector, and

• assessment processes with regard to internal capital.517

These provisions are also based on the principle of minimum harmonisation, while the

extent of harmonisation is limited, since member states have the discretion to adopt

additional micro-prudential measures (e.g., liquidity requirements) on which European

banking law is still silent.

It is this minimum harmonisation of European banking law’s provisions on micro-

prudential supervision that has rendered necessary the involvement of CEBS as a

“level-3” Committee, in order to achieve their common implementation and consistent

application by member states and avoid competitive distortions within the single

financial market. In addition, since CEBS has also been assigned the task to promote

the convergence of banking supervisory practices of member states, it can deal with

the distortions arising from the limited-extent harmonisation of the provisions of EU

legislation in the field of banking micro-prudential supervision.

On the contrary, the European banking law in force does not yet contain any provisions

on the macro-prudential regulation of credit institutions.

(c) The operation of deposit-guarantee schemes is governed by provisions

pertaining to:

• the extent and level of coverage of deposits,

• the persons entitled to compensation if a credit institution’s deposits were to

become “unavailable”,

• the procedure for paying compensation, and

• the information to be provided to depositors on the scheme’s operation.518

The level of harmonisation is minimum in this case as well, and its extent is limited,

since certain aspects of the schemes’ operation, such as their funding and

administration, are left to the discretion of Member States.

2.2.2 Provisions on the authorities and schemes competent for the implementation of

regulatory intervention

2.2.2.1 The decision not to create supranational authorities and deposit-guarantee

schemes

In order to contribute to the preservation of the European banking system’s stability,

European banking law also contains provisions on the authorities (and in the case of

deposit guarantee, the schemes) which are responsible for the implementation of

regulatory intervention. In this respect, it is, first of all, worth mentioning that the main

political decision taken was not to establish, up to now at least, one or more

supranational bodies competent for the exercise of regulatory intervention in the

European banking (and, more generally, financial) sector. In particular:

517

Directive 2006/48/EC, articles 56-123, and Directive 2006/49/EC, articles 12-21 and 28-34.

See Fernandez-Bollo et Tabourin (2007), p. 107-123, and 123-125, respectively.

518 Directive 94/19/EC, Articles 2, 3, 5 and 7-11. See Sousi-Roubi (2005), pp. 231-234.

151

(a) The authorities designated by Member States are competent for both the

authorisation of EU credit institutions and their micro-prudential supervision.519

In

contrast to the monetary and foreign-exchange policies which have been

“communitised” following the creation of the European Monetary Union that became

operative on 1 January 1999, the ECB (i.e. the single European monetary authority) has

not concurrently become a single European supervisory authority either for the entire

European financial system or for any of its sectors.

This is based on the provisions of paragraph 5, Article 127 TFEU, which is carried

over verbatim in Article 3.3 of the Statutes of the ESCB and of the ECB,520

according

to which: “the ESCB shall contribute to the smooth conduct of policies pursued by the

competent authorities relating to the prudential supervision of credit institutions and

the stability of the financial system”.521

In this context, the ECB has the right, inter alia,

under Article 25.1 of the Statutes, to issue (legally non binding) opinions.522

(b) National are also the supervisory and/or judicial authorities competent for the

adoption of reorganisation measures and the initiation of winding-up proceedings for

unviable credit institutions.523

(c) Finally, the deposit-guarantee schemes are also national.524

2.2.2.2 Competent authorities and deposit-guarantee schemes for foreign

establishments of EU credit institutions in other Member States

(a) Branches of EU credit institutions established in other Member States

European banking law contains detailed provisions applying to the branches of EU

credit institutions established in other Member States, whose content derives from the

application of the abovementioned principle of mutual recognition of credit

institutions’ authorisations. In particular:

519

Directive 2006/48/EC, Article 4, point 4. See Lastra (2006), pp. 298-300. For a summary of

the different proposals with regard to the creation of one or more supranational financial

supervisory authorities in the EU, see ibid., pp. 324-328, and Hadjiemmanuil (2006), pp. 818-

828.

These supervisory authorities also have regulatory powers (extensive or limited, where

appropriate) as well the power to impose sanctions. Accordingly, it would not be inappropriate

to refer to them as supervisory and regulatory authorities.

520 For more information on the historical evolution of these provisions, which do not apply

either to the Member States with derogation (Statutes, article 43.1) or to the United Kingdom

(Protocol No 15 to the TEU and the TFEU, paras. 4 and 7), see Smits (1997), pp. 334-338.

521 This is not one of the principal tasks of the ESCB, which are listed exclusively in paragraph

2, Article 127 of the TFEU. On this article, see Smits (1997), pp. 193-221, Lastra (2006), pp.

216-222, and Louis (2009), pp. 162-166 (with specific reference to the powers of the ESCB

during the recent (2007-2009) international financial crisis).

522 On other means for achieving the task established in Article 127 (para. 5), see Smits (1997),

pp. 339-343.

523 Directive 2001/24/EC, Article 2, sixth indent.

524 Directive 94/19/EC, Article 3, para. 1, first sentence. Each member state may have one or

more such explicit schemes.

152

(i) The micro-prudential supervision of these branches is exercised:

• with regard to solvency, by the competent supervisory authorities of their

home Member State (i.e. those who have granted them the authorisation to

branch out in the host Member State),525

and

• with regard to liquidity, by the competent supervisory authorities of the host

Member State.526

The obligation has also been established for close cooperation between the competent

authorities of home and host Member States of such credit institutions.527

(ii) The reorganisation measures adopted and the winding-up procedures initiated

by competent supervisory and/or judicial authorities of EU credit institutions are also

effective in those Member states, in which such institutions establish and operate their

foreign branches.528

(iii) The deposits of branches of EU credit institutions established in other (host)

Member States are covered by the deposit guarantee scheme of the home Member

State.529

However, these branches may also voluntarily join the deposit guarantee

scheme of the host Member State, if the level and extent of coverage offered by the

latter exceed those of the home Member State’s scheme, in order to supplement the

guarantee (the so-called ‘topping-up’ option).530

In such a case, the deposit-guarantee schemes concerned must establish

appropriate rules and procedures (on a bilateral basis) for paying compensation to the

depositors of those foreign branches.531

(b) Subsidiaries of EU credit institutions incorporated in other member states

Credit institutions which are subsidiaries of EU credit institutions are incorporated and

authorised according to the laws of the Member State, in which their registered or head

offices are located. Their “home Member State” is the one which granted their

authorisation, and the abovementioned provisions of European banking law apply to

them accordingly.

European banking law contains some specific provisions on these subsidiaries, which

refer to their authorisation and micro-prudential supervision. In particular:

(ba) Before granting authorisation to such a subsidiary, the competent supervisory

authorities must consult with the competent supervisory authorities of the Member

State where its parent undertaking is operating, and exchange information on the

suitability of shareholders and the reputation and experience of managers.532

525

Directive 2006/48/EC, articles 40 and 43. See Sousi-Roubi (1995), pp. 198-206.


527 Ibid., Article 42. See Sousi-Roubi (1995), p. 206-210, and Fernandez-Bollo & Tabourin

(2007), pp. 133-135.

528 Directive 2001/24/EC, Articles 3-7 and 9-18. See more details in Wessels (2006), pp. 55-81.

529 Directive 94/19/EC, Article 4, para. 1. See Sousi-Roubi (1995), pp. 229-231.


531 Ibid., Annex II.

532 Directive 2006/48/EC, Article15, paras 1 and 3.

153

(bb) In addition to micro-prudential supervision on a solo basis by the competent

supervisory authorities of the home Member State, these subsidiaries are also subject to

micro-prudential supervision on a consolidated basis by the competent authorities of

the member state where the parent credit institution is incorporated.533

Directive

2009/111/EC, whose provisions apply since 31 December 2010, also introduced the

following elements:

(i) The term ‘significant branches’ is introduced. For a branch of a credit

institution established in a host Member State to be considered as significant, the host

competent authorities must, if specific requirements are fulfilled, make a request to the

consolidating supervisor or to the competent authorities of the home Member State of

the credit institution. This provision has been introduced in order to reinforce the

information rights of host supervisors, taking into account that information deficits

between home and host competent authorities have proved, during the recent crisis

(and might prove again), detrimental to the financial stability in host Member States .

(ii) “Colleges of supervisors” have been established for the purpose of

strengthening coordination between competent authorities and thus bolster the

efficiency of micro-prudential supervision and regulation on individual banking groups

on a consolidated basis and mitigate systemic risk. Their establishment should be an

instrument for stronger cooperation by means of which competent authorities reach

agreement on key supervisory tasks.

3. Provisions of European banking law relating to branches and subsidiaries of non-EU credit institutions

3.1 Branches of non-EU credit institutions

European banking law also contains specific provisions relating to the branches of non-

EU credit institutions established in the European Union. These concern:

• the requirement, imposed on Member States, to avoid applying provisions on

such branches that would result in a treatment more favourable than the one

accorded to branches of credit institutions from other Member States,534

• the possibility of the EU to conclude agreements with third countries, under

which these branches would be treated identically throughout the EU,535

• specific arrangements related to reorganisation measures and winding-up

proceedings for these branches,536

and

• the regime governing these branches in relation to their participation in the

deposit guarantee scheme of the Member State in which they are

established.537

533

Ibid., Articles 125-143. See Fernandez-Bollo & Tabourin (2007), pp. 128-132. These

provisions, as well as those of Directive 2006/49/EC, Articles 22-27, do not only apply to

“pure” banking groups, but also to other categories of “homogeneous” financial groups,

excluding financial conglomerates On this distinction, see Dierick (2004).

534 Directive 2006/48/EC, Article 38, para. 1.


536 Directive 2001/24/EC, Articles 8 (reorganisation) and 19 (winding-up).

537 Directive 94/19/EC, Article 6.

154

In general, as regards the authorisation requirements for, and micro-prudential

supervision of, such branches applicable are the provisions of the General Agreement

on Trade in Services (GATS) of the World Trade Organisation,538

including the Fifth

Protocol concerning financial services.539

These are based on the principle of most-

favoured-nation treatment (MFN treatment) as a general obligation, and the principles

of national treatment and market access as specific commitments.540

3.2 Subsidiaries of non-EU credit institutions

Credit institutions which are subsidiaries of non-EU credit institutions, just like

subsidiaries of EU credit institutions, are incorporated according to the laws of the

Member State, in which their registered and head offices are located. Thus, they are

governed by the totality of provisions of European banking law, as outlined above,

treated as EU credit institutions. Specific provisions on these credit institutions apply

only with regard to consolidated micro-prudential supervision.541

On the contrary, the adoption of Directive 2006/48/EC brought about the abolition of

specific provisions of European banking law with regard to the conditions for the

authorisation of these subsidiaries, based on the principle of reciprocity.542

538

The GATS was approved on behalf of the EU by Council Decision 94/800/EC (OJ L 336,

23.12.1994, p. 1 ff.).

539 This Protocol was approved on behalf of the EU by Council Decision 1999/61/EC (OJ L 20,

27.1.1999, p. 38-39).

540 On the provisions of GATS in general, see indicatively Wolfrum, R., Stoll, P.T. and C.

Feinäugle (editors, 2008). On the Annexes of GATS on financial services and on the Fifth

Protocol, see von Bogdandy and Windsor (2008), pp. 618-640 and 643-646, respectively.

541 Directive 2006/48/EC, Articles 39 and 143.

542 Directive 2001/12/EC (OJ L 126, 26.5.200, pp. 1-59), Article 23. On these provisions,

which were firstly adopted in 1989 by Directive 89/646/EC, the so-called “Second Banking

Directive” (OJ L 386, 30.12.1989, p. 1 ff.), and then carried over verbatim in Directive 2000/12/EC, see Vigneron and Smith (1990).

155

TABLE 7

European banking law (I): status quo

1. Provisions on the rules according to which regulatory intervention is conducted

Financial policy instruments Extent and level of harmonisation

Authorisation of credit institutions • full harmonisation

• minimum harmonisation

Micro-prudential supervision of credit

institutions • minimum harmonisation

Micro-prudential regulation of credit

institutions • partial harmonisation


Reorganisation and winding-up of credit

institutions • no harmonisation

Operation of deposit-guarantee schemes • partial harmonisation


156

TABLE 7 (continued)


2. Provisions on the authorities and schemes competent for conducting regulatory intervention

Financial policy

instruments

National vs.

supranational competent authorities

and schemes

Competent authorities and schemes for foreign

establishments of EU credit institutions in other member states

Foreign branches Foreign subsidiaries

Authorisation of

credit institutions

National supervisory

authorities

home member state

supervisory authorities • supervisory

authorities of

subsidiary’s home

member state

• consultation and

exchange of

information between

supervisory

authorities of parent

and subsidiary credit

institutions

Micro-prudential

supervision of

credit institutions


authorities • home member state

supervisory authorities

(as regards solvency)

• host member state


(as regards liquidity)

• on a solo basis:

supervisory

authorities of

subsidiary’s home

member state

• on a consolidated

basis: supervisory


credit institution

Macro-prudential

oversight

European Systemic

Risk Board

Reorganisation

and winding-up of

credit institutions


and/or judicial

authorities

home member state

competent authorities

competent authorities of

the subsidiary’s home

member state

Operation of

deposit-guarantee

schemes

National deposit-

guarantee schemes • home member state

scheme


scheme (in case of

“topping-up”)

• cooperation between

home and host member

state schemes (in case

of “topping-up”)

scheme of the

subsidiary’s home

member state

157

TABLE 7 (continued):



Financial policy

instruments

National vs.

supranational


and schemes


establishments of EU credit institutions in other

member states

Last-resort

lending

No specific legal

provision – de facto:

national central banks

(Emergency Liquidity

Assistance (ELA)) in

the euro area)

Provision of state

subsidies to

systemically

important credit

institutions

(recapitalisation

in the context of a

‘taxpayers’

solution')

No specific rules of

banking law

(state aid rules, Article

107, para. 3(b) TFEU)

158

C. Current developments

1. General Overview

(a) In June 2013, the Directives of the European Parliament and of the Council

2006/48/EC and 2009/49/EC have been repealed by two (2) new legal sources, which

incorporated into European banking law the provisions of the Basel Committee's 'Basel

III framework':543

• Regulation (EU) No 575/2013 of the European Parliament and of the Council

of 26 June 2013 on prudential requirements for credit institutions and

investment firms and amending Regulation (EU) No 648/2012544

(see under 2,

below), and

• Directive 2013/36/EU of the European Parliament and of the Council of

26 June 2013 on access to the activity of credit institutions and the prudential

supervision of credit institutions and investment firms, amending Directive

2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC545

(see

under 3, below)

(b) A proposal for a Directive of the European Parliament and of the Council

establishing a framework for the recovery and resolution of credit institutions and

investment firms was submitted by the European Commission on 6 June 2012. Its

adoption is pending (see under 4, below).

(c) Finally, there is a proposal for a Directive of the European Parliament and of

the Council with regard to the repeal of Directive 94/19/EC on deposit-guarantee

schemes, as amended by Directive 2009/14/EC. Its adoption is also pending (see under

5, below).

2. Micro-prudential regulation of credit institutions

2.1 Introduction

The Regulation (‘CRR’) includes, among others, new provisions on the the regulatory

framework of EU credit institutions with regard to:

• the amendement of their capital adequacy framework (see under 2.2, below),

and

• the intoduction of “innovative” elements and additional rules on micro-

prudential regulation (under 2.3).

543

On the 'Basel III framework', see Gortsos (2011).

544 OJ L 176, 27.6.2013, pp. 1-337.

545 OJ L 176, 27.6.2013, pp. 338-436.

159

2.2 Amendments to the existing rules governing the capital adequacy of credit institutions

2.2.1 Provisions on credit institutions’ minimum regulatory capital

During the recent financial crisis it was found that the quality of capital instruments

required to absorb unexpected losses from risks in the trading book and Tier 3 capital

instruments were not of sufficiently high quality. Furthermore, the harmonisation in

the EU of the definition of capital was insufficient. The main objective of the proposal

is to strengthen further the criteria for eligibility of capital instruments and to introduce

harmonisation of the adjustments made to accounting equity in order to determine the

regulatory capital that it is prudent to recognize for regulatory purposes. The new

requirements would be implemented gradually between 2013 and 2015.

2.2.2 Provisions on coverage against exposure to credit risk

The crisis revealed a number of shortcomings in the current regulatory treatment of

counterparty credit risk arising from derivatives, repo, and securities financing

activities. Requirements for management and capitalisation of the counterparty credit

risk will be strengthened. Risk weights on exposures to financial institutions relative

to the non-financial corporate sector will be raised. The proposal for a Regulation

would also enhance incentives for clearing over-the-counter instruments through

central counterparties.

2.3 “Innovative” elements

2.3.1 Leverage ratio

In order to limit an excessive build-up of leverage on credit institutions’ and

investment firms’ balance sheets and thus help contain the cyclicality of lending, the

Commission proposes to introduce a non-risk based leverage ratio (namely, assets and

off-balance sheet items of banks are not risk-weighted as in the case of capital

adequacy requirements). The leverage ratio will be introduced as an instrument for the

supervisory review of institutions. Its impact will be monitored with a view to

migrating it to a binding pillar one measure in 2018.

2.3.2 Liquidity ratios

Existing liquidity risk management practices were shown by the crisis to be inadequate

in fully grasping risks linked to originate-to-distribute securitization, use of complex

financial instruments and reliance on wholesale funding with short term maturity

instruments. This contributed to a demise of several financial institutions and strongly

undermined the financial health of many others, threatening the financial stability and

necessitating public support.

To improve short-term resilience of the liquidity risk profile of financial institutions, a

Liquidity Coverage Ratio (‘LCR’) will be introduced after an observation and review

period in 2015. LCR would require institutions to match net liquidity outflows during

a 30 day period with a buffer of “high quality” liquid assets.

160

After an observation and review period in 2018, a Net Stable Funding Ratio (‘NSFR’)

will also be introduced in order to address funding problems arising from asset-liability

maturity mismatches. The NSFR would require institutions to maintain a sound

funding structure over one year in an extended firm-specific stress scenario such as a

significant decline in its profitability or solvency.

3. Macro-prudential regulation of credit institutions

3.1 Introduction

Several rules of the 'CRD IV' are introduced for the first time and are addressing

exclusively the time dimension of systemic risk. In this context, credit institutions are

called to create:

• a “capital conservation buffer” in times of economic growth (under 3.2), and

• a “countercyclical buffer” in times of excessive credit expansion (under 3.3).

Both buffers are meant to attenuate the risk of pro-cyclicality and the risk of excessive

leverage by building strong “forward-looking provisions” and covering against

excessive cyclicality of the minimum capital requirements of credit institutions.

3.2 Capital conservation buffer

According to the CRD IV, the Capital Conservation Buffer amounts to 2.5% of risk

weighted assets, applies at all times, and has to be met with capital of the highest

quality. It is aimed at ensuring institutions’ capacity to absorb losses in stressed

periods that may span a number of years. Credit institutions would be expected to build

up such capital in good economic times.

3.3 Countercyclical conservation buffer

According to the CRD IV, the Countercyclical Capital Buffer is set by national

authorities for loans provided to natural and legal persons within their Member State, it

can be set between 0% and 2.5% of risk weighted assets, and has to be met by capital

of the highest quality likewise. This buffer will be required during periods of excessive

credit growth and released in a downturn.

4. Resolution of credit institutions

According to the proposal of the European Commission for a Directive of the

European Parliament and of the Council on the recovery and resolution of credit

institutions and investment firms, submitted in June 2012, the aim is to provide

national competent authorities:

“with the tools to intervene sufficiently early and quickly in an unsound or failing

credit institution so as to ensure the continuity of the credit institution’s essential

financial and economic functions, while minimizing the impact of an institution’s

failure on the financial system and ensuring that shareholders and creditors bear

appropriate losses”.

161

As a first step towards that end, the Commission is developing a legislative proposal

for a harmonized regime for crisis prevention and bank recovery, which includes a

common set of resolution tools and reinforcement of cooperation between national

authorities. The framework of the Commission comprises three (3) classes of

measures: preparatory and preventative measures (see under a, below), early

supervisory intervention (under b), and resolution tools and powers (under c).

(a) Preparatory and preventative measures are designed to increase the possibility

that developing problems will be identified at an early stage, include reinforced micro-

prudential supervision by competent authorities, asset transferability, the conduct of

recovery and resolution plans (“living wills”) setting out the measures a credit

institution or group would take under different scenarios to address liquidity problems,

raise capital or reduce risk, and preventative powers of authorities (indicatively,

amendments to business operations and operational structures).

(b) Early supervisory intervention measures are designed to address developing

problems at the entity and group level at an early stage, prevent them from aggravating

and secure recovery, include in particular:

• expanded supervisory powers (indicatively, clear powers to require the

replacement of managers or directors),

• implementation of recovery plans in case an institution is failing to meet the

solvency and liquidity requirements under the provisions of the European

financial law in force, and

• the supervisory power to appoint a special manager to take over the

management, or assist the existing management of an institution.

(c) Resolution tools require the adoption of appropriate financial insolvency laws

in order to ensure that “failing” financial institutions can be resolved in a way that

minimizes risk of contagion and ensures continuity of essential financial services. The

resolution tools include:

• the sale of business tool (articles 32-33): the ‘bad’ bank under liquidation –

critical assets and liabilities transferred to another entity,

• the bridge institution tool (articles 34-35): the ‘bad’ bank under liquidation,

a new bridge bank is licensed,

• the asset separation tool (article 36): assets and liabilities of a troubled bank

are transferred to a new ‘asset management vehicle’ (owned by public

authorities, and/or private entities), and

• the bail-in tool (articles 37-50).

162

TABLE 8

An overview of the proposal for a Directive on the recovery and resolution of credit

institutions and investment firms

Titles Subject-area Articles

Subject matter - scope of application - definitions - 1-2 I

Resolution authorities 3

Recovery and resolution plans 4-12

Powers to address or remove impediments to resolvability 13-15 II

Intra-group financial support 16-22

III Early interventions – special management 23-25

Chapter I Objectives, conditions, general principles 26-29

Chapter II Valuation 30

Chapter III Resolution tools 31-50

Chapter IV Write-down of capital instruments 51-55

Chapter V Resolution powers 56-64

Chapter VI Safeguard 65-73

Chapter VII Procedural obligations 74-76

IV

Chapter VIII Right of appeal and exclusion of other actions 77-79

V Cross- border resolution (resolution colleges) 80-83

VI Relations with third countries 84-89

VII Resolution funding (European System of Financing

Arrangements)

90-99

VII Sanctions 100-102

IX Executive powers 103

X Amendments to existing Directives 104-112

163

5. Deposit-guarantee schemes

The main amendments to the existing framework Directive 94/19/EC, as amended by

Directive 2009/14/EC, proposed by a new Directive of the European Parliament and of

the Ciuncil, are the following:

(a) Coverage level: the coverage level will be set at of EUR 100,000 at maximum.

(b) Payout: the DGS must act to repay depositors within one week (from 20

working days according to Directive 2009/14/EC).

(c) DGS financing and borrowing between DGS: according to the proposal for a

Directive, DGSs’ available financial means should be proportionate to their potential

liabilities. The financing of DGSs will be based on the following subsequent steps:

• First, in order to ensure sufficient funding, DGSs must have 1.5% of eligible

deposits on hand after a transition period of 10 years.

• Second, credit institutions must pay extraordinary (ex-post) contributions of

up to 0.5% of eligible deposits if necessary.

• Third, a mutual borrowing facility allows a DGS in need to borrow from all

other DGSs in the EU, which, altogether, must lend to the DGS a maximum

of 0.5% of its eligible deposits in need.

• As a fourth and last line of defense against taxpayers’ involvement, DGSs

must have in place alternative funding arrangements, recalling that those

arrangements must comply with the monetary financing prohibition laid down

in article 123 TFEU.

(d) Risk-based contributions to DGSs: Contributions from credit institutions to

DGSs must be calculated according to their risk profiles in a harmonised way. The

proposed indicators cover the key risk classes commonly used to evaluate the financial

soundness of credit institutions (capital adequacy, asset quality, profitability and

liquidity).

164

TABLE 9

European banking law (II): current regulatory developments

1. Provisions on the rules according to which regulatory intervention is exercised

(current developments in italics)

Financial policy instruments Extent and level of harmonisation

Authorisation of credit institutions

(amendments) (CRD IV) • full harmonisation


Micro-prudential supervision of credit

institutions (new elements) (CRD IV and

proposal for a ‘Recovery and Resolution

Directive’)

• partial harmonisation


Micro-prudential regulation of credit

institutions (amendments) (CRR) • partial harmonisation

• maximum harmonisation

Macro-prudential regulation of credit

institutions (new element) (CRD IV) • partial harmonisation


Reorganisation and winding-up of credit

institutions • no harmonisation

Resolution of credit institutions (new

element) (proposal for a Directive) • partial harmonisation


Operation of deposit-guarantee schemes

(amendments) (proposal for a Directive) • partial harmonisation

• quasi maximum harmonisation

165

TABLE 9 (continued)




Financial policy

instruments

National vs.

supranational

competent authorities and schemes


establishments of EU credit institutions in other

Member States

Foreign branches Foreign subsidiaries

Authorisation of

credit institutions


authorities

home member state

supervisory authorities • supervisory

authorities

ofsubsidiary’s home

member state

• consultation and

exchange of

information between

supervisory


and subsidiary credit

institutions

Micro-prudential

supervision of

credit institutions




(for solvency)



(for liquidity)

• on a solo basis:

supervisory

authorities of

subsidiary’s home

member state

• on a consolidated

basis: supervisory


credit institution

• supervisory colleges

Macro-prudential

oversight

European Systemic

Risk Board

Reorganisation

and winding-up of

credit institutions


and/or judicial

authorities

home member state


competent authorities of

the subsidiary’s home

member state

Resolution of

credit institutions

(proposal for a

Directive)

National resolution


authorities



state authorities

• authorities of the

subsidiary’s home

member state

• colleges of resolution

authorities

166

TABLE 9 (continued)


2. Provisions on the authorities and schemes competent for conducting regulatory intervention (continued)


Operation of

deposit-guarantee

schemes

National deposit-

guarantee schemes • home member state

scheme


scheme (in case of

“topping-up”)



state schemes (in case

of “topping-up”)

scheme of the

subsidiary’s home

member state

Last resort lending No specific legal

provision – de facto:

national central banks

(Emergency

Liquidity Assistance

(ELA) in the euro

area

Provision of state

subsidies to

systemically

important credit

institutions

(recapitalisation in

the context of a

‘taxpayers’

solution')

No specific rules of

banking law

(state aid rules,

Article 107, para.

3(b) TFEU)

167

CHAPTER TWO

The key provisions of European Banking Law

169

SECTION 1

The provisions on negative financial integration: freedoms to establish and to provide services by credit and financial

institutions

A. The principle of mutual recognition of authorisations of EU credit

institutions

1. Content of the principle of mutual recognition of authorisations

1.1 General remarks

As already mentioned in chapter 1 (section C) of this study, the principle of mutual

recognition, by member states, of the legislative, regulatory and administrative

measures taken by other member states concerning terms of authorisation of credit

institutions was established in the European banking law by the Second Banking

Directive (89/646/EEC).546

Pursuant to this directive, starting January 1st 1993, every

credit institution (in the main sense of the term) authorised547

by the competent

authorities of the member state where it has its registered office and head office (called

the competent authorities of the home member state) is entitled, based on this

authorisation, to conduct its business548

in other member states, either by establishing

branches or via the freedom to provide services,549

without requiring:

• neither an authorisation from the competent authorities of the host member

state,550

nor

• in case of branches, the payment of any guarantee in the form of endowment

capital, regarding the performance of obligations undertaken by operating in

the host member state.551

However, in both cases, for a credit institution to commence providing services in a

host member state pursuant to the principle of mutual recognition of authorisations, a

specific process needs to be followed, as described in articles 25-26 and 28 of

Directive 2006/48/EC (see details in section B below, under 2 and 3 respectively).

The authorisation granted by the competent authorities of the home member state to an

EU credit institution is referred to as “single authorisation” or “EU passport”.

546

Directive 89/646/EEC, article 18, para. 1 (included now in Directive 2006/48/EC, as article

23).

547 On the definition of the term “authorisation”, see just below, under 1.2.1.

548 On the scope of this business, see 3 in this section below.

549 On the definition of the terms “branches” and “freedom to provide services”, see just below,

under 1.2.2.

550 The competent authorities of the host member state do not have the right to audit the terms

of authorisation by the competent authorities of the home member state (Commission

Interpretative Communication (1997): Freedom to provide services and the interest of the

general good in the second banking Directive, SEC (97) 1193 final, Brussels, 20.06.1997, p. 15).

551 Directive 2006/48/EC, article 16, sentence a. This provision does not apply to electronic

money institutions (Directive 2000/46/EC, article 2, para. 2, sentence a).

170

1.2 Definitions

1.2.1 The term “authorisation”

Directive 2006/48/EC defines the authorisation as “an instrument issued in any form

by the (competent) authorities by which the right to carry on the business of a credit

institution is granted”.552

According to this definition, member states have full

discretion with regard to the form of the authorisation instrument granted by their

competent authorities. On this aspect, there has been no harmonisation at EU level.553

1.2.2 The terms “branch” and “freedom to provide services”

1.2.2.1 Branch

Directive 2006/48/EC defines a branch as “a place of business which forms a legally

dependent part of a credit institution and which carries out directly all or some of the

transactions inherent in the business of credit institutions”.554

From this definition,

which also covers branches of non-EU states established in the member states, three

important elements arise:

(a) As already mentioned, contrary to subsidiary undertakings, branches do not

form independent legal entities.

(b) The establishment of a branch must be of a permanent nature ("place of

business").555

If the establishment is provisional in nature, this would be provision of

services.

(c) Branches are entitled to conclude final contracts in the name and on behalf of

the credit institution with respect to the services provided (which is not the case for

agencies which can only do preparatory work for the conclusion of contracts).556

The same Directive also stipulates that if a EU credit institution has established more

places of business (i.e. branches) in a host member state, they are considered as one

single branch (for the purpose of application of its provisions).557

1.2.2.2 Freedom to provide services

Freedom to provide services is not defined in Directive 2006/48/EC. Consequently, in

order to define this term, it is necessary to turn to the relevant provisions of the TFEU

(and the interpretation thereof given by the Court of Justice of the European Union),

according to which freedom to provide services is used to describe any activity of a

provisional nature (contrary to a branch), exercised cross-border within the EU, and

implemented:

• either through the provisional movement of the service supplier (or his agents)

to the host member state, or

552

Directive 2006/48/EC, article 4, point 2.

553 On this see Sousi-Roubi (1995), p. 101.

554 Directive 2006/48/EC, article 4, point 3.

555 On this see Sousi-Roubi (1995), p. 132, with additional bibliographical references.

556 Ibid, p. 133.

557 Directive 2006/48/EC, article 27.

171

• through the provisional movement of the service recipient to the home member

state, or finally

• through the movement of the service itself (“cross-border” provision), if

provided electronically.558

1.2.2.3 The “grey area”

1.2.2.3.1 Introductory remarks

In 1997, the European Commission issued an interpretative communication on the

application of certain provisions of the (then in force) Second Banking Directive

(89/646/EEC) for which interpretation problems had arisen. One of the questions that

concerned the Commission related to whether under certain special circumstances,

services in the host member state are carried on under the status of freedom of

establishment or freedom to provide services.559

The Commission focused its interest

on the following three (3) cases:

• where a credit institution provides services in the host member state through

the mere installation in that member state of automated teller machines

(ATMs) (see 1.2.2.3.2 below),

• where a credit institution, in order to provide services in the host member

state, uses independent intermediaries, who are neither credit institutions nor

investment firms (see 1.2.2.3.3 below), and

• where services are provided in the host member state through the permanent

physical presence of credit institution staff (see 1.2.2.3.4 below).

1.2.2.3.2 Automated teller machines

Regarding the case of ATMs, the Commission considered that the provision of services

by one EU credit institution in a host member state through the installation of

automated teller machines in its territory must be subject to the provisions of Directive

2006/48/EC on the exercise of freedom to provide services.560

558

On this see Sousi-Roubi (1995), p. 134. Note that these three forms of cross-border service

provision by a credit institution with no commercial presence are also recognised within the

General Agreement on Trade in Services (“GATS”) as modes of “trade in services”, according

to the abovementioned in chapter 1 of this study.

559 The practical importance of this distinction is that:

• in the first case, the procedure of articles 25 and 26 of Directive 2006/48/EC does

apply, while

• in the second, that of article 28.

See details below, in section B under 2 and 3, respectively, in this chapter of the study.

560 Commission Interpretative Communication (1997), part 1, section B, para. 3, point b.

172

1.2.2.3.3 Independent intermediaries

Regarding the provision of services by a credit institution in the territory of a host

member state through independent intermediaries, the Commission adopted the

following distinction:561

(a) The provisions of Directive 2006/48/EC on the exercise of the right of

establishment must be activated, provided the intermediary meets the following four

(4) requirements:

• has received a permanent mandate from the credit institution it represents,

• is under the management and control of the credit institution represented,

• operates in the host member state on a permanent basis, and

• has the authority to undertake commitments on behalf of the credit

institution.562

(b) If the credit institution uses the intermediary provisionally and occasionally to

provide services in the host member state, then the provisions of Directive 2006/48/EC

on freedom to provide services apply.

(c) Finally, if the intermediary is only used for the purpose of attracting clients on

behalf of the credit institution in the host member state, without having the authority to

carry out transactions, the provisions of Directive 2006/48/EC do not apply.

1.2.2.3.4 Permanent credit institution staff in the host member state

Finally, if a credit institution in the host member state carries out one or more services

covered by the mutual recognition principle through staff with permanent physical

presence in the host member state (and on condition that such staff has the authority to

conclude final contracts in the name of the credit institution), then these are services

provided through a branch, and the relevant provisions of Directive 2006/48/EC on the

right of establishment apply.563

2. Categories of financial intermediaries for which the mutual recognition of authorisations principles apply

2.1 Credit institutions

The mutual recognition of authorisations principle applies to all EU credit institutions

(pursuant to the main definition of the term), that have been authorised by the

competent authorities of the home member state, pursuant to the provisions of

Directive 2006/48/EC and are under their supervision.564

Of course, credit institutions,

which do not come under the scope of Directive 2006/48/EC are excluded.

561

Ibid, part 1, section B, para. 3, point a

562 Note that in this case, the independent intermediary does not become a branch of the credit

institution.

563 Commission Interpretative Communication (1997), part 1, section B, para. 2.

564 Directive 2006/48/EC, article 23.

173

In this sense, the principle also applies to all credit institutions authorised in one

member state and are subsidiaries565

of parent undertakings566

having their registered

office either in another member state or in a third country, outside the EU. As already

mentioned repeatedly, in the case of subsidiary undertakings which are independent

legal entities, the member state that has granted the authorisation is considered to be

their home member state, and not the one that has authorised the parent undertaking.

We need to point out that subsidiary undertakings themselves do not benefit from

application of the mutual recognition principle, since before starting to operate, they

need to be authorised by the competent authorities of the member state where they will

have their registered office and head office. On the contrary, the mutual recognition

principle applies to their carrying out cross-border service provision (either with or

without establishment) in other (host) member states.

Below are two examples:

(a) The British credit institution Londonbank wishes to enter the French banking market,

and for this reason establishes a subsidiary credit institution in France styled Londonbank

(France). This subsidiary undertaking is a legal entity according to French Law, and must

be authorised as a credit institution by the competent French supervisory authorities, and,

according to the mutual recognition of authorisations principle, may carry out its business

in Greece by establishing branches, without needing to get authorised by the Greek

competent authorities or pay an endowment capital.

(b) Turkish bank Instanbulbank establishes a subsidiary credit institution in Luxembourg

styled Istambulbank (Luxembourg). This subsidiary undertaking is a legal person according

to Luxembourgian Law, it must be authorised by the competent Luxembourgian authorities

and, pursuant to the mutual recognition of authorisations principle, can carry out its

business in Greece through cross-border service provision, without needing to be authorised

by Greek competent authorities.

On the contrary, the mutual recognition principle does not apply to branches of non-EU

credit institutions established and operating in EU member states. In the case of these

branches applicable are the provisions of para. 1 of article 38 of Directive 2006/48/EC.

565

The definition of a subsidiary undertaking is made with reference to articles 1 and 2 of the

seventh company Directive 83/349/EEC of the Council (Directive 2006/48/ EC, article 4, point

13, item a).

566 The definition of a parent undertaking is also made with reference to articles 1 and 2 of the

Directive 83/349/EEC of the Council (ibid, article 4, point 12, item a).

174

2.2 Financial institutions

When the Second Banking Directive (89/646/EEC) was about to be published,

legislation in member states did not allow credit institutions to provide all their

services benefiting from mutual recognition, according to the descriptions in part 3 of

this section of the chapter, below.567

Some, however, allowed that some services that

could not be provided by credit institutions, could be provided by their subsidiary

undertakings which, since 1984 had been subject to the consolidated supervision of

their parent undertakings, according to the provisions of Directive 83/350/EEC.

In view of these conditions, it became necessary also to apply the mutual recognition

principle to these subsidiary undertakings of EU credit institutions.568

To this end, the

Second Banking Directive has established the term of a financial institution, thus

extending application of the mutual recognition principle to EU financial

institutions.569

The mutual recognition of authorisation’s principle applies to EU financial institutions,

only provided the following requirements are met:570

(a) The financial institution is a subsidiary undertaking of one or more EU credit

institutions.571

(b) The parent undertaking or undertakings is authorised as credit institutions in

the member state by the law of which the financial institution is governed.

(c) The business of the financial institution benefiting from mutual recognition

must be, indeed, carried out in the member state where the parent undertaking or

undertakings and the financial institution are registered.

(d) The parent undertaking or undertakings must hold 90% or more of the voting

rights attaching to shares in the capital of the financial institution.

(e) The parent undertaking or undertakings must:

• prove to the competent authorities of the home member state that the financial

institutions is prudently managed, and

567

This primarily applied to leasing services, issuing and managing credit cards, as well as

many investment services provided in money and capital markets. Similar prohibitions still

apply in Member States. Nevertheless, since 1997, member states are not allowed to have in

force any provision prohibiting credit institutions from participating in organised markets (i.e.

stock or commodities markets), or have access thereto, pursuant to the provisions of para. 3,

article 15, Directive 93/22/EEC.

568 On this see Sousi-Roubi (1995), p. 126-127.

569 According to para. 1 of article 24 of Directive 2006/48/EC (sentence a), the provisions of

articles 25, 26 and 28, apply to financial institutions, excluding only those that establish a

presumption of fulfilment of the procedural conditions for exercising the right of establishment

and the freedom to provide services, during the period prior to entry into effect of the provisions

of the Second Banking Directive (i.e. the provisions of articles 26, para. 4 and 28, para. 3).

570 Directive 2006/48/EC, article 24, para. 1, sentence a. This provision also applies pro rata to

a financial institution’s subsidiary undertakings (ibid article 24, para. 3).

571 The parent undertaking must be a credit institution in the main sense of the term, as the

provisions of article 24 of Directive 2006/48/EC do not apply when the parent undertaking is an

electronic money institution (Directive 2000/46/EC, article 2, para. 2, sentence a).

175

• declare that they will be entirely responsible for the obligations assumed by the

subsidiary (the latter provided that the competent authorities in the home

member state consent).

(f) The financial institution is included in the prudential consolidated supervision

of the parent undertaking or (as the case may be) each of its parent undertakings,

especially with regard to:

• minimum capital requirements,

• the control of large financial exposures, and

• limiting holdings in other undertakings.

The competent authorities in the financial institution’s home member state must

verify that these conditions are met, since they are the ones granting the certificate that

needs to be attached to the notices of articles 25 and 28 of Directive 2006/48/EC.572

If

the financial institution no longer meets any of the above conditions, the competent

authorities in the home member state must inform the competent authorities in the host

member state of this fact. In such a case, the business carried out by the financial

institution in the host member state is subject to the regulatory framework of the

legislation of the latter.573

3. Services benefiting from mutual recognition

3.1 Services provided by credit institutions


The mutual recognition of authorisations principle does not apply to all the services

provided by credit institutions. Only services meeting the two conditions, one general

(see 3.1.1.2 below) and one specific (3.1.1.3), set in article 23 of Directive 2006/48/EC,

benefit from mutual recognition.

3.1.2 The general condition

The first condition that must be met according to article 23, so that a service provided

by a EU credit institution can benefit from mutual recognition, concerns all EU credit

institutions in all member states. According to this, only the services included in the

list of Annex I of Directive 2006/48/EC (see Table 6 below) benefit from mutual

recognition.574

572

Directive 2006/48/EC, article 24. para. 1, sentence b. For the content of these notices, see

section B, under 2 and 3 below in this chapter of the study.

573 Ibid, article 24, para 2 (which wrongly states that the obligation is on the home member

state). This provision does also apply pro rata to the financial institution’s subsidiary

undertakings (ibid article 24, para. 3).

574 Such services may also be provided, under the regime of mutual recognition, remotely,

according to the provisions of Directives 2000/31/EC and 2002/65/EC.

176

This list includes a very broad spectrum of services.575

It is, moreover, noteworthy that

the principle of mutual recognition of the authorisations of credit institutions is

covering, according to the “universal banking model”, both:

• commercial banking services, i.e. services provided in the context of indirect

financing or banking intermediation (see 3.1.2.1, below), and

• investment banking services, i.e. services provided by credit institutions in

money and capital markets in the context of direct financing (3.1.2.2).

3.1.2.1 Commercial banking services

The following services come under the commercial banking services class included in

the list of Annex I of Directive 2006/48/EC:

(i) Acceptance of deposits and other repayable funds (item 1).

(ii) Lending including, inter alia: consumer credit, mortgage credit, factoring,

with or without recourse, financing of commercial transactions (including

forfeiting) (item 2).576

(iii) Financial leasing (item 3).

(iv) Money transmission services (item 4).

(v) Issuing and administering payment instruments (e.g. credit and debit cards,

travellers' cheques and bankers' drafts) (item 5).

(vi) Guarantees and commitments (item 6).

(vii) Money broking (item 10).

3.1.2.2 Investment banking services

(a) Investment services included in the Annex I list of Directive 2006/48/EC

The following services provided in money, capital and foreign exchange markets,

come under the investment banking services or investment services class577

and are

included in the list of Annex I of Directive 2006/48/EC:

(i) Trading for own account or for account of customers in money market

instruments, foreign exchange, financial futures and options, exchange

and interest-rate instruments and transferable securities (item 7).

575

The authority to expand the content of the list in Annex I or to adapt the relevant

terminology so that it would take into account the developments taking place in the financial

system, has been given to the European Commission (Directive 2006/48/EC, article 150, para.

1, item f)). Note, however, that since 1989, when the Second Banking Directive was published

(where this list was included for the first time), until June 2006, when Directive 2006/48/EC

was published, the list has not sustained any changes. In the latter case, there is merely also a

reference to the list of Annex I of Directive 2004/39/EC.

576 Note that the first two classes of services, together constitute the basis of designating an

undertaking as a credit institution according to the European banking law.

577 Although the first term is more widely known, the second one is more valid as it is the one

used in the legal acts that constitute the sources of European capital market law (on this see

Directive 2004/39/EC)

177

(ii) Participating in securities issues and the provision of services related to

such issues, in particular underwriting services (item 8).

(iii) Advicing undertakings on capital structure, industrial strategy and related

questions and as well as services relating to mergers and the purchase of

undertakings (item 9).

(iv) Portfolio management on an individual basis578

or advice on portfolio

management (item 11).

(v) Safekeeping and administrating of securities (item 12).

(b) Investment services and activities included in the Annex I list of Directive

2004/39/EC

According to Annex I of Directive 2006/46/EC (in finem) and articles 31 (para. 1) and

32 (para. 1) of Directive 2004/39/EC, as soon as the provisions of the first

abovementioned Directive entered into effect, the mutual recognition principle of

authorisations of EU credit institutions also applies to investment services, ancillary

investment services and investment activities provided/carried out thereby, provided

that they:

• are included in parts A and B of Annex I of Directive 2004/39/EC (see Table 7

below), and

• regard financial instruments referred to in part C of the same Annex.

It is, however, noteworthy that there is significant overlapping between the investment

services included in the list of Annex I of Directive 2006/48/EC (according to a)

above) and those included in the Annex list of Directive 2004/39/EC. We should note,

finally, that with regard to ancillary investment services, the mutual recognition

principle of authorisations of credit institutions, only applies provided that at least one

investment service is provided or one investment activity is carried out.579

578

According to European capital market law, portfolio management on a collective basis must

be performed by independent legal entities, called undertakings for collective investment in

transferrable securities (UCITS, e.g. mutual funds or portfolio investment firms).

579 Directive 2004/39/EC, article 31, para. 1, sentence b, and article 32, para. 1, sentence b.

178

The term financial instrument includes the following instruments;

1. transferrable securities (stocks and bonds);

2. money-market instruments (i.e short-term bonds);

3. units in collective investment undertakings;

4. options, futures, swaps, forward rate agreements and any other derivative

contracts relating to securities, currencies, interest rates or yields, or other

derivatives instruments, financial indices or financial measures which may be

settled physically or in cash;


contracts relating to commodities that must be settled in cash or may be settled in

cash at the option of one of the parties (otherwise than by reason of a default or

other termination event);

6. options, futures, swaps, and any other derivative contract relating to commodities

that can be physically settled provided that they are traded on a regulated market

and/or an MTF;

7. options, futures, swaps, forwards and any other derivative contract relating to

commodities that can be physically settled;

• not mentioned above (6);

• not intended for commercial purposes, and

• have the characteristics of other derivative financial instruments, having

regard to whether, inter alia, they are cleared and settled through recognised

clearing houses or are subject to regular margin calls

8. derivative instruments for the transfer of credit risk;

9. financial contracts for differences;


contracts relating to climatic variables, freight rates, emission allowances or

inflation rates or other official economic statistics that must be settled in cash or

may be settled in cash at the option of one of the parties (otherwise than by reason

of a default or other termination event); and

11. any other derivative contracts relating to assets, rights, obligations, indices and

measures not otherwise mentioned in this Section, which have the characteristics

of other derivative financial instruments, having regard to whether, inter alia, they

are traded on a regulated market or an MTF, are cleared and settled through

recognised clearing houses or are subject to regular margin calls;

179

3.1.2.3 Other services

Finally, two more services provided by credit institutions benefit from mutual

recognition, which are neither commercial nor investment banking services: credit

reference services (item 13), and safe custody services (item 14). Conversely, the list in

Annex I of Directive 2006/48/EC does not include, among others, any insurance

service, nor IT services that in some member states may be provided by national credit

institutions.

3.1.3 The specific condition

The second requirement that needs to be met, pursuant to Directive 2006/48/EC and

Directive 2004/39/EC, in order for the mutual recognition principle of authorisations of

EU credit institutions, is a special condition and regards the credit institutions’ home

member states on the one part, and the credit institutions themselves, on the other.

Specifically, the mutual recognition principle only applies to services and activities in

the abovementioned lists of Annex I, Directive 2006/48/EC and Annex I, Directive

2004/39/EC, covered by the authorisations that the competent authorities in the home

member state have granted to EU credit institutions.580

Consequently, if the national law in a member state does not allow credit institutions in

general, or a specific class of credit institutions (e.g. cooperative, mortgage or savings

banks) to provide one or more of the services included in the list, then, national credit

institutions are not allowed to provide these services in host member states under the

mutual recognition regime.581

The same applies to credit institutions that have opted to carry out a limited range of

activities, and have only been authorised for those services.

Given, however, the fact that the mutual recognition principle has also extended to

financial institutions (as described above), in member states where national law

prohibits that certain services in the list are provided by credit institutions, but only by

their subsidiary undertakings (which are considered financial institutions), the services

in the list may be provided under the mutual recognition regime in the host member

states by the subsidiary undertakings of the group in which the credit institutions

belong (on condition, of course, that the financial institutions meet the abovementioned

conditions of article 24, Directive 2006/48/EC).

580

Directive 2006/48/EC, article 23, in finem, and Directive 2004/39/EC, articles 31 (para. 1,

sentence a) and 32 (para. 1, sentence a).

581 It is, therefore, reasonable that credit institutions having their registered and head office in

member states that allow these credit institutions to provide a broad range of services are in a

competitively advantageous position in the single banking market, in relation to those that

operate in member states that pursue a more restrictive strategy in relation to the activity of

credit institutions.

180

3.1.4 The effects

Considering the above, every EU credit institution fulfilling the two conditions

mentioned, are entitled to provide the covered services in the host member state,

without requiring authorisation from that member state’s authorities, even if the legal

framework in the host member state does not allow its national credit institutions to

exercise those services in its territory.582

Conversely, if a EU credit institution wishes

to provide services not fulfilling these conditions in the host member state, the

provisions of Directive 2006/48/EC do not apply. In such case, the provisions of the

Treaty shall apply,583

and consequently, if the services provided are subject to control

in the host member state, an authorisation from that member state’s competent

authorities is required.

3.2 Services provided by financial institutions

As regards EU financial institutions, all the services in the lists of Annex I, Directive

2006/48/EC and (quite paradoxically) of Annex I, Directive 2004/39/ΕΚ benefit from

mutual recognition, on condition that the articles of association permit so.584

Taking

deposits or other repayable funds from the public is a service that is, of course,

excluded, pursuant to the above definition of a financial institution.

582

This remark confirms, from the host member state’s perspective, the argument developed in

the previous footnote.

583 Directive 2006/48/EC, point 14 of the recitals.

584 Directive 2006/48/EC, article 24, para. 1, sentence a.

181

TABLE 10

Services benefiting from mutual recognition according to Annex I of Directive 2006/48/EC

1. Taking deposits or other repayable funds

2. Lending including factoring

3. Financial leasing

4. Payment and money transmission services

5. Issuing and administering of payment instruments (credit and debit cards, travellers'

cheques and bankers' drafts)

6. Guarantees and commitments

7. Trading for own account or for account of customers in money market instruments

(cheques, bills, certificates of deposit), foreign exchange, financial futures and options,

exchange and interest-rate instruments and transferable securities

8. Participation in securities issues and the provision of services related to such issues, in

particular underwriting services

9. Advice to undertakings on capital structure, industrial strategy and related questions and

advice as well as services relating to mergers and the purchase of undertakings

10. Money broking

11. Portfolio management and advice

12. Safekeeping and administration of securities

13. Credit reference services, including client creditworthiness ratings

14. Safe custody services

182

TABLE 11

Services and activities benefiting from mutual recognition according to Annex I of Directive 2004/39/EC

Investment services and activities

1. Reception and transmission of orders in relation to one or more financial instruments

2. Execution of orders on behalf of clients

3. Dealing on own account

4. Portfolio management

5. Investment advice

6. Underwriting of financial instruments and/or placing of financial instruments on a firm

commitment basis

7. Placing of financial instruments without a firm commitment basis

8. Operation of Multilateral Trading Facilities

Ancillary services

1. Safekeeping and administration of financial instruments for the account of clients,

including custodianship and related services such as cash/collateral management

2. Granting credits or loans to an investor to allow him to carry out a transaction in one

or more financial instruments, where the firm granting the credit or loan is involved in

the transaction

3. Advice to undertakings on capital structure, industrial strategy and related matters and

advice and services relating to mergers and the purchase of undertakings

4. Foreign exchange services where these are connected to the provision of investment

services

5. Investment research and financial analysis or other forms of general recommendation

relating to transactions in financial instruments

6. Services related to underwriting

7. Investment services and activities as well as ancillary services of the type included

under Section A or B of Annex 1 related to the underlying of the derivatives included

under Section C - 5, 6, 7 and 10 - where these are connected to the provision of

investment or ancillary services

183

B. Procedural conditions for credit institutions to exercise the right of

establishment and the freedom to provide services


As already mentioned, as of 1st January 1993, the establishment, via a branch, of a EU

credit institution in another member state does not require an authorisation from the

competent authorities in the host member state, pursuant to the provisions of the

European banking law. Nevertheless, this establishment does not occur automatically.

For a EU credit institution branch to start operating in a host member state, a specific

procedure must be adhered to, described in articles 25 and 26 of Directive 2006/48/EC

(see 2, below).

As in the case of establishment through branches, no authorisation from the competent

authorities of the host member state is required for cross-border service provisions

from one EU credit institution in another member state. However, in this case as well,

a specific procedure must be adhered to, according to the provisions of article 28 of

Directive 2006/48/EC, which, nevertheless, is simpler than that of articles 25 and 26

(see 3, below).

Moreover, articles 33-35 of Directive 2004/39/EC establish special provisions in the

context of EU credit institutions providing investment services and their exercise of

investment activities in host member states (see 4, below).

Finally, articles 29-37 of Directive 2006/48/EC, demarcate the powers of the

competent authorities in the host member states with respect to EU credit institutions

having their registered office in another member state than that they carry out their

activity in their territory, either through branches, or through service provision, and

also fix the sanctions that they are entitled to impose in case of breach of the provisions

awarding them competencies (see 5, below).

2. Exercise of the right of establishment through branches

2.1 Actions of the credit institution

The procedure to be followed for the establishment of a EU credit institution through

branches in a host member state under the mutual recognition regime, can be activated

by the submission of a written notification of intent by the EU credit institution.585

This

notification must be addressed to the competent authorities of the home member state

and not to the competent authorities of the host member state,586

and must be

accompanied by information on the following:587

• the host member state,

585

Directive 2006/48/EC, article 25, para. 1.

586 Ibid. According to the provision of para. 4, article 26 of Directive 2006/48/EC (sentence a),

branches of EU credit institutions which have been established in their host member states

before 1 January 1993, were released of the notification duty of para. 1 and 2 of article 25, as

they were presumed to have been subject to that procedure.

This provision does not apply to financial institutions and electronic money institutions

(Directive 2000/46/EC, article 2, para. 2, sentence a).

587 Directive 2006/48/EC, article 25, para. 2.

184

• the exact address of the branch, as well as the names of its management

executives, and

• the branch’s program of activities, along with a description of the

organisational structure and the type of services it intends to provide in the

host member state.

Credit institutions are entitled to state any desired number of branches in the

notification, as well as various places of establishment in the host member state, even

if national law in that member state imposes restrictions on national credit institutions.

2.2 Actions of the supervisory authorities of the home member state

Within a deadline of three (3) months after receipt of the abovementioned information,

the competent authorities in the home member state must assess it and take any one of

the following actions, as they deem appropriate:

(a) The first alternative is to unreservedly communicate the information provided

by the credit institution to the competent authorities of the host member state, and

inform the credit institution accordingly.588

This information must be communicated

within three (3) months of receipt of the information by the home member state.589

In

such case, the competent authorities of the home member state must also communicate

to the competent authorities of the host member state:

• the amount of own funds, and

• the sum of the capital requirements of the credit institution, pursuant to

Article 75 of Directive 2006/48/EC.590

(b) The second alternative is make the above communication, by set certain

restrictions to the credit institution’s activities in the host member state.591

(c) Finally, the competent authorities of the home member state have the authority

to refuse to communicate information to the competent authorities of the host member

state, if, according to the activity programme submitted by the credit institution, they

have reason to doubt the adequacy of the administrative structure or the financial

situation of the credit institution.592

. Such decision of the competent authorities, which

in essence constitutes a rejection of the credit institution’s application, and the reasons

for which must be provided to the credit institution concerned within three (3) months

of receipt of all the information,593

entails that the branch cannot start operating in the

host member state under the mutual recognition regime.594

588

Ibid, article 25, para. 3, sentence a.

589 Ibid.

590 Ibid, article 25, para 3, sentence b.

591 Although Directive 2006/48/EC makes no reference to this alternative, in the author’s

opinion this cannot be ruled out, since the competent authorities of the home member state are

entitled to refuse communication (see (c) below).

592 Ibid, article 25, para 3, sentence a.

593 Ibid, article 25, para 4, sentence a.

594 Member States must report to the European Commission the number and types of cases in

which there has been a refusal (ibid, article 36).

185

That refusal of communication of information by the competent authorities of the

home member state to the competent authorities of the host member state, as well as a

failure to reply on the part of the former, pursuant to the above, are subject to a right to

apply to the administrative courts in the home member state.595

2.3 Start of operation of a branch in the host member state

To the extent that the competent authorities of the home member state decide to

communicate the information they have received from the interested credit institution

to the competent authorities of the host member state, the branch of the EU credit

institution is entitled to commence its operation on the territory of the host member

state, as soon as it receives communication from the competent authorities of the host

member state or, in the event of a non reply, after expiry of the two (2) month time

limit since receipt by the competent authorities of the host member state of the credit

institution’s communication from the competent authorities of the home member state,

as per the above.596

Consequently, in the context of the procedure followed for the

exercise of the right of establishment, a “triangular relation” has been formed between

the credit institution, the competent authorities in the home member state and the

competent authorities in the host member state.597

The abovementioned time limit has been set for two reasons:598

(a) The first is that there needs to be an adequate period of time to allow the

competent authorities in the host member state to take the necessary measures to better

organise the prudential supervision of the branch.

(b) Moreover, the competent authorities in the home member state must adequate

time to communicate, if necessary, to the credit institution the conditions under which,

in the interest of general good, those activities are carried out in the host member state.

Considering all the above time limits, the time elapses between submission of the communication by the credit institution to the competent authorities in the home member state and the date of commencement of the branch’s operation in the home member state, could, if all time limits are exhausted, be more than 5 months, since:

• there is an (undefined) period between the date on which information is submitted by the credit institution and the date on which the competent authorities in the home member state shall receive them;

• then there is the (maximum) three-month period between the date the competent authorities in the home member state receive the information and the date they communicate them to the competent authorities of the host member state;

• there is another (undefined) period between the above communication and its receipt by the competent authorities of the host member state, and finally

• there is the (average) two-month period between the date the communication is received by the competent authorities of the host member state and the date the branch starts operating.

595

Ibid, article 25, para 4, sentnence b.

596 Ibid, article 26, para. 2.

597 Commission Interpretative Communication (1997), p. 15.


186

2.4 Change in the content of information communicated to the competent authorities of the home member states

In the event of a change in any of the particulars that need to be communicated by a

credit institution to the competent authorities in the home member state according to

the above, the credit institution must give written notice of the change in question to

the competent authorities of the home and host member states at least one (1) month

before making the change. This communication is necessary for the following

reasons:599

• in order to enable the competent authorities in the home member state to re-

assess whether they will communicate the information to the competent

authorities of the host member state, and

• to provide adequate time to the competent authorities in the host member state

to better organise the prudential supervision of the branch according to the new

situation, and communicate, if necessary, to the credit institution the conditions

under which, in the interest of general good, those activities are being carried

out in the host member state.600

3 Exercise of the freedom to provide services

3.1 Actions of the credit institution

As mentioned in the introductory note to this section of the study, the procedure

followed regarding the exercise of the freedom to provide services by a EU credit

institution according to article 28 of Directive 2006/48/EC, is simpler in relation to the

one established for the exercise of the right of establishment. This procedure is

activated upon submission (in writing) of a notification by the credit institution to the

competent authorities of the home member state.

This notification has to specify the services that are covered by the institution’s

authorisation, that benefit from mutual recognition, and that the credit institution

wishes to exercise for the first time on the territory of the host member state.601

The

notification of intent to carry out activity in the host member state through provision of

services must not, however, be accompanied by supplementary information, as in the

case of para. 2 article 25 of Directive 2006/48/EC on the right of establishment.

3.2 Actions of the supervisory authorities of the home member state

The abovementioned notification must be communicated by the competent authorities

of the home member state to the competent authorities of the host member state, not

later than one (1) month after receipt.602

599

Ibid, article 26, para. 3.

600 This provision does also apply to branches of EU credit institutions established in host

member states before 1 January 1993 (ibid, article 26, para. 4, sentence b).

601 Ibid, article 28, para 1.


187

3.3 Start of provision of services in the host member state

The credit institutions is entitled to start providing services in the host member state on

the date notified to the competent authorities of the home member state as the desired

date for exercising service in the host member state for the first time.603

3.4 On the terms of application of article 28 of Directive 2006/48/EC

3.4.1 Time of application

One of the issues of concern for the European Commission, in its Interpretative

Communication of 1997, concerned defining the time of application of the provisions

of article 20 of (the then in force) Second Banking Directive 89/646/EEC (now article

28 of Directive 2006/EC) on freedom to provide services by EU credit institutions.

Specifically, the Commission examined whether the obligation to notify the competent

authorities in the home member state stipulated therein, concerns only services that EU

credit institutions have started providing on the territory of host member states after

entry into force of the Second Banking Directive, or whether it should be expanded to

those provided earlier.

The Commission concluded604

that this issue is fully covered by the provision of article

20 of the Second Banking Directive (now, para. 3, article 28 of Directive 2006/48/EC),

according to which: “this Article shall not affect rights acquired by credit institutions

providing services before 1 January 1993”. Consequently, in this case there is no

obligation to notify.

3.4.2 Extent of application

The second issue that has arisen regarding article 21 of Directive 2006/48/EC regarded

the conceptual definition of the phrase “on the territory of another member state”. In

particular, the study focused on whether or not this phrase refers to cross-border

service provision in the broad sense, since, if the answer is yes, it pertains to all the

services provided by EU credit institutions in the host member state:

• either through the provisional movement of the credit institution’s agents to the

host member state,605

• or through the movement of the service itself (i.e. service provided by

telephone, fax or email).


that the notification obligation applies to both cases, in

the second case, however, on condition that the service is provided on the initiative of

the credit institution.

603

Member states must report to the European Commission the number and types of cases in

which there has been a refusal (ibid, article 36).

604 Commission Communication (1997), part 1, section A, para. 1, sentence b.

605 Conversely, if the service is provided through the movement of its recipient in the member

state where the credit institution is providing such service, article 28 does not apply.

606 Commission Communication (1997), part 1, section A, para. 2, point b.

188

3.4.3 The legal nature of notification

Another disputed issue was the legal nature of the notification that credit institutions

are obliged to make pursuant to Article 28 of Directive 2006/48/EC. In this context the

Commission examined:

• whether this is a measure only for informing the competent authorities in the

home and host member states regarding the overall activity of credit

institutions within the EU, or

• whether it also aims at protecting consumers.


that notification serves the former purpose, and

therefore, if omitted it does not affect the validity of contracts concluded between an

EU credit institution and its clients.

4. Special provisions in relation to the provision of investment services and the exercise of investment activities608

4.1 Freedom to access regulated markets in host member states

When a EU credit institution is authorised by the competent authorities in the home

member state to provide the investment service of receiving and transmitting client

orders609

or trading for own account,610

it is entitled of becoming a member of

regulated markets established in other member states (host) or have access thereto:

• either directly, by setting up branches in the host member states; or

• by becoming a remote member of or having remote access to the regulated

market without having to be established, on the condition that the trading

procedures and systems of the market in question do not require a physical

presence for conclusion of transactions in the market.611

Directive 2004/39/EC explicitly stipulates that member states are not allowed to

impose any additional regulatory or administrative requirements, in respect of matters

covered by it, on credit institutions exercising the above right.612

4.2 Freedom to access central counterparty and clearing and settlement systems

Article 34 of Directive 2004/39/EC established the freedom of EU credit institutions to

access central counterparty and clearing and settlement systems in host member states,

for the purposes of finalising or arranging the finalisation of transactions in financial

instruments.613

In this context:

607

Ibid, part 1, section A, para. 4.

608 Articles 33-35 of Directive 2004/39/EC do apply to credit institutions pursuant to para. 2

article 1 of the Directive.

609 Directive 2004/39/EC, Annex I, Section A, item 1.

610 Directive 2006/48/EC, Annex I, item 7.



613 Ibid, article 34, para. 1, sentence a.

189

• access to such facilities must be subject to the same non-discriminatory,

transparent and objective criteria as apply to local participants,614

and

• member states may not restrict the use of those facilities to the clearing and

settlement of transactions in financial instruments undertaken on a regulated

market or MTF in their territory. 615

These rights are without prejudice to the right of operators of central counterparty,

clearing or securities settlement systems to refuse, on legitimate commercial grounds,

to make the requested services available.616

4.3 Right to designate a settlement system

Article 34 of Directive 2004/39/EC, also established the right to designate the system

for the settlement of transactions in financial instruments undertaken in host member

states. According to its provisions, regulated markets in host member states are

required to offer all their members or participants the right to designate the system for

the settlement of transactions in financial instruments undertaken on it, subject to:

• such links and arrangements between the designated settlement system and any

other system or facility as are necessary to ensure the efficient and economic

settlement of the transaction in question; and

• agreement by the competent authority responsible for the supervision of the

regulated market that technical conditions for settlement of transactions

concluded on the regulated market through a settlement system other than that

designated by the regulated market are such as to allow the smooth and orderly

functioning of financial markets.617

This assessment of the competent authorities of the regulated market is without

prejudice to the competencies of the national central banks as overseers of settlement

systems or other supervisory authorities on such systems618

. In this case as well, the

right to designate is without prejudice to the right of operators of systems to refuse, on

legitimate commercial grounds, to make the requested services available.619

614

Ibid, article 34, para. 1, sentence b.

615 Ibid, article 34, para. 1, sentence c.



618 Ibid, article 34, para. 2, sentence b. The competent authorities must take into account the

oversight/supervision already exercised by those institutions, in order to avoid undue

duplication of control (ibid, article 34, para. 2, sentence c).


190

4.4 Specific provisions regarding the operation of a multilateral trading facility

According to Annex I of Directive 2004/39/EC, investment activities benefiting from

mutual recognition also include the operation of a multilateral trading facility

(hereinafter the “MTF”).620

As regards the freedom to exercise this activity on a cross-

border basis, article 31 stipulates that EU credit institutions operating an MTF are

entitled to set up the appropriate arrangements on the territory of other member states

so as to facilitate access to and use of their systems by remote users or participants

established in their territory,621

on condition that the following procedure is observed:

(a) The credit institution operating an MTF has to communicate to the competent

authority of its home member state the member state in which it intends to provide

such arrangements.622

(b) The competent authorities in the home member state of the MTF has in this

regard two obligations:

• first to communicate, within one month, this information to the competent

authorities of member state in which the arrangements will be provided,623

• moreover, on the request of the competent authorities of the host member state

and within a reasonable delay, to communicate the identity of the members or

participants of the MTF established in the home member state.624

4.5 Provisions regarding central counterparty, clearing and settlement arrangements in respect of MTFs

According to article 35 of Directive 2004/39/EC, credit institutions operating an MTF

are allowed to enter into appropriate arrangements with a central counterparty or

clearing house and a settlement system of another member state, with a view to

providing for the clearing and/or settlement of some or all trades concluded by market

participants under their systems.625

The competent authorities of the home member

state of EU credit institutions operating an MTF may oppose the use of central

counterparty, clearing houses and/or settlement systems in another member state only

where this is demonstrably necessary in order to maintain the orderly functioning of

that MTF and taking into account the conditions of para. 2 article 34 of Directive

2004/39/EC on settlement systems.626

620

According to article 4, para. 1, item 15 of Directive 2004/39/EC, a multilateral trading

facility (MTF) is defined as: “a multilateral system, operated by an investment firm or a market

operator, which brings together multiple third-party buying and selling interests in financial

instruments - in the system and in accordance with non-discretionary rules - in a way that

results in a contract in accordance with the provisions of Title II”.


622 Ibid, article 31, para 6, sentence a. The provision falsely stipulates that the communication

must be addressed to the host member state.

623 Ibid, article 31, para. 6, sentence b.



626 Ibid, article 35, para. 2, sentence a. In order to avoid undue duplication of control, the

competent authorities must take into account the oversight/supervision of the clearing and

settlement system already exercised by the national central banks as overseers of clearing and

191

5. Powers of host member states and their competent authorities and sanctions in case of violation

5.1 Powers of host member states and their competent authorities

5.1.1 Obligations imposed upon credit institutions

Host member states may, for statistical purposes, require from all credit institutions

having branches within their territory to report periodically on the trading conducted in

their territory to the national competent authorities.627

Moreover, in discharging the

responsibilities imposed on them for the micro-prudential supervision of those

branches, the competent autorities may require from those to provide them with the

same information as they require from domestic credit institutions for that purpose. 628

5.1.2 Advertisment of services in host member states

EU credit institutions providing services in host member states are entitled to advertise

them by all available means of communication in that state. Such advertising must,

however, be subject to any rules governing the form and content of such advertising,

and adopted in the interest of the general good.629

5.1.3 Powers of host member state competent authorities with regard to the provision

of investment services and the exercise of investment activities by branches

According to article 32 of Directive 2004/39/EC, the competent authorities of the

member state in which a branch of a EU credit institution provides investment services

and/or carries out investment activities may assume responsibility for ensuring that the

services provided by the branch within their territory comply with the obligations of

the following articles of the Directive and the measures adopted pursuant thereto:

• articles 19, 21 and 22 on investor protection, and

• articles 25, 27 and 28 on market transparency and integrity.630

Moreover, they are entitled to examine branch arrangements and request such changes

as are strictly needed to enable them to enforce the measures adopted with respect to

the services and/or activities provided by the branch in the host member state.631

settlement systems or by other supervisory authorities with competence in relation to such

systems (ibid, article 35, para. 2, sentence b).

627 Directive 2006/48/EC, article 29, sentence a.

628 Ibid, article 29, sentence b.

629 Ibid, article 37.


631 Ibid, article 32, para 7, sentence b.

192

5.2 Sanctions

5.2.1 Violation of provisions on the powers of the host member state

If a credit institution having a branch or providing services within the territory of a host

member state is not complying with the legal provisions adopted in that state pursuant

to Directive 2006/48/EC and assigning powers to its competent authorities according to

the abovementioned, the following procedure has to be followed:

(a) Firstly, the competent authorities of the host member state have the power to

require the credit institution concerned to put an end to that irregular situation.632

(b) If the credit institution concerned fails to take the necessary steps, the

competent authorities of the host member state must inform the competent authorities

of the home member state accordingly,633

which are required, at the earliest

opportunity, to take all appropriate measures to ensure compliance.634

(c) If, despite the measures taken by the competent authorities of the home member

state or because such measures prove inadequate or are not available in the member

state in question, the credit institution persists in violating the rules, the competent

authorities of the host member state may, after informing the competent authorities of

the home member state:

• take appropriate measures to prevent or to punish further irregularities, and

• in so far as is necessary, prevent that credit institution from initiating further

transactions within its territory.635,636

Before following the abovementioned procedure, the competent authorities of the host

member state may, in emergencies, take any precautionary measure necessary to

protect the interests of depositors, investors and others to whom services are provided

and promptly inform the Commission and the home member state competent

authorities.637

The Commission may, after consulting the latter, decide that the host

member state must amend or abolish those measures.638

632

Directive 2006/48/EC, article 30. para. 1.


634 Ibid, article 30, para. 2, sentence b. The nature of those measures must be communicated to

the competent authorities of the host member state (ibid, article 30, para. 2, sentence c).


636 Member states must report to the European Commission the number and types of cases in

which measure have been taken in accordance with the provisions of para. 3, article 30 of the

Directive (ibid, article 36).

637 Ibid, article 33, sentences a and b.

638 Ibid, article 33, subparagraph c.

193

5.2.2 Violation of the general good principle

5.2.2.1 Introductory remarks

By derogation from the abovementioned principle of mutual recognition of

authorisations, Directive 2006/48/EC provides the following: “the host member state

should be able, in connection with the exercise of the right of establishment and the

freedom to provide services, to require compliance with specific provisions of its own

national laws or regulations on the part of institutions not authorised as credit

institutions in their home member states and with regard to activities not listed in

Annex I provided that, on the one hand, such provisions are compatible with EU law

and are intended to protect the general good and that, on the other hand, such

institutions or such activities are not subject to equivalent rules under this legislation

or regulations of their home member states”.639

Besides, “the member states should ensure that there are no obstacles to carrying on

activities receiving mutual recognition in the same manner as in the home member

state, as long as the latter do not conflict with legal provisions protecting the general

good in the host member state”.640

The second subject of the abovementioned interpretative Commission Communication

pertains to the application of the general good principle, with a view to determining:

• under what conditions and based on what general principles are the competent

authorities of a host member state allowed to bend the mutual recognition

principle, invoking the general good principle,

• whether there should be a mechanism according to which the Commission

itself will receive information regarding national rules on general good, and

• whether it is necessary to make a provision that competent authorities in the

host member state of a EU credit institution are obliged to provide that credit

institution (or the competent authorities) with a list of the general good rules

that apply in their territory.

5.2.2.2 Power to impose sanctions

Consistently with the above, Directive 2006/48/EC lays down the power of host

member states to take appropriate measures to prevent or to punish irregularities

committed within their territory which are contrary to the rules they have adopted in

the interest of the general good.641

This includes the possibility of preventing offending

credit institutions from initiating further transactions within their territory.642

639

Ibid, point 17 in the recitals.

640 Ibid, point 18 in the recitals.

641 Ibid, article 31, sentence a.

642 Ibid, article 31, subparagraph b.

194

5.2.3 Material procedural conditions

Any measure taken pursuant to articles 30 and 31 above, involving penalties or

restrictions on the exercise of the freedom to provide services must be properly

justified, be communicated to the credit institution concerned, and be subject to a right

of appeal to the courts of the member state in which it was taken.643

5.2.4 Violation of other provisions

Finally, the Directive stipulates that host member states must take appropriate

measures to prevent or to punish irregularities committed within their territory by

credit institutions having their registered office in another member state, preventing,

among others, offending credit institutions from initiating further transactions within

their territory.644

643

Ibid, article 32.


195

SECTION 2

The provisions on positive financial integration (A): prevention of crises

I. Authorisation and operation of credit institutions

A. Conditions for authorisation


According to the provisions of Directive 2006/48/EC (which ascribes everything that

applied in the European banking law when the so-called “First Banking Directive”

(Directive 77/780/EC) was issued645

), before commencing activities in a member state,

an EU credit institution is required to obtain authorisation from the competent

authorities of the member state of its registered and head office, namely the home

member state.646

Therefore, no credit institution is entitled to exercise any activity in a

member state, unless previously authorised.

Before granting such an authorisation, the competent authorities of the home member

state must ascertain whether the applicant credit institution meets all the requirements

laid down in articles 7 to 12647

of Directive 2006/48/EC (see 2.1 – 2.6, below).648

Moreover, the provisions of articles 11, 13 and 14 of Directive 2004/39/EC (see 2.7)

apply as well to credit institutions providing investment services and carrying out

investment activities. Since European banking law is based on this field on the

principle of minimum harmonisation, member states may establish stricter terms. All

the terms on the authorisation of credit institutions applicable in member states must be

notified to the European Commission.649

2. Individual conditions for authorisation

2.1 Programme of operations

Applications for authorisation must be accompanied by a specific programme of

operations setting out, inter alia, the types of (banking and investment) business

envisaged and the structural organisation of the credit institution.650

645

OJ L 322, 17.1.2.1977, p. 30 ff.


647 To the author’s opinion, the provisions of article 10 do not constitute a condition for granting

an authorisation, but rather a condition enabling EU credit institutions to continue their

activities. For this reason, they will be examined in this chapter under section B.

648 Directive 2006/48/EC, article 6, sentence b. Some of these terms were introduced by the

First Banking Directive, while others with the Second Banking Directive and Directive

83/646/EC amending it. Note, moreover, that the European banking law does not include any

provisions regarding the terms of authorisation of financial institutions.

649 Ibid.


196

European banking law does not define a specific range of activities that credit

institutions may carry out (according to the main definition of the term) in every

member state. This power has been left at the discretion of member states. In addition,

the list of services benefiting from mutual recognition does not in any way demarcate

this power of the member states. Specifically:

(a) The law of a member state may stipulate that credit institutions are allowed to

provide a wider range of services than those included in Annex I list of the Directive.

In such a case, according to European banking law, the consequence would be that the

services not included in said list do not benefit from mutual recognition and, therefore,

provision of such services in host member states are not subject to the provisions of

Directive 2006/48/EC (as per the above), but to the general provisions of the Treaty on

the right of establishment and freedom to provide services.

(b) The law in a member state may also prohibit credit institutions from providing

one or more services cited in the Annex list of Directive 2006/48/EC or Directive

2004/39/EC.651

2.2 Initial capital

2.2.1 The rule

According to European banking law, the first condition for authorisation of a EU credit

institutions by the competent authorities of the home member state is the existence of

separate own funds or of a minimum amount of initial capital.652

As a rule, the

minimum initial capital of EU credit institutions has been set at five (5) million

euros.653

Initial capital includes the share capital and reserves, as defined in points (a)

and (b) of article 57 of Directive 2006/48/EC.654

2.2.2 Waivers

Two waivers have been introduced to the abovementioned rule regarding the minimum

initial capital of credit institutions:

(a) Firstly, according to the provisions the First Banking Directive (which remain

in force), it was at the discretion of member states to allow credit institutions to

continue their business even if they did not have separate own funds, provided they

operated on their territory before December 15, 1979.655

651

A typical example is that of leasing services, which in some member states must be provided

by an independent legal entity, usually a subsidiary undertaking of a credit institution (in which

case it can benefit from the privileges of mutual recognition as a financial institution according

to the provisions of article 24 of Directive 2006/48/EC).

652 Ibid, article 9, para 1, sentence a. The (unsuccessful, in the author’s opinion) wording of this

provision is an attempt to combine the relevant provisions in the First and the Second Banking

Directives.

653 Ibid.


655 Ibid, article 9, para 1, sentence c.

197

(b) Moreover, the law in member states may stipulate that the relevant competent

authorities are entitled to authorise particular categories of credit institutions,656

even

with an initial capital lower than five (5) million euros, provided they meet the

following three (3) conditions:657

(i) the initial capital must be no less than EUR 1 million;

(ii) the member states concerned have to notify the Commission of their

reasons for exercising this option; and

(iii) to inform depositors, the name of each credit institution with an initial

capital less than EUR 5 million, must be annotated to that effect in the list

that the European Commission publishes according to article 14 of

Directive 2006/48/EC.

2.3 Persons responsible for the management

Adopting a standard supervisory practice, Directive 2006/48/EC stipulates that the

authorisation application must specify the names of not less than two (2) persons who

effectively direct the business of the credit institution.658

These persons must be of

sufficiently good repute or possess sufficient experience to perform such duties.659

2.4 Registered office/head office

According to an explicit provision in the Directive, credit institutions must have their

head office in the same member state as their registered office.660

2.5 Qualified holdings

Upon submitting an authorisation application, a credit institution must communicate to

the competent authorities the identity of the shareholders or members, whether direct

or indirect, natural or legal persons, that have qualifying holdings, and of the amounts

of those holdings.661

European banking law defines a “qualified holding” as:662

656

This provision does not set criteria for defining the special nature of credit institutions. In the

author’s opinion, this provision concerns credit institutions which, according to the law in the

home member state, have a limited range of operations, such as credit institutions in the form of

a credit cooperative.


658 Ibid, article 11, para 1, sentence a. Member states were entitled to exempt credit institutions

with no separate own funds and operating nn their territory before 15 December 1979 (see

2.1.1.2 above) from the requirement to meet these conditions (ibid, article 9, para. 1, sentence c).

659 Ibid, article 11, para. 1, sentence b. Presenting the two conditions as alternatives is, in the

author’s opinion, inadequate. No one would ever imagine that the competent authorities would

ever authorise a credit institution whose managers would indeed be extremely experienced, but

immoral banking executives.

660 Ibid, article 11, para. 2, item (a). In the (rare) case where the credit institution is not a legal

entity, the head office must be established in the member state which granted its authorisation

and in which it actually carries on its business (ibid, article 11, para. 2, item (b)).


662 Ibid, article 4, point 11.

198

• both the direct or indirect holding in an undertaking which represents 10 % or

more of the capital or of the voting rights,663

and

• the holding that makes it possible to exercise a significant influence over the

management of that undertaking.

To determine whether the qualified holding criteria are met, the following must be

taken into account:

• the voting rights stipulated in articles 9 and 10 of Directive 2004/109/EC, and

• the terms for aggregating holdings stipulated in article 12, paras. 4 and 5 of

that Directive.

On the contrary, voting rights or shares with attached voting rights held by credit

institutions as a result of underwriting and/or placing of financial instruments of a “firm

commitment basis”, according to the provisions of point 6, Section A, Annex I of

Directive 2004/39/EC, are not taken into account on the condition that the rights:

• are neither exercised nor otherwise used with intent to intervene in the issuer’s

management, and

• must be transferred within one year of acquisition.664

The competent authorities are entitled to assess the quality of shareholders or members

and not grant authorisation, if they are not satisfied as to their suitability, "taking into

account the need to ensure the sound and prudent management of a credit

institution”.665

2.6 Group structure transparency

An additional condition to the authorisation of a EU credit institutions is (since

1994), the verification of existence of any “close links” between the credit institution

and other natural or legal persons.666

Specifically, the competent authorities of the

home member state may authorise a credit institution only if:

663

Member States are entitled to set the qualifying holding threshold below 10%, since the

Directive’s provision establishes minimum harmonisation. On this see Sousi-Roubi (1995), p.

109, citing the French example where the threshold is 5%.

664 Directive 2006/48/EC, article 12, para. 1, sentence b, as amended by Directive 2007/44/EC,

article 5, para. 1.


666 According to point 46 of article 4 of Directive 2006/48/EC, “close links” means a situation

in which two or more natural or legal persons are linked in any of the following ways:

• either through participation which means the ownership, direct or by way of a control

link, of 20% or more of the voting rights or capital of an undertaking,

• or through control, i.e. through the link between a parent and a subsidiary undertaking, in

all instances cited in paras. 1 and 2 of article 1 of Directive 83/349/EEC, or through a

relationship of the same nature between any natural or legal person and an undertaking

(a subsidiary of a subsidiary is considered a subsidiary of the parent undertaking at the

top).

Close links between two or more natural persons or legal entities are also considered to be

created in a situation where all such persons or entities are permanently linked to one and the

same third person by a control relationship.

199

• those links do not prevent the effective exercise of their supervisory

functions,667

and

• the laws, regulations or administrative provisions of a third country governing

one or more natural or legal persons with which the credit institution has close

links, or difficulties involved in the enforcement of those laws, regulations or

administrative provisions, do not prevent the effective exercise of their

supervisory functions.668

2.7 Additional conditions for authorisation of credit institutions providing investment services and exercising investment activities


Pursuant to Directive 2004/39/EC, in order for a EU credit institution intending to

provide investment services or carry out investment activities (as per Annex I of the

same Directive) to be authorised, it must fulfil the terms set in articles 11, 12 and 14.669

2.7.2 Membership in an authorised investor compensation scheme

Any EU credit institution applying for authorisation covering the provision of

investment services and the exercise of investment activities must comply with its

obligations under Directive 97/9/EC of the European Parliament and of the Council on

investor-compensation schemes at the time of authorisation.670

Specifically, according

to the provisions of this Directive member states must ensure that one or more

investor-compensation schemes are introduced and officially recognised within their

territory, which all investment firms and credit institutions providing investment

services, having their registered office in their territory, must be a member of.671

No

investment firm authorised in a member state may carry on investment business unless,

it belongs to the investor-compensation scheme (or, as the case may be, one of the

schemes) set up in that member state.672

The investor compensation scheme has to provide cover for an investment firm’s

investors where either a decision of the competent authorities or a ruling of a judicial

authority in the home member state determine that the investment firm appears to be

unable to meet its obligations arising out of investors' claims regarding the return of

money or instruments.673

In particular, cover must be provided for claims arising out of

an investment firm's inability to:674

667





671 Ibid, article 2, para.1, subparagraph a, sentence a. Fulfilment of this obligation exhausts the

member states’ responsibility (on this see point 24 of the recitals of Directive 97/9/EC).

672 Ibid, article 2, para .1, subparagraph a, sentence b.

673 Ibid, article 2, para. 2, subparagraph a.

674 Ibid, article 2, para. 2, subparagraph b.

200

• repay money owed to or belonging to investors and held on their behalf in

connection with investment business, and

• return to investors any instruments belonging to them and held, administered

or managed on their behalf in connection with investment business.

However, there was a special provision for credit institutions participating both in an

investor-compensation scheme and a deposits-guarantee scheme. Any claim on a credit

institution which, according to the above, would be covered by the investor-

compensation scheme, it would also be covered by the deposit-guarantee scheme and

“shall be directed by that member state to a scheme under one or other of those

Directives as that member state shall consider appropriate”.675

Nevertheless, no claim

can be eligible for compensation more than once under Directives 94/19/EC and

97/9/EC.676

2.7.3 Organisational requirements

A credit institution applying for authorisation covering the provision of investment

services and the exercise of investment activities must comply with the following

organisational requirements:677

(a) Establish adequate policies and procedures sufficient to ensure compliance of

the firm including its managers, employees and tied agents with its obligations under

the provisions of this Directive as well as appropriate rules governing personal

transactions by such persons.

(b) Maintain and operate effective organisational and administrative arrangements

with a view to taking all reasonable steps designed to prevent conflicts of interest as

defined in Article 18 of the Directive from adversely affecting the interests of its

clients.

(c) Take reasonable steps to ensure continuity and regularity in the performance of

investment services and activities. To this end the investment firm must employ

appropriate and proportionate systems, resources and procedures.

(d) Ensure, when relying on a third party for the performance of operational

functions which are critical for the provision of continuous and satisfactory service to

clients and the performance of investment activities on a continuous and satisfactory

basis, that it takes reasonable steps to avoid undue additional operational risk.

Outsourcing of important operational functions may not be undertaken in such a way

as to impair materially the quality of its internal control and the ability of the

supervisor to monitor the firm's compliance with all obligations.

675



677 Ibid, article 13, para. 1, with references to paras. 2-8. In order to take account of technical

developments in financial markets and ensure the uniform application of this provision, the

European Commission has the authority to adopt, in accordance with the procedure referred to

in para. 2 of article 64 implementing measures, which specify the concrete organisational

requirements to be imposed on investment firms performing different investment services

and/or activities and ancillary services or combinations thereof (ibid, article 13, para. 10).

201

(e) Have sound administrative and accounting procedures, internal control

mechanisms, effective procedures for risk assessment, and effective control and

safeguard arrangements for information processing systems.

(f) Arrange for records to be kept of all services and transactions undertaken by it

which will be sufficient to enable the competent authority to monitor compliance with

the requirements under this Directive, and in particular to ascertain that the investment

firm has complied with all obligations with respect to clients or potential clients.678

(g) When holding financial instruments belonging to clients, make adequate

arrangements so as to safeguard clients' ownership rights, especially in the event of the

investment firm’s insolvency, and to prevent the use of a client's instruments on own

account except with the client’s express consent.

(h) When holding funds belonging to clients, make adequate arrangements to

safeguard the clients' rights and, except in the case of credit institutions, prevent the

use of client funds for its own account.

2.7.4 Trading process and finalisation of transactions in an MTF

(a) Regarding the trading process and finalisation of transactions in an MTF,

member states are required to provide for the following:

(aa) In addition to meeting the abovementioned requirements of article 13, credit

institutions operating an MTF must establish:

• transparent and non-discretionary rules and procedures for fair and orderly

trading, and

• objective criteria for the efficient execution of orders.679

(ab) Member states must ensure that Articles 19, 21 and 22 of Directive

2004/39/EC (on investor protection) are not applicable to the transactions concluded,

under the rules governing an MTF, between its members or participants or between the

MTF and its members or participants in relation to the use of the MTF.

However, the members of or participants in the MTF have to comply with the

obligations provided for in the above articles with respect to their clients when, acting

on behalf of their clients, they execute their orders through the systems of an MTF.680

(b) Member state must require that credit institutions operating an MTF:

• establish transparent rules regarding the criteria for determining the financial

instruments that can be traded under its systems,681

678

In the case of branches of credit institutions, the competent authorities of the member state in

which the branch is located must, without prejudice to the possibility of the competent

authorities of the home member state of the investment firm to have direct access to those

records, enforce this obligation with regard to transactions undertaken by the branch (ibid,

article 13, para. 9).




202

• where applicable, investment firms or market operators operating an MTF

provide, or are satisfied that there is access to, sufficient publicly available

information to enable its users to form an investment judgement, taking into

account both the nature of the users and the types of instruments traded,682

• establish and maintain transparent rules, based on objective criteria, governing

access to the MTF,683

• clearly inform its users of their respective responsibilities for the settlement of

the transactions executed in that facility,684

• have put in place the necessary arrangements to facilitate the efficient

settlement of the transactions concluded under the systems of the MTF,685

and

• comply immediately with any instruction from its competent authority

pursuant to article 50, paragraph 1, to suspend or remove a financial instrument

from trading.686

(c) Where a transferable security, which has been admitted to trading on a

regulated market, is also traded on an MTF without the consent of the issuer, the issuer

is not subject to any obligation relating to initial, ongoing or ad hoc financial disclosure

with regard to that MTF.687

3. The decision of the competent authorities

The competent authorities must review the submitted authorisation applications and

issue a relevant decision approving or rejecting the application, within twelve (12)

months from receipt of the application.688

If competent authorities approve the

authorisation application, they must notify the authorisation to the European

Commission, which will then enter it in a list published in the Official Journal of the

European Union and keep it up to date.689

Reasons have to be given whenever a decision not to grant an authorisation is taken

and the applicant must be notified thereof within six (6) months of receipt of the

application or, should the latter be incomplete, within six (6) months of the applicant's

sending the information required for the decision.690

It is, however, explicitly stipulated

that it is not within the power of the competent authorities to reject a credit institution’s

authorisation application invoking the economic needs of the market.691

682

Ibid, article 14, para. 2, sentence b.

683 Ibid, article 14, para. 4. These rules must comply with the conditions established in article 42,

paragraph 3 of Directive 2004/39/EC.





688 Directive 2006/48/EC, article 13, sentence b.




203

B. Conditions for conducting business


Directive 2006/48/EC did not rules only with respect to terms for authorising EU credit

institutions, but also with respect to certain terms regarding the conduct of business

after authorisation. These conditions relate to:

• the preservation of own funds (see 2.1, below);

• the supply of information from credit institutions regarding the existence of

close links (see 2.2, below),

• informing competent authorities in case of change to the shareholder structure

(see 2.3, below), and

• the organisation and appropriate internal audit procedures (see 2.4, below).

Since, as a rule, the minimum harmonisation principle is applicable in this case as well,

member states may establish stricter terms to national credit institutions regarding the

conduct of their business. Moreover, the provisions of articles 16-17 of Directive

2004/39/EC (see 2.6, below) apply as well to credit institutions providing investment

services and carrying out investment activities.692

2. Specific provisions

2.1 Preservation of the amount of initial capital

2.1.1 The rule

According to Directive 2006/48/EC, a credit institution’s own funds may not, after

commencement of operation, fall below the amount of initial capital required at the

time of its authorisation.693

This provision applies whether the initial capital is the

minimum required by article 9 of Directive 2006/48/EC (EUR 5 million or lower were

permitted) or higher according to the provisions of each member state’s national law.

According to article 57 of Directive 2006/48/EC, the own funds of credit institutions

include clearly more than is included in their initial capital. Therefore, a credit

institution could, potentially, meet the obligation arising from that provision of the

Directive, even if the share capital is lower that one required at the time of

authorisation.

692

According to para. 2 of article 1 of Directive 2004/39/EC, all the provisions of chapter II,

title II, of the Directive regarding the terms of business of investment terms apply to EU credit

institutions (excluding the provision in sentence b of para. 2, article 23). These provisions

appear in three parts:

• part 1 (articles 16-18) contains general provisions;

• part 2 (articles 19-24) contains provisions regarding investor protection, and

• part 3 (articles 25-30) contains provisions regarding market transparency and integrity.

In the author’s opinion, and further to what has been discussed in section A of chapter 1 of this

study, the provisions of article 18 and all the provisions of parts 2 and 3 relate to the European

capital market law and will, therefore, not be presented herein.


204

If the own funds of a credit institution are reduced, the competent authorities of the

home member state may, where the circumstances justify it, allow it a limited period in

which to restore the capital up to the minimum amount. In case of failure of the credit

institution to comply, the competent authorities may ask it to cease its activities.694

2.1.2 Waiver

According to the provisions of the Second Banking Directive (89/646/EEC), that

remain in force, credit institutions already in existence on 1st January 1993, the own

funds of which do not attain the levels specified for initial capital, may continue to

carry on their activities. In that event, their own funds may not fall below the highest

level reached with effect from 22nd

December 1989.695

However, two restrictions were

set to this waiver:

(a) Firstly, if control of a credit institution, falling within this waiver, is taken by a

natural or legal person other than the person who controlled the institution previously,

the own funds of that credit institution must attain at least the level specified for initial

capital in article 9 of Directive 2006/48/EC.696

(b) Moreover, in certain specific circumstances and with the consent of the

competent authorities, where there is a merger of two or more credit institutions falling

within the same waiver, the own funds of the credit institution resulting from the

merger may not fall below the total own funds of the merged credit institutions at the

time of the merger.697

2.2 Information on the existence of close links

If so requested, credit institutions must provide to the competent authorities of the

home member state the information they require in order to ascertain that there are no

problems in the discharge of their responsibilities from the existence of close links

between the credit institutions and other natural or legal persons.698

2.3 Qualified holdings of natural and legal persons in a credit institution


A survey of the European Commission conducted in 2005 showed that the prior

approval process stipulated in European financial law for acquiring and increasing

holdings in financial intermediaries (including credit institutions), by the competent

national supervisory authorities, was a major impediment to the performance of cross-

border mergers and acquisitions. Indeed, the European legal framework regulated the

case in which the acquirer intended to acquire a holding, or increase his holding in a

credit institution within the country or on a cross-border level, enabling the competent

694

Directive 2006/48/EC, article 10. para. 5.

695 Ibid, article 10, para. 2. The abovementioned powers of competent authorities to take

compliance measures against credit institutions apply in this case as well.


697 Ibid, article 10, para. 4. The abovementioned powers of competent authorities to take

compliance measures against credit institutions do apply in this case as well.


205

authorities to oppose the acquisition of said holding, if, in view of the need to ensure

the sound and prudent management of the credit institution, they wwere not convinced

as to the acquirer’s suitability. However, no special criteria were set to assess the

acquirer’s suitability, nor were there any detailed description of the process whereby

such cases are evaluated. The same applied to other categories of financial institutions.

Considering the above, the European Parliament and the Council issued in September

2007 Directive 2007/44/EC. This Directive seeks to enhance the legal certainty, clarity

and transparency of the assessment process by supervisory authorities, with regard to

the acquisition and increase of a holding in financial service providers operating in the

banking sector, in securities and in insurance, within the single market, including credit

institutions.699

2.3.2 Obligations of persons acquiring or disposing of a qualified holding

2.3.2.1 Acquiring a qualified holding

If a natural or legal person (called a proposed acquirer in the Directive) has decided to

acquire, directly or indirectly, a qualifying holding in a EU credit institution, he must

first inform the competent authorities of the credit institution in writing, telling them of

the size of the intended holding, as well as any relevant information pursuant to para. 4

of article 19a.700

The same obligations apply to the natural or legal person, if he decides

to further increased, directly or indirectly, his already existing qualified holding, so

that:

• the proportion of the voting rights or of the capital held by him would reach or

exceed 20%, 30% or 50%, or

• the credit institution would become (if the acquiring person is a legal entity)

his subsidiary.

These decisions of the natural or legal person are called “proposed acquisition” in the

Directive.701

The minimum 30% threshold does not apply, where, pursuant to article 9, para. 3, item

(a) of Directive 2004/109/EC, a member state applies a threshold of one-third.702

2.3.2.2 Disposal or reduction of qualified holding

Any natural or legal person who intends to dispose, directly or indirectly, of a

qualifying holding in a EU credit institution, must first address a notification in writing

to the competent authorities of the credit institution, telling them of the size of his

intended (reduced) holding.703

Such a natural or legal person must likewise inform the

competent authorities if he decides to reduce his qualifying holding so that:

• the proportion of the voting rights or of the capital held by him would fall

below 20%, 30% or 50%, or

699

Directive 2007/44/EC, article 5, paras. 2-5.


701 Directive 2007/44/EC.



206

• the credit institution would cease to be his subsidiary.704

In this case as well, the minimum 30% threshold does not apply, where, pursuant to

article 9, para. 3, item (a) of Directive 2004/109/EC, a member state applies a threshold

of one-third.705

2.3.2.3 Qualified holding criteria

(a) In determining fulfilment of qualified holding criteria in the context of articles

19-21, the following are to be taken into account:

• the voting rights stipulated in articles 9 and 10 of Directive 2004/109/EC, and

• the terms for aggregating holdings stipulated in article 12, paras. 4 and 5 of

Directive 2004/109/EC.706

(b) In determining fulfilment of the qualified holding criteria pursuant to article

21, voting rights or shares with attached voting rights held by investment firms or

credit institutions as a result of underwriting and/or placing of financial instruments of

a firm commitment basis as per point 6, Section A, Annex I of Directive 2004/39/EC,

are not be taken into account on condition that the rights:

• are neither exercised nor otherwise used with intent to intervene in the

issuer’s management, and

• must be transferred within one (1) year of acquisition.707

2.3.3 Powers of competent authorities of the home member state

2.3.3.1 General provisions

(a) The competent authorities must, promptly and in any event within two (2)

working days following receipt of the notification, as well as following the possible

subsequent receipt of the information referred to in para. 3, article 19, acknowledge

receipt thereof in writing to the proposed acquirer.708

(b) The competent authorities have a maximum of sixty (60) working days as

from the date of the written acknowledgement of receipt of the notification and all

documents required by the member state to be attached to the notification (on the basis

of the list referred to in article 19a para. 4), referred to as the “assessment period”, to

carry out the assessment provided for in article 19a (para.1).709

(c) The competent authorities must inform the proposed acquirer of the date of the

expiry of the assessment period at the time of acknowledging receipt.710

704

Ibid, article 20, subparagraph b.

705 Ibid, article 20, subparagraph c.




709 Ibid, article 19, para. 2, subparagraph b..

710 Ibid, article 19, para. 2, subparagraph c.

207

(d) The competent authorities may, during the assessment period, if necessary,

and no later than on the 50th working day of the assessment period, request any further

information that is necessary to complete the assessment.711

Such request must be made

in writing and specify the additional information needed.712

(e) For the period between the date of request for information by the competent

authorities and the receipt of a response thereto by the proposed acquirer, the

assessment period may be interrupted.713

The interruption may not exceed twenty (20)

working days.714

Any further request by the competent authorities for completion or

clarification of the information is at their discretion, but may not result in an

interruption of the assessment period.715

(f) The competent authorities may extend the interruption referred to in the second

subparagraph of paragraph 3 up to 30 working days if the proposed acquirer is situated

or regulated outside the EU, or is a natural or legal person not subject to supervision

under Directives 85/611/EEC, 92/49/EEC, 2002/83/EC, 2004/39/EC or 2005/68/EC.716

(g) If the competent authorities, upon completion of the assessment, decide to

oppose the proposed acquisition, they have, within two working days and not

exceeding the assessment period, to inform the proposed acquirer in writing and

provide the reasons for that decision.717

Subject to national law, an appropriate

statement of the reasons for the decision may be made accessible to the public at the

request of the proposed acquirer.718

This may not prevent a member state from

allowing the competent authority to make such disclosure in the absence of a request

by the proposed acquirer.719

(h) If the competent authorities do not oppose the proposed acquisition within the

assessment period in writing, it will be deemed to be approved.720

(i) The competent authorities may fix a maximum period for concluding the

proposed acquisition and extend it where appropriate.721

The maximum harmonisation principle is established in this respect, since the

Directive states that member states may not impose requirements for notification to

and approval by the competent authorities of direct or indirect acquisitions of voting

rights or capital that are more stringent than those set out in this Directive.722

711

Ibid, article 19, para. 3, subparagraph a, sentence a.

712 Ibid, article 19, para. 3, subparagraph a, sentence b.

713 Ibid, article 19, para. 3, subparagraph b, sentence a

714 Ibid, article 19, para. 3, subparagraph b, sentence b.

715 Ibid, article 19, para. 3, subparagraph b, sentence c.








208

2.3.3.2 Assessment criteria

In assessing the notification provided for and the information referred to in article 19,

according to the above, the competent authorities must (in order to ensure the sound

and prudent management of the credit institution in which an acquisition is proposed,

and having regard to the likely influence of the proposed acquirer on the credit

institution), appraise the suitability of the proposed acquirer and the financial

soundness of the proposed acquisition from a financial viewpoint, against five (5)

criteria set in the Directive and must be fulfilled in aggregate. These criteria are:

(a) The reputation of the proposed acquirer.

(b) The reputation and experience of any person who will direct the business of

the credit institution as a result of the proposed acquisition.

(c) The financial soundness of the proposed acquirer, in particular in relation to

the type of business pursued and envisaged in the credit institution in which the

acquisition is proposed.

(d) Whether the credit institution will be able to comply and continue to comply

with the prudential requirements based on this Directive and, where applicable, other

Directives, notably, Directives 2000/46/EC, 2002/87/EC and 2006/49/EC, in particular,

whether the group of which it will become a part has a structure that makes it possible

to exercise effective supervision, effectively exchange information among the

competent authorities and determine the allocation of responsibilities among the

competent authorities.

(e) Whether there are reasonable grounds to suspect that:

• in connection with the proposed acquisition, money laundering or terrorist

financing within the meaning of article 1 of Directive 2005/60/EC is being or

has been committed or attempted, or

• that the proposed acquisition could increase the risk thereof.723

The competent authorities may oppose the proposed acquisition only if two conditions

are met:

• if there are reasonable grounds for doing so on the basis of the

abovementioned criteria, or

• if the information provided by the proposed acquirer is incomplete.724

The Directive also stipulates that member states must:

• neither impose any prior conditions in respect of the level of holding that

must be acquired,

• nor allow their competent authorities to examine the proposed acquisition in

terms of the economic needs of the market.725

723

Ibid, article 19a, para. 1.

724 Ibid, article 19a, para. 2.

725 Ibid, article 19a, para. 3

209

Member States must make publicly available a list specifying the information that is

necessary to carry out the assessment and that must be provided to the competent

authorities at the time of notification referred to in para. 1 of article 19.726

The

information required must:

• be proportionate and adapted to the nature of the proposed acquirer and the

proposed acquisition,727

and

• not be relevant for a prudential assessment.728

Where two or more proposals to acquire or increase qualifying holdings in the same

credit institution have been notified to the competent authority, the latter have to treat

the proposed acquirers in a non-discriminatory manner.729

2.3.3.3 Power of the competent authorities to take measures and impose sanctions

Article 21 of Directive 2006/48/EC also established special provisions with respect to

the power that competent authorities have to take measures and impose sanctions when

certain conditions are met. Specifically:

(a) Where competent authorities deem that the influence exercised by the persons

that have acquired a qualified holding is likely to operate to the detriment of the

prudent and sound management of the credit institution, the competent authorities must

take appropriate measures to put an end to that situation,730

such as:

• sanctions against directors and managers, and

• the suspension of the exercise of the voting rights attaching to the shares held

by the shareholders or members in question.731

Similar measures apply to natural or legal persons failing to comply with the

obligation to provide prior information to competent authorities.732

(b) Moreover, if a holding is acquired despite the opposition of the competent

authorities, the member states must, regardless of any other sanctions to be adopted,

provide either for exercise of the corresponding voting rights to be suspended, or for

the nullity of the votes cast or for the possibility of their annulment.733

2.3.3.4 Cooperation between competent authorities

In assessing the acquisition of a holding in an EU credit institution, the competent

authorities of member states has to extensively deliberate among them, provided the

proposed acquirer fulfils one of the following capacities:

726

Ibid, article 19a, para. 4, sentence a.

727 Ibid, article 19a, para. 4, sentence b.

728 Ibid, article 19a, para. 4, sentence c.

729 Ibid, article 19a, para. 5.

730 Ibid, article 21, para. 2, subparagraph a, sentence a.

731 Ibid, article 21, para. 2, subparagraph a, sentence b.



210

• a credit institution, assurance undertaking, insurance undertaking, reinsurance

undertaking, investment firm or UCITS management company (within the

meaning of article 1a of Directive 85/611/EEC) is authorised in another

member state or in a sector other than that in which the acquisition is proposed,

• the parent undertaking of a credit institution, assurance undertaking, insurance

undertaking, reinsurance undertaking, investment firm or UCITS management

company is authorised in another member state or in a sector other than that in

which the acquisition is proposed, or

• a natural or legal person controlling a credit institution, assurance undertaking,

insurance undertaking, reinsurance undertaking, investment firm or UCITS

management company is authorised in another member state or in a sector

other than that in which the acquisition is proposed.734

In these cases, the competent authorities must, without undue delay, provide each other

with any information which is essential or relevant for the assessment,735

notably they

must communicate to each other upon request all relevant information, and on their

own initiative all essential information.736

Finally, according to an explicit provision of the Directive, in these cases, a decision by

the competent authority that has authorised the credit institution in which the

acquisition is proposed must indicate any views or reservations expressed by the

competent authority responsible for the supervision of the proposed acquirer.737

2.3.4 Obligations of credit institutions

EU credit institutions in which a holding is acquired or disposed of or reduced which

exceeds (upwards or downwards, as the case may be) the abovementioned (under

2.3.1) thresholds, have two obligations vis-à-vis the competent authorities:738

(a) Firstly, they must inform them of any acquisitions or disposals of holdings

upon becoming aware.

(b) They also have, at least once a year, to inform the competent authorities of the

names of shareholders and members possessing qualifying holdings and the sizes of

such holdings as shown, notably:

• by the information received at the annual general meetings of shareholders and

members, or

• by information received as a result of compliance with the regulations relating

to companies listed in a regulated market.

734

Ibid, article 19b, para. 1.

735 Ibid, article 19b, para. 2, sentence a.

736 Ibid, article 19b, para. 2, sentence b.

737 Ibid, article 19b, para. 2, sentence c.


211

2.4 Organisation and internal audit procedures

According to article 22 of Directive 2006/48/EC, home member state competent

authorities may require that every credit institution have robust (corporate) governance

arrangements, which at least include:

• a clear organisational structure with well defined, transparent and consistent

lines of responsibility,

• effective processes to identify, manage, monitor and report the risks it is or

might be exposed to, and

• adequate internal control mechanisms, including sound administrative and

accounting procedures.739

These arrangements, processes and mechanisms must have the following qualities.

• be comprehensive,

• be proportionate to the nature, scale and complexity of the credit institution's

activities, and

• take into account the technical criteria laid down in Annex V of Directive

2006/48/EC.740

2.5 Use of name

For the purposes of exercising their activities, EU credit institutions may,

notwithstanding any provisions of the host member state concerning the use of the

words “bank” or “savings bank”, use throughout the territory of the EU where they

provide services the same name as they use in the member state in which their head

office is situated.741

If there is a danger of confusion, the host member state may, for

clarification purposes, require that the name be accompanied by certain explanatory

particulars.742

2.6 Conditions for conducting business of credit institutions providing investment

services and exercising investment activities

2.6.1 Regular review of conditions for initial authorisation743

Pursuant to article 16 of Directive 2004/39/EC, member states are entitled to require

the following:

739




742 Ibid, article 18, subparagraph b.

743 The provisions of para. 3, article 16 and of para. 2, article 17 of Directive 2004/39/EC, are

not, in the author’s opinion, by definition applicable to credit institutions, given that, according

to their articles of incorporation, these institutions may not exclusively provide investment

advice services. Consequently, in para. 2 of article 1 of the same Directive, they have

erroneously been included in the provisions applicable to credit institutions.

212

(a) A credit institution authorised in their territory must comply at all times with

the conditions for initial authorisation established in the Directive (pursuant to section

A in this chapter, under 2.7).744

(b) Competent authorities must establish appropriate methods to monitor that

credit institutions comply with their above obligation.745

In this context, they may

require credit institutions to notify the competent authorities of any material changes to

the conditions for initial authorisation.746

2.6.2 General obligations in respect of on-going supervision

Member states must ensure, taking where necessary all appropriate measures, that the

competent authorities in a credit institutions’ home member state747

are in a position to:

• properly supervise the activities of credit institutions, thus being able to assess

compliance with the business conditions stipulated in Directive 2004/39/EC,

and

• receive all information necessary to assess the credit institutions’ compliance

with such obligations.748

744




747 According to the legislation of member states, the competent authorities supervising credit

institutions as to the provision of investment services and the exercise of investment activities,

may be different than the authorities supervising the credit institutions’ commercial banking

services.


213

C. Conditions for the revocation of an authorisation

1. The provisions of Directive 2006/48/EC

According to Directive 2006/48/EC, the competent authorities may revoce the

authorisation granted to a credit institution only in the following cases:749

(a) The credit institution has not made use of the authorisation within 12 months,

or expressly renounces the authorisation.

(b) The credit institution has ceased to engage in business for more than six (6)

months.

(c) The credit institution has obtained the authorisation by making false

statements or by any other irregular means.

(d) The credit institution no longer fulfils the conditions under which

authorisation was granted.

(e) The credit institution no longer possesses sufficient own funds or can no

longer be relied on to fulfil its obligations towards its creditors, and in particular no

longer provides security for the assets entrusted to it.

The decision of competent authorities to withdraw the authorisation of a credit

institution must be:

• justified,

• communicated to the credit institution concerned, and

• notified to the European Commission.750

Where the competent authorities of the home member state withdraw the authorisation

of a credit institution operating in other member states through a branch or cross-

border service provision, the competent authorities of the host member state(s) must be

informed and take appropriate measures to prevent the credit institution concerned

from initiating further transactions within its territory and to safeguard the interests of

depositors.751

2. The provisions of Directive 2001/24/EC

According to Directive 2001/24/EC, the withdrawal of the authorisation of a credit

institution is imperative where the opening of winding-up proceedings is decided on, in

the absence of, or following the failure of reorganisation measures.752

If a credit

institution operates branches in other member states, the competent authorities of the

host member state(s) must be informed in order to prevent the credit institution

concerned from continuing its operation, and to safeguard the interests of depositors.753

749

Directive 2006/48/EC, article 17, para. 1.





214

II. Micro-prudential regulation of credit institutions

215

III. Macro-prudential regulation of credit institutions

216

IV. Micro-prudential supervision of credit institutions

217

V. Macro-prudential oversight of the financial system: the role of the

European Systemic Risk Board


As already mentioned above, the de Larosière Report suggested for the first time that

an institution at EU level should be established, entrusted with the task of macro-

prudential oversight. It recommended that the ECB/ESCB should be assigned with this

responsibility in the European Union.754

On 23 September 2009, the European

Commission presented legislative proposals to implement the recommendations made

in the Larosière Report with the aim of strengthening financial supervision in Europe.

These proposals included, inter alia, the creation of a European Systemic Risk Board

(ESRB) for macro-prudential oversight. It was suggested that the ECB and the EU

NCBs (comprising the ESCB) should play a leading role in this, given their expertise

and existing responsibilities in the area of financial stability.

The ECOFIN Council reached a broad consensus on the main features of the ESRB at

its meeting on 20 October 2009.755

Subject to approval by the European Parliament,756

the political objective was for the ESRB to take up its duties at the beginning of 2011,

together with the three abovementioned European Supervisory Authorities (ESAs).

The ESRB is responsible for the macro-prudential oversight of the whole financial

system within the EU in order to contribute not only to the prevention or mitigation of

systemic risks to EU financial stability, but also to the smooth functioning of the

internal market. Consequently, the regulation of the European Parliament and of the

Council on EU macro-prudential oversight of the financial system and establishing a

European Systemic Risk Board is based on the provision regarding the functioning of

the EU internal market (Article 114 TFEU) and adopted by the European Parliament

and the Council by qualified majority757

pursuant to Article 16 of the Treaty on

European Union.

754

Report by The High-Level Group on Financial Supervision in the EU, pp. 39-40, point 153.

755 This report is based on the legal texts put forward by the EU Commission as amended by the

Council of the European Union (Interinstitutional File: 2009/0141(CNS), 5551/10 dated 21

January 2010 and Interinstitutional File: 2009/0140(COD), 5554/10 dated 21 January 2010).

These documents are available at: n/10/st05/st05551.en10.pdf, and

http://register.consilium.europa.eu/pdf/en/10/st05/st05554.en10.pdf.

756 A draft report by the competent committee (ECON) is available at: europarl.europa.eu/

oeil/FindByProcnum.do?lang=2&procnum=COD/2009/0140. The proposed amendments

deviate from the de Larosière Group’s recommendations, the EU Commission’s proposals and

the ECOFIN consensus in suggesting that the number of central bank representatives in the

ESRB should be reduced and replaced by persons with backgrounds in academic fields, the

private sector, trade unions, or as providers/consumers of financial services.

757 The requirements for a qualified majority pursuant to Article 16 TEU are laid down in the

Protocol No 36 on Transitional Provisions annexed to the Lisbon Treaty. In principle, under

Article 3 of this Protocol, a qualified majority is achieved if two thirds of the members are in

favour of adopting the legal act.

218

2. The composition of the Board

The ESRB will be governed by a General Board and will have a Steering Committee, a

Secretariat and an Advisory Technical Committee. The members of the ESRB must

perform their duties impartially and solely in the interests of the EU as a whole.

(a) The General Board will consist of the President of the ECB, the Governors of

the ESCB central banks, a member of the European Commission and the chairpersons

of the three new European Supervisory Authorities. Furthermore, a representative of

the national supervisory authority of each EU Member State and the President of the

EU’s Economic and Financial Committee will be members without voting rights. The

Chair, presumably the ECB President, will be elected only from those members of the

General Board who are also members of the General Council of the ECB.

(b) A Steering Committee will assist the General Board and will be consisted of

the Chair, the Vice-Chair of the ESRB, five other members of the General Board who

are also members of the General Council of the ECB, a member of the EU

Commission, the President of the EU’s Economic and Financial Committee and the

chairpersons of the three new European Supervisory Authorities. This composition will

not reflect the composition of the General Board, on which members from EU National

Central Banks (NCBs) will have a clear majority.

(c) The members of the Advisory Technical Committee, which will provide

advice and assistance on technical issues, will be representatives of the institutions and

bodies involved in the General Board.

(d) The ECB will ensure the Secretariat, which will provide analytical, statistical,

logistical and administrative support to the ESRB. The legal basis of this task coud

have been Article 127(5) TFEU, whereby the Eurosystem already has its own

competence in the field of financial stability.758

As the ESRB will be established on the

basis of Article 114 TFEU, it will be a European body mandated with tasks concerning

the stability of the financial system. It would consequently have been conceivable to

base the role of the Secretariat only on Article 127(5) TFEU. On this basis, the

Governing Council of the ECB could have decided independently on the provision of

the secretariat function for the new EU body. Nevertheless, for the purpose of

establishing the Secretariat, the EU Commission has proposed a second Council

Regulation on the basis of Article 127(6) TFEU entrusting the European Central Bank

with specific tasks concerning the functioning of the European Systemic Risk Board.759

This regulation must be adopted unanimously by the Council.

758

According to this Article, the ECB and the Eurosystem contribute to the smooth conduct of

policies pursued by the competent authorities relating to the prudential supervision of credit

institutions and the stability of the financial system.

759 Under Article 127(6) of the TFEU specific tasks concerning policies relating to the

prudential supervision of credit institutions and other financial institutions with the exception of

insurance undertakings could be conferred on the ECB.

219

The Governing Council of the ECB has already declared its willingness for the ECB to

provide the ESRB’s Secretariat.760

The ECB’s own financial stability tasks according

to art. 127(5) TFEU will remain legally unaffected, while its primary objective of

maintaining price stability will remain unchanged. The ESRB’s members from the

Governing Council of the ECB will have to distinguish between their ESRB

responsibilities and their ESCB tasks, namely their financial stability functions, which

they will execute independently pursuant to Art. 130 TFEU.

3. The tasks and powers of the Board

The ESRB is carrying out the following, inter alia, tasks:

• determining and/or collecting and analysing all the relevant and necessary

information,

• identifying and prioritising systemic risks,

• issuing warnings where such systemic risks are deemed to be significant and,

where appropriate, make those warnings public,

• issuing recommendations for remedial action in response to the risks

identified and, where appropriate, making those recommendations public,

• cooperating closely with all the other parties to the ESFS; and, in particular, in

collaboration with the ESAs, developing a common set of quantitative and

qualitative indicators to identify and measure systemic risk, and

• coordinating its actions with those of international financial organisations,

particularly the IMF and the FSB as well as the relevant bodies in third

countries on matters related to macro-prudential oversight.

The ESRB’s key role will be to issue warnings and recommendations for action in

response to identified risks. They can be addressed to the EU as a whole, to one or

more EU member states, to one or more of the new European Supervisory Authorities

(as mentioned above in this section, under 1) or to one or more national supervisory

authorities. The ESRB shall decide on a case-by-case basis, after having consulted the

Council, whether a warning or a recommendation should be made public. The

addressees must communicate the action undertaken in response to the

recommendations or provide adequate justification in the event of inaction (“act or

explain”).

In order to fulfil its tasks, the ESRB will collect and analyse relevant information and

identify systemic risks to financial stability. To this end, the ESRB may request macro-

prudential information, primarily from the new European Supervisory Authorities.

Furthermore, the ESRB will coordinate with international institutions and fora, in

particular the International Monetary Fund and the Financial Stability Board.

760

See point 3 of the ECB opinion on the EU Commission’s proposals concerning the ESRB

(CON/2009/88), available at: www.ecb.int/ecb/legal/pdf/c_27020091111en 00010008.pdf.

221

SECTION 3

The provisions on positive financial integration (B): crisis management

I. Reorganisation and winding-up of credit institutions

222

II. Resolution of credit institutions

223

III. Deposit-guarantee schemes

A. Terms and conditions of EU credit institutions’ membership in deposit-

guarantee schemes

1. Domestic credit institutions

1.1 The compulsory membership rule

Membership of EU credit institutions in the officially recognised deposit-guarantee

scheme operating in the Member State where they have their registered office and or

head office (and where they have been authorised by the competent authorities) is

compulsory, and constitutes a conditio sine qua non to their right to accept deposits

from the public. Without prejudice to the limited exemptions laid down in Directive

94/19/EC, no credit institution authorised in a member state pursuant to the provisions

of Directive 2006/48/EC761

may accept deposits from the public, unless it is a member

of the national deposit-guarantee scheme or, in case there are more than one schemes, a

member in one of them.762

1.2 Exemptions

Two (permanent) exemptions have been introduced to the rule of compulsory

membership of EU credit institutions in a deposit-guarantee system:

(a) A member state may exempt a credit institution from the obligation to belong

to the national deposit-guarantee scheme where that credit institution belongs to a

system which protects the credit institution itself and in particular ensures its liquidity

and solvency, thus guaranteeing protection for depositors at least equivalent to that

provided by a deposit-guarantee scheme.763

For the credit institution to be exempted

from the national deposits-guarantee scheme, such an alternative system must fulfil the

following criteria:

• the system must be in existence and have been officially recognised when

Directive 94/19/EC was adopted;

• the system must be designed to prevent deposits with credit institutions

belonging to the system from becoming “unavailable”764

and have the

resources necessary for that purpose at its disposal,

• the system must not consist of a guarantee granted to a credit institution by a

member state itself or by any of its local or regional authorities,765

and

761

On this, see above chapter 5 of this study.

762 Directive 94/19/EC, article 3, para. 1, subparagraph a, sentence b.

763 Ibid, article 3, para. 1, subparagraph b. This provision pertains:

• to cooperative banks in certain member states (e.g. Germany, France) that participate

in a mutual guarantee scheme, offering guarantees not only for deposits but also for the

entire assets of the participating credit institutions, and

• to certain EU credit institutions linked to networks of mutual insurance organisations,

savings banks, or welfare funds subject to the same depositor protection conditions.

764 On the concept of the “unavailable deposit”, see section B below in this chapter, under 5.1.

224

• the system must ensure that depositors are informed in accordance with the

terms and conditions laid down in article 9 of Directive 94/19/EC (see section

B below in this chapter of the study, under 6).766

(b) The second permanent exemption was established with regard to credit

institutions excluded from the deposit-guarantee scheme to which they belong for the

main cover for their deposits, as they do not fulfil their obligations to it (on the

exclusion process, see 3 in this section, below). Specifically, with the express consent

of the competent authorities which issued its authorisation, a credit institution excluded

from a deposit-guarantee scheme may continue to take deposits if, before its exclusion,

it has made alternative guarantee arrangements which ensure that depositors will enjoy

a level and scope of protection at least equivalent to that offered by the officially

recognised scheme.767

2. Branches of EU credit institutions established in other Member States

2.1 Main cover for deposits

Cover for deposits that EU credit institutions take through their branches in other

member states, is provided by the scheme in the home member state.768

Conversely,

cover (or non-cover) for deposits taken by branches of EU credit institutions

established in third-party countries outside the EU, is left to he discretion of member

states.

2.2 Supplementary cover for deposits

To satisfy the requirement for competition equality among all EU credit institutions

within the single market, a rule was adopted whereby branches of EU credit institutions

operating in other member states are entitled to file a request for participation in the

host member state’s scheme.769

Participation in the host member state’s scheme aims

exclusively at supplementing the cover provided for the branch’s deposits, where the

level and/or scope of cover offered by the host member state are more beneficial than

that provided in the home member state.

This provision does not exclude the possibility of supplemental cover being provided

by the scheme on the home member state.770

765

According to a statement of the Council entered in the minutes of its joint position on the

Directive, this provision:

"must be interpreted as meaning that the system must itself possess the required means ensuring

that credit institutions that depend on it will not find themselves in a position of inability to pay

deposits, and that it does not exclude the possibility of the member-state or local or regional

government organisations offering additional guarantees to the system”.

766 Member states making use of this option must inform the Commission accordingly; in

particular, they must notify the Commission of the characteristics of any such protective

systems and the credit institutions covered by them and of any subsequent changes in the

information supplied (Directive 94/19/EC, article 3, para. 1, subparagraph c, sentence a).




770 On this see point 13 of the Directive’s recitals (sentence d).

225

To facilitate application of this provision, member states have to make sure that the

following two conditions are met:

• an officially recognised deposit-guarantee scheme operates within their

territory, which a branch of any credit institution authorised in another

member state may join voluntarily,771

and

• objective and generally applied conditions are established.772

Exercise of the right is left at the discretion of the branch filing the request. Admission

of a branch of an EU credit institution to the scheme of the host member state for

provision of supplementary cover, is conditional on fulfilment of the relevant

obligations of membership.773

Where, however, a branch applies to join a host member

state scheme for supplementary cover, the host member state scheme will bilaterally

establish with the home member state scheme appropriate rules and procedures based

on the guiding principles set out in Annex II of Directive 94/19/EC.774

In this context,

the scheme in the host member state is entitled:

• to impose on these branches the same terms and conditions that apply to

participating national credit institutions,775

• to demand disclosure of information which it will then verify with the

competent authorities in the home member state,776

and

• to charge branches for supplementary cover on an appropriate basis which

takes into account the guarantee funded by the home member state scheme,

and assume that its liability will in all circumstances be limited to the excess of

the guarantee it has offered over the guarantee offered by the home member

state, regardless of whether the latter actually pays any compensation in

respect of foreign deposits held by national credit institutions.777

By 31st December 1999, the European Commission was obliged to submit a report on

the application of the provisions of Directive 94/19/EC on the supplementary cover of

deposits and, if deemed necessary, suggest amendments. This report was submitted on

18 October 2001.778

The Commission found that, despite the fact that credit institutions

made limited use of this capability, the measure is still useful in particular for credit

institutions from the (then) ten (10) accession Member States.

771

Ibid, article 4, para 2, subparagraph b. If more that one schemes operate in the host member

state, the branch must join the scheme covering the category of institution to which it belongs or

most closely corresponds to that in the host member state.




775 Ibid, Annex II, point (a).

776 Ibid.

777 Ibid, Annex II, point (d).

778 COM (2001) 595 final.

226

2.3 Limitation of the cover provided by the scheme of the home member state

The rule of “not exporting” to host member states, the fullest cover provided by the

scheme in the home member state, was established in EU law as a transitional

regulation, with the following wording: “Until 31st December 1999 neither the level

nor the scope, including the percentage, of cover provided shall exceed the maximum

level or scope of cover offered by the corresponding guarantee scheme within the

territory of the host member state”.779

Therefore, if the scheme in the home member state of a credit institution is more

“generous” than the scheme operating in the host member state where its branches

operate, the deposits in these branches are covered by the scheme of the home member

state, but the level and scope of cover is limited according to the rules applying in the

host Member State.

According to the adopted review clause, until the end of 1999, the European

Commission was obliged to draw up a report on the basis of the experience acquired in

applying this clause, and consider whether it should continue to apply. In case of a

positive recommendation, the Commission will have to submit a proposal for a

Directive to the European Parliament and the Council, with a view to the extension of

its validity.780

In its report submitted in December 1999,781

the Commission found that

extension of application of the non-exporting rule is not expedient, but, in any case,

reserved the right to follow all market developments and take up legislative action if

need be.

3. Exclusion of a credit institution from a deposit-guarantee scheme


With Directive 94/19/EC, member states undertook to establish a special procedure for

excluding credit institutions from the national deposits guarantee scheme they have

joined, either for main or supplementary cover of their deposits, where such

institutions fail to comply with the obligations arising from their membership. The

context of this exclusion procedure also imposes an obligation for close cooperation

between the competent authorities of the non-compliant credit institution and the

scheme it has joined.

3.2 Exclusion of a credit institution from the scheme of the home Member State

If a credit institution does not comply with the obligations imposed on it as a member

of a deposit-guarantee scheme providing main cover for deposits, the following process

is activated:

(a) The scheme’s administrator notifies the competent authorities that have

provided the credit institution’s authorisation. These authorities, in collaboration with

the guarantee scheme, must take all appropriate measures including the imposition of

sanctions to ensure that the credit institution complies with its obligations.782

779

Directive 94/19/EC, article 4. para. 1, subparagraph b.

780 Ibid, article 4, para 1, subparagraph c.

781 COM (1999) 722 final.

782 Directive 94/19/EC,article 3, para 2.

227

(b) If those measures fail to secure compliance on the part of the credit institution,

the scheme may express its intention to exclude the credit institution. Three conditions

need to be fulfilled for a member to be excluded:783

• national law must not contain any provision prohibiting this,

• competent authorities must offer their express consent, and

• the scheme must give not less than 12 months' notice of its intention of

excluding the credit institution from membership of the scheme

Deposits made before the expiry of the notice period continue to be fully covered.784

(c) If, on the expiry of the notice period, the credit institution has not complied

with its obligations, the guarantee scheme may, again having obtained the express

consent of the competent authorities, proceed to exclusion.785

A credit institution excluded from a deposit-guarantee scheme may continue to take

deposits if, before its exclusion, it has made alternative guarantee arrangements which

ensure that depositors will enjoy a level and scope of protection at least equivalent to

that offered by the officially recognised scheme.786

If a credit institution is unable to

make alternative arrangements, then the competent authorities which provided its

authorisation must revoke.787

3.3 Exclusion from the scheme of the host member state

A similar procedure is also implemented for branches of an EU credit institution that is

a member of an officially recognised deposit-guarantee scheme in the host member

state for the supplementary cover of its deposits according to the above. Specifically:

(a) If a branch does not comply with the obligations imposed on it as a member of

a deposit-guarantee scheme in the host member state, the competent authorities which

provided the authorisation must be notified and, in collaboration with the scheme, take

all appropriate measures to ensure that the obligations are complied with.788

(b) If those measures fail to secure compliance, after an appropriate period of

notice of not less than 12 months, the guarantee scheme may, with the consent of the

home member state’s competent authorities, exclude the branch.789

Deposits made before the date of exclusion continue to be covered by the scheme,

while there is also an express obligation to inform depositors of the exclusion.790

783

Ibid, article 3, para 3, sentence a.

784 Ibid, article 3, para 3, sentence b. According to a statement made by the Council and

recorded in the minutes of its common position to the Directive, this provision “does not in any

way restrict any deposits guarantee system from asking the competent authorities to use their

powers in order to limit or forbid this credit institution from taking new deposits.

785 Ibid, article 3, para 3, sentence c.



788 Ibid, article 4, para 4, subparagraph a.

789 Ibid, article 4, para. 4, subparagraph b, sentence a.

790 Ibid, article 4, para. 4, subparagraph b, sentences b and c.

228

B. Terms of operation of deposit-guarantee schemes

1. Extent of cover


It has been agreed that the extent to which deposit-guarantee schemes of member states

cover the deposits, that their members’ credit institutions accept, is broad, leaving it up

to the discretion of individual member states to determine such extent. To this end,

Directive 94/19/EC contains provisions fixing the following:

• the classes of items considered as deposits and covered mandatorily by all

schemes (see 1.2 below)

• the classes of receivables which, while falling within the definition of a

deposit, it was deemed necessary to be excluded from cover by all schemes

(see 1.3.1 below), and

• the classes of deposits which member states can, at their own discretion,

exclude from cover offered by the deposit-guarantee scheme that operates on

their territory (see 1.3.2 below).

1.2 Classes of deposits covered

Article 1 of Directive 94/19/EC offers a definition of the deposits that must be covered

by the member states’ deposit-guarantee schemes. For its purposes, two classes of

items fall within the definition of a deposit:791

(a) First of all, any credit balance which a credit institution must repay under the

legal and contractual conditions applicable, and which result:

• either from funds left in a bank account (the beneficiary being either a natural

person or legal entity),

• or from temporary situations deriving from normal banking transactions (e.g.

remittance balances).792

(b) Deposits also include credits resulting from any debt evidenced by a certificate

issued by a credit institution. According to Directive 86/635/EEC of the Council, such

certificates include deposit receipts, “bons de caisse” and liabilities arising out of own

acceptances and promissory notes.793

On the contrary, the term deposit does not

include bonds which satisfy the conditions prescribed in Article 22, paragraph 4, of

Directive 85/611/EEC of the Council “on the coordination of laws, regulations and

administrative provisions relating to undertakings for collective investment in

transferable securities (UCITS)”.794

791

Directive 94/19/EC, article 1, point 1, subparagraph a.

792 For the purpose of calculating a credit balance, in the context of paying compensations,

member states shall apply the rules and regulations relating to set-off and counterclaims

according to the legal and contractual conditions applicable to a deposit (ibid, article 1, point 1,

subparagraph d).

793 Directive 86/635/EEC, article 20. para. 1.

794 As this article applies after being amended by the provision of para. 10, article 1, Directive

2001/28/EC.

229

However, Directive 94/19/EC expressly stipulates that the EU regulatory framework

shall not preclude the retention or adoption, by Member States, of provisions which

offer a higher or more comprehensive cover for deposits.795

1.3 Excluded classes of deposits

1.3.1 Mandatory exclusion from cover

The classes of deposits excluded from the cover offered by the national deposit-

guarantee schemes are cited in article 2 of Directive 94/19/EC. Specifically excluded

are:

(a) Deposits made by other credit institutions on their own behalf and for their

own account. Therefore, this provision does not include deposits made by credit

institutions on behalf of its clients, provided the conditions of article 8, para. 3, are

met.796

Namely, it must be possible to prove the existence and the identity of the credit

institution's client that made the interbank deposit, before activation of the

compensation payment process, according to what is specified below.

(b) All instruments included in supplementary items to the “own funds” of credit

institutions, namely instruments issued upon conclusion of subordinated loans and

securities of indeterminate duration.

(c) Finally, deposits arising out of transactions in connection with which there has

been a criminal conviction for using the financial system for money laundering as

defined in Directive 91/308/EEC, as in force.

1.3.2 Potential exclusion from cover

Member states may provide that certain, specifically listed, classes of depositors or

deposits shall be excluded from the cover offered by national deposit-guarantee

schemes.797 The list of potential exclusions appears in Annex Ι of Directive

94/19/ΕC798

and includes the following:

(a) Deposits by various classes of legal entities of the entire financial sector, such

as: financial institutions, insurance undertakings, undertakings for collective

investment in transferable securities (“UCITS”),799

as well as pension and retirement

funds.

(b) Deposits by state services, central administration departments, and by

provincial, regional, local and municipal authorities.

(c) Deposits by the following classes of natural persons or legal entities connected

with a credit institution participating in a deposit-guarantee scheme:

• directors, managers, members personally liable, holders of at least 5 % of the

credit institution's capital,

795

Directive 94/19/EC, article 7, para. 3, sentence a.

796 Ibid, article 8, para. 3, subparagraph a, sentence a.



799 According to article 1 (para. 2) of Directive 85/611/EEC, as amended by article 1 of

Directive 2001/108/EC, UCITS include mutual funds and portfolio investment firms.

230

• persons responsible for carrying out the statutory audits of the credit

institution's accounting documents,

• persons of similar status in other companies in the same group,

• close relatives and third parties acting on behalf of all the above classes of

depositors, and

• other companies in the same group.

(d) Non-nominative deposits.

(e) Deposits for which the depositor has, on an individual basis, obtained from the

same credit institution rates and financial concessions which have helped to aggravate

its financial situation.

(f) Debt securities issued by the same credit institution and liabilities arising out

of own acceptances and promissory notes.

(g) Deposits in currencies other than those of the member states.

(h) Deposits by companies which are of such a size that they are not permitted to

draw up abridged balance sheets pursuant to Article 11 of Directive 78/660/EEC “on

the annual accounts of certain types of companies”.

2. Beneficiaries of covered deposits

As a rule, the person whose deposits are covered by the deposit-guarantee schemes is

the person whose name appears on the bank account containing a credit balance as

mentioned above. There are, however, cases in which a person may act in his own

name, but on behalf of a third party. For such cases, the rule of protecting the "entitled

beneficiary” was adopted, so as to able to identify the persons whose deposits are

indeed covered and who are entitled to compensation.800

If there are several persons

who are absolutely entitled, the share of each under the arrangements subject to which

the sums are managed shall be taken into account.801

3. Coverage level

3.1 Minimum coverage level

The minimum coverage level provided by deposit-guarantee schemes established in the

member states for deposits in EU credit institutions was initially set at 20,000 euros,

and was binding.802

Then, by virtue of Directive 2009/14/EC, the minimum coverage

level has been increased to 50,000 euros, and, by 31st December 2010, to 100,000

euros.

800

Directive 94/19/EC, article 8. para. 3, subparagraph a, sentence a.

801 Ibid, article 8, para 3, subparagraph a, sentence b. This provision does not apply to collective

investment undertakings, since they are subject to special protection rules (ibid, article 8, para. 3,

subparagraph b).

802 Ibid, article 7, para 1, subparagraph a. Member states are entitled to establish a level of

cover lower than 20,000 euros, only for those classes of deposits that they are entitled to

exclude from cover, as mentioned above (ibid, article 7, para. 2, sentence a).

231

3.2 Deviations

In view of the fact that in some Member States the coverage level offered by the

deposit-guarantee schemes, when Directive 94/19/EC was issued, was higher than

above minimum level of cover,803

it was necessary to allow them to both retain and

latter adopt provisions which offer a higher level of cover for deposits.804

Moreover,

deposit-guarantee schemes may, on social considerations, cover certain kinds of

deposits in full.805

In addition, a member state is allowed to retain a deposit level of cover lower than the

minimum harmonised level, but only for those classes of deposits which they are also

entitled to exclude from cover, according to the abovementioned.806

3.3 Coinsurance

The depositor coinsurance rule was established in Directive 94/19/EC with the

following wording: “Member states may limit the guarantee provided for in paragraph

1 or that referred to in paragraph 3 to a specified percentage of deposits. The

percentage guaranteed must, however, be equal to or exceed 90% of aggregate

deposits until the amount to be paid under the guarantee reaches the amount referred

to in paragraph 1”.807

According to this provision, in member states where the depositor coinsurance rule will

be adopted, the deposit-guarantee scheme shall be entitled to pay the amount that

corresponds only to the covered deposits as compensation to entitled depositors, if the

relevant conditions apply (on this see below in this section of the chapter, under 5).

However, if the amount of compensation that will ultimately be paid to the beneficiary

(taking coinsurance into account) does not exceed €100,000, then the coinsurance rate

may not exceed 10%.808

4. Criteria for calculating the level of cover for deposits

To calculate the level of cover that deposit-guarantee schemes will offer, according to

what has been mentioned above, the rule of “cover per depositor per credit institution”

was established. Consequently, the limit of cover that every national scheme offers

shall apply for the sum of all the deposits kept by one natural person or legal entity in

the same EU credit institution, irrespective the number of deposits, the currency or the

place (within the single market) where the branch holding the deposit is established.809

803

This was the case in Denmark (€40,000), France (€61,120), Italy (€100,000), and Germany

(almost unlimited).


805 Ibid, article 7, para. 3, sentence b. This provision is a typical expression of the demand for

the protection of low-income savers. However, it also offers cover to other groups of savers

which, as the case may be, are deemed to be in need of special protection (e.g. flood victims,

earthquake victims).



808 This provision applies in the UK deposit-guarantee scheme.


232

There is a special provision for beneficiaries of joint accounts, namely accounts opened

in the names of two or more persons or over which two or more persons have rights

that may operate against the signature of one or more of those persons.810

The share of

each depositor in a joint account shall be taken into account in calculating the limits of

levels of cover,811

whereas in the absence of special provisions, such an account shall

be divided equally amongst the depositors.812

Member states may also provide that deposits in an account to which two or more

persons are entitled as members of a business partnership, association or other

grouping of a similar nature, without legal personality, may be aggregated and treated

as if made by a single depositor .813

5. Procedure for payment of compensations

5.1 Activation of the procedure: the concept of "unavailable deposit”

The point of reference for activating the procedure for paying compensations to savers,

whose deposits are covered by a deposit-guarantee scheme, is when the deposits of a

credit institution become “unavailable”. According to the provision,814

the deposits of a

credit institution are considered as unavailable, when the following conditions apply

cumulatively:

(a) Deposits are due and payable, but have not been paid by a credit institution

under the legal and contractual conditions applicable thereto.

(b) One of the following events has occurred:

(i) The relevant competent authorities have determined that in their view the

credit institution concerned appears to be unable for the time being, for

reasons which are directly related to its financial circumstances, to repay

the deposits and to have no current prospect of being able to do so.

According to a joint statement of the Council and the European

Commission, entered in the minutes of the Council’s joint position on the

Directive, the phrase “to have no current prospect of being able to do so”

means that the deposit is not considered unavailable, provided the credit

institution’s inability to pay it is due to temporary cash problems and it is

likely to be able to pay the deposit within a few days.

The competent authorities must make that determination as soon as

possible and at the latest twenty one (21) days after first becoming

satisfied that a credit institution has failed to repay deposits which are due

and payable.

810

Ibid, article 1, point 2.




814 Ibid, article 1, point 3.

233

(ii) A judicial authority has made a ruling for reasons directly related to the

credit institution's financial circumstances, which has the effect of

suspending depositors’ ability to make claims against it. This ruling shall

be made before the abovementioned determination by the competent

authorities.

Therefore, the deposits of a credit institution become unavailable when events occur

revealing that the credit institution is in financial crisis. Conversely, if a credit

institution’s suspension of payments is the result of force majeure (e.g. strike, natural

catastrophe, war), the procedure for paying compensations from the deposit-guarantee

scheme will not be activated.

5.2 Direct action of depositors against the scheme

Depositors, whose deposits are covered by the deposit-guarantee scheme of a member

state, shall have the right of direct action against the scheme for payment of

compensation, if the deposits of a participating credit institution become unavailable.815

5.3 Payout period

5.3.1 The initial provisions

According to the initial provisions of the Directive, deposit-guarantee schemes should

be in a position to pay duly verified claims by depositors in respect of unavailable

deposits within three (3) months of the date on which the deposits of such credit

institution became unavailable. In wholly exceptional circumstances and in special

cases, a guarantee scheme could apply to the competent authorities for a maximum of

two (2) extensions of the above three-month time limit. No such extension could

exceed three months.816

There are special provisions regulating certain details relating to the payment of

compensation to entitled depositors. Specifically:

(a) The time limit laid down in paragraphs 1 and 2 may not be invoked by a

guarantee scheme in order to deny the benefit of guarantee to any depositor who has

been unable to assert his claim to payment under a guarantee in time.817

(b) The documents relating to the conditions to be fulfilled and the formalities to

be completed to be eligible for a payment under the guarantee referred to in paragraph

1 shall be drawn up in detail in the manner prescribed by national law in the official

language or languages of the member state in which the guaranteed deposit is

located.818

815





234

(c) Notwithstanding the time limit laid down in paragraphs 1 and 2, where a

depositor or any person entitled to or interested in sums held in an account has been

charged with an offence arising out of or in relation to money laundering as defined in

Article 1 of Directive 91/308/EEC of the Council, the guarantee scheme may suspend

any payment pending the judgment of the court.819

(d) Without prejudice to any other rights which they may have under national law,

schemes which make payments under guarantee shall have the right of subrogation to

the rights of depositors in liquidation proceedings for an amount equal to their

guarantee payments.820

5.3.2 The amendments introduced by Directive 2009/14/EC

By virtue of Directive 2009/14/EC, the payout period has been reduced to twenty

(20) working days. This period can be extended for another ten (10) working days only

under exceptional circumstances, in special cases, and upon approval by the competent

authorities. When the payout is triggered by a determination of the competent

authorities that the deposits of a credit institution are unavailable (and not by a ruling

of a judicial authority), this determination must be made at the latest within five (5)

working days (from twenty-one (21) days before), after first becoming satisfied that a

credit institution has failed to repay deposits which are due and payable.

5.4 Payment of supplementary compensation

Member states must follow the guiding principles set out in Annex II of Directive

94/19/EC regarding the payment by the deposit-guarantee scheme of the host member

state of compensations to the depositors of branches of an EU credit institution

participating therein for supplementary cover.821

Specifically, it is stipulated that the

home member state schemes (offering primary cover) and the host member state

schemes (offering supplementary cover) must have established proper bilateral

procedures, taking the following principles into account:822

(a) The compensation payment procedure must be activated as soon as the host

member state scheme is informed by the competent authorities in the home member

state that the deposits of a credit institution have become unavailable.

(b) Before paying the compensation to entitled depositors, the host member state

scheme shall be entitled to confirm their legalisation, following its own procedures.

(c) Ensuring the payment of full compensation to entitled depositors, within a

short period of time, requires close cooperation between the schemes of home and host

member states.

(d) A special agreement is required on how the existence of a depositor’s

counterclaim, which may give rise to set-off under either scheme, will affect the

compensation paid to the depositor by each scheme.

819




822 Ibid, Annex II, points (b)-(d).

235

6. Information requirements

Directive 94/19/EC imposes on member states to ensure credit institutions provide

accurate and adequate information to the public with regard to the terms of operation of

the deposit-guarantee scheme to which they belong. The following specific provisions

are made:

(a) Every EU credit institution shall make available to the public (namely actual

and intending depositors) all information necessary, facilitating the identification of:

• either the officially recognised deposit-guarantee scheme of which they are

members to cover the deposits of both the institution itself and of its branches

established in other member states, or

• any alternative arrangement applicable if not a member of a deposit-guarantee

scheme, according to the above.823

Those credit institutions permanently or provisionally excluded from the obligation to

belong to an officially recognised deposit-guarantee scheme, shall also be obliged to

inform depositors regarding the status they are subjected to.

(b) The (above) information shall be made available to depositors in a readily

comprehensible manner and shall cover all the provisions governing the scheme in

which the credit institution belongs, notably the amount and scope of cover offered by

the deposit-guarantee scheme.824

Depositors shall also be entitled to request the credit

institution to provide information on the conditions for compensation and the

formalities that must be completed to obtain compensation.825

(c) The above information shall be made available in the manner prescribed by

national law, in the official language or languages of the Member State in which the

credit institution or, as the case may be, its branch is established.826

This provision is

particularly significant for informing depositors who are residents of one member state

and transact with branches of EU credit institutions with head offices in other member

states.

In these cases, the amount and/or scope of deposits cover offered by the member

state’s national scheme (which are known to depositors), could differ from the amount

and/or scope of deposits cover offered by the deposit-guarantee scheme of the credit

institution’s home member state which, according to the above, mandatorily covers the

branch’s deposits.

(d) In order to prevent conditions of destabilisation of the banking system and,

predominantly, of shaking the depositors’ confidence, the Directive gave member

states the discretion to establish rules whereby credit institutions would have limited

capacity to use the above information for advertising purposes. Indeed, it recommends

member states to restrict such advertising to a factual reference to the scheme to which

a credit institution belongs.827

823

Ibid, article 9, para. 1, subparagraph a, sentence a.

824 Ibid, article 9, para. 1, subparagraph a, sentences b and c.




237

CHAPTER THREE

The way ahead: towards a “European banking union”

239

A. Issues at hand - a historical overview

1. Provisions of primary European Union law

The launch on 1 January 1999 of the Economic and Monetary Union (hereinafter

‘EMU’) within the European Union (hereinafter the ‘EU’) did not bring about any

changes to the regime on the authorisation and micro-prudential supervision of credit

institutions incorporated in euro area Member States. Contrary to the definition and

implementation of the single monetary and foreign exchange policy, for which

competences became supranational, the European Central Bank (hereinafter ‘ECB’)

has not shifted into a supranational supervisory authority for the financial system, or

even at least one of its sectors, given that relevant competences have remained with

Member States.828

Competent both for the authorisation and micro-prudential supervision of EU credit

institutions are the authorities designated as such by the member states.829

This was

also explicitly provided in Article 105, para. 5 of the Treaty establishing the European

Community (hereinafter 'TEC')830

(carried over verbatim in Article 3.3 of the Statute of

the European System of Central Banks and the ECB),831

stipulating that:

“the ESCB shall contribute to the smooth conduct of policies pursued by the competent

authorities relating to the prudential supervision of credit institutions and the stability

of the financial system‒.832

The relevant competence of the ECB was mainly to submit opinions, in accordance

with Article 105, para. 4, TEC, within the limits and under the conditions set out in Decision 98/415/EC of the Council,833

issued on the basis of Article 105, para. 5.834

The Treaty of Lisbon did not amend these provisions. They are repeated verbatim in

Article 127, para. 5, and 127, para. 4, respectively, of the Treaty on the Functioning

of the European Union (hereinafter ‘TFEU’)835

and continue to be in force.836

828

For a summary of the different proposals with regard to the creation of one or more

supranational financial supervisory authorities in the EU, see Lastra (2006) p. 324-328, and

Hadjiemmanuil (2006), p. 818-82.

829 Directive 2006/48/EC, article 4, point 4. These supervisory authorities have also (extensive

or limited, as the case may be) regulatory powers, as well the power to impose sanctions.

Accordingly, it would not be inappropriate to refer to them as supervisory and regulatory

authorities.

830 OJ C C 325, 24.12.2002, pp. 33 f.

831 Protocol No. 4 TEU and TFEU (OJ C 83, 30.3.2010, pp. 230-250).

832 These provisions were in force since the launch of Stage III of the EMU (Article 116, para. 3,

second indent TEC, with a reference to the provisions of Article 105, para. 5). For a historical

background of their content, see Smits (1997), p. 334-350, Andenas, Gormley,

Hadjiemmanuil and Harden (1997), pp. 386-394, Lastra (2006), p. 216-222, Louis (2009), p.

162-166 (with specific reference to the powers of the ESCB during the recent (2007-2009)

international financial crisis), and Lastra and Louis (2013), pp. 82-94.

833 OJ L 189, 3.7.1998, pp. 42-44.

834 OJ L 189, 3.7.1998, pp. 42-44.

835 OJ C 83, 30.3.2010, pp. 47-199.

836 The provisions of Article 127, para. 5 TFEU do not apply to Member States with a

derogation (Article 139, para. 2, point 3 TFEU, and Statute of the ESCB and the ECB, Article

240

However, the TEC also contained an enabling clause (known as ‘sleeping beauty

clause’ (Article 105, para. 6, now Article 127, para. 6,,TFEU)), according to which:

“The Council, acting by means of regulations in accordance with a special legislative

procedure, may unanimously, and after consulting the European Parliament and the

European Central Bank, confer specific tasks upon the European Central Bank

concerning policies relating to the prudential supervision of credit institutions and

other financial institutions with the exception of insurance undertakings�.837

It is worth noting that:

• any Regulation adopted on the basis of this Article has to be issued by the

Economic and Financial Affairs Council (hereinafter ‘ECOFIN Council’) in

accordance with a special legislative procedure (Article 289, para. 2, TFEU),

in which the European Parliament’s contribution (along with that of the ECB)

is limited to an advisory role, and

• such a Regulation must be unanimously approved by the ECOFIN Council.838

The only component of the bank safety net which has already been Europeanised is the

macro-prudential oversight of the European financial system in the context of the

functioning of the European Systemic Risk Board since 1 January 2011.839

on which

specific tasks have been assigned to the European Central Bank .840

42.1, respectively), including to the United Kingdom (in particular, Protocol No. 15 (OJ C 83,

30.3.2010, pp. 284-286)).

The fact that micro-prudential supervision of credit institutions does not form part of the ECB’s

tasks is one of the two main asymmetries of the EMU. The other is the fact that, while within

the framework of the ‘monetary union’, the Union has exclusive competence on monetary

policy (Article 3, para. 1(c) TFEU), the same does not hold for fiscal policy within the

framework of the ‘economic union’ (ibid., Article 5, para. 1).

837 On the history of this article, see Smits (1997), p. 355-360, Andenas. Gormley,

Hadjiemmanuil and Harden (1997), pp. 402-403, Lastra (2006), Louis (2009), p. 166-168,

and Lastra and Louis (2013), pp. 82-94..

838 The provisions of Article 127, para. 6 TFEU do apply to Member States with a derogation

(Article 139, para. 2, point 3 TFEU, and Statute of the ESCB and the ECB, Article 42.1,

respectively), as well as to the United Kingdom (in particular, Protocol No. 15 (OJ C 83,

30.3.2010, pp. 284-286)). Accordingly, unanimity within the Council must be met by the

representatives of all twenty-seven (27) Member States.

The fact that micro-prudential supervision of credit institutions does not form part of the ECB’s

tasks is one of the two main asymmetries of the EMU. The other is the fact that, while within

the framework of the ‘monetary union’, the Union has exclusive competence on monetary

policy (Article 3, para. 1(c) TFEU), the same does not hold for fiscal policy within the

framework of the ‘economic union’ (ibid., Article 5, para. 1).

839 Regulation (EU) no. 1092/2010 of the European Parliament and of the Council of 24

November 2010 "on European Union macro-prudential oversight of the financial system and

establishing a European Systemic Risk Board", OJ L 331, 15.12.2010, p. 1-11.

840 Council Regulation (EU) No 1096/2010 of 17 November 2010 "conferring specific tasks

upon the European Central Bank concerning the functioning of the European Systemic Risk

Board», OJ L 331, 15.12.2010, p. 162-164.

241

On the other hand, the function of central banks as lenders of last resort lacks a legal

basis (following the principle of ‘constructive ambiguity’). Even within the Eurozone,

this function is considered to be a task for National Central Banks. Indeed,

‘Emergency Liquidity Assistance’ (ELA) is granted:

• by national central banks of the Member States whose currency is the euro,841

• to individual solvent credit institutions facing temporary liquidity problems842

,

and

• against collateral that is not eligible for the ECB’s monetary policy operations.

ELA has been activated with regard to Irish and Greek credit institutions during the

current Eurozone fiscal crisis (2012-2013).

2. The de Larosière Report (2009)

The academic debate on the creation of supranational supervisory authorities for the

European financial system can be basically traced back to the mid-2000s.843

At the

political level, this prospect was essentially put forward, for the first time, in 2009 by

the de Larosière Report,844

following the onset of the recent international financial

crisis.845

This report concluded that contrary to macro-prudential oversight, micro-

prudential supervision of the European financial system should not be assigned to the

ECB.846

On the contrary, it proposed the creation of a European System of Financial

Supervisors, which is operational since 1 January 2011, as 'European System of

Financial Supervision' (hereinafter 'ESFS'), and consists of:

841

The Governing Council of the ECB is allowed to prohibit this, if it is in conflict with the

objectives and the tasks of the ECB, according to Article 14.4 of the Statute of the ESCB and

the ECB.

842 The ECB remains responsible for providing liquidity to the financial system as a whole

through its monetary policy operations.

843 See, merely by means of indication, Lastra (2006), pp. 324-328 (with extensive further

bibliographical references).

844 The High-Level Group on Financial Supervision in the EU, Chaired by Jacques de Larosière,

Report, Brussels, 25 February 2009. This Report is available at:

http://ec.europa.eu/commission_barroso/president/pdf/statement_ 20090225_ en.pdf

(hereinafter the 'De Lariosière Report').

845 On this crisis, see indicatively Gortsos (2012b), pp. 127-129, with extensive further

references.

846 De Larosière Report (2009), para. 146. This report (Chapter III, Section V “Reviewing and

possibly strengthening the European System of Financial Supervision”) also includes a

proposal on the possibility of moving towards a system which would rely only on two

Authorities – apart from the ECB – mainly following the ‘functional approach’ pattern in

relation to the institutional set-up of the financial system’s micro-prudential supervision

(currently in use in the Netherlands and, as of April 2013, in the United Kingdom).

As regards this approach, as well as its alternatives, i.e. the ‘sectoral approach’ and the ‘full

integration approach’ for supervisory authorities of the financial system, see Lastra (2006), pp.

324-328, Group of Thirty (2008), Seelig and Novoa (2009), and Central Bank Governance Group (2011).

242

• three ‘European Supervisory Authorities’, which are nonetheless mainly

regulatory authorities and only exercise supervisory competencies in

exceptional circumstances,847

and

• the above-mentioned European Systemic Risk Board (hereinafter ‘ESRB’),

responsible for the macro-prudential oversight of the financial system within

the EU (rather than merely the euro area), with regard to which ‘specific tasks’

have been assigned to the ECB according to the above-mentioned Article 127, para. 6 TFEU.

As a result, the creation of the ESFS did not, literally speaking, lead to the creation of

supervisory authorities of the financial system at EU level.

3. The impact of the current fiscal crisis on the euro area

3.1 Towards a ‘European Banking Union’

The current fiscal crisis in the euro area, which became manifest in 2010,848

triggered –

just a year following the publication of the de Larosière Report – a new debate on the

need to set up supranational supervisory authorities for the European financial system.

At the current juncture, the debate has taken on a broader focus, with a view to creating

a ‘European Banking Union’,849

which would lead to setting up at European (Union)

level a fully Europeanised ‘bank safety net’850

consisting of:

• a single supervisory mechanism exclusively for the banking sector (that is, not

for the other two sectors of the financial system),

• a single resolution authority for unviable credit institutions, and a single

resolution fund to cover any capitalisation needs or funding gaps, provided that

a decision is made in favour of the resolution of unviable credit institutions,851

• a single deposit guarantee scheme, and

• a ‘single rulebook’'852

that will cover all the above aspects, on the basis of a

'total harmonisation approach''.853

847

On these Authorities, see below under B.5.

848 For an evaluation of this crisis, see Eichengreen, Feldmann, Liebman, von Hagen and

Wyplosz (2011), pp. 47-64, and Stephanou (2012).

849 For arguments in favour or against setting up a European banking union, see (in

chronological order) Carmassi, Di Noia and Micossi (2012), Pisani-Ferry, Sapir, Véron and

Wolff (2012), Constâncio (2012), and Pisani-Ferry and Wolff (2012).

850 For an overview of the components of the ‘bank safety net’, aimed at contributing to the

stability of the banking system, see Gortsos (2012b), pp. 90-106.

851 If, in the context of resolution, the decision is made to have recourse to the tool of a ‘bridge

bank’, this bank has to be capitalised. If the tool of ‘asset transfer’ to an existing credit

institution is preferred, a ‘funding gap’ emerges as a result of the mismatch between assets and

liabilities (the value of the latter is greater) transferred onto the existing credit institution.

852 The term ‘single rulebook’ is commonly used, from a stricto sensu perspective, to refer to

the total harmonisation of the rules pertaining to the micro- and macro-prudential regulation

of credit institutions, adopted at three levels:

• at ‘Level 1’ by the European Parliament and the (ECOFIN) Council in the form of

Regulations and Directives,

243

To the author's view the only elements of the bank safety net on which provisions are

not yet in hand are those on the reorganisation and winding-up of credit institutions. It

is also questionable whether the ELA for credit institutions directly to be supervised by

the ECB will remain with the national central banks in the Eurozone, as currently.

3.2 The political decisions of 29 June 2012 and the response of the European

institutions

(a) At the 29 June 2012 Euro Area Summit, the euro area Heads of State or

Government asked the European Commission to present specific legislative proposals

on the establishment of a single supervisory mechanism over credit institutions, in the

context of a wider political initiative on the creation of a ‘European Banking Union’.

More particularly, the Statement of this Summit reads:

“We affirm that it is imperative to break the vicious circle between banks and

sovereigns.”854

The European Summit which was held later on the same day decided855

to invite the

European Commission to develop, in close collaboration with the President of the

Commission, the President of the Eurogroup and the President of the ECB, a specific

and time-bound road map for the achievement of a genuine Economic and Monetary

Union (in accordance with the relevant report tabled on 26 June of the same year by the

President of the European Council),856

one of the four elements of which was the

creation of a European banking union.857

(b) In response to this demand, the Commission issued on 12 September 2012:

• an Announcement regarding “A roadmap for a Banking Union”,858

• a proposal for a Council Regulation “conferring specific tasks on the

European Central Bank concerning policies relating to the prudential

supervision of credit institutions”,859

and

• at ‘Level 2’ by the European Commission in the form of regulatory and implementing

technical standards, and

• at ‘Level 3’ by the European Banking Authority in the form of recommendations and

guidelines (see on this Gortsos (2011)).

From a lato sensu perspective, however, the single rulebook should also refer to the full

harmonisation of rules pertaining to the resolution of credit institutions and the operation of the

single deposit guarantee scheme.

853 To the author's opinion, the term 'total harmonisation' denotes a combination of full (in terms

of scope) and maximum (in terms of level) harmonisation.

854 Euro Area Summit Statement, 29 June 2012, first paragraph, first sentence.

855 European Council Conclusions, 28/29 June 2012, EUCO 76/12, paragraph 4(b).

856 Van Rompuy Report (2012): Towards a Genuine Economic and Monetary Union, EUCO

120/12. The final relevant report was submitted in December 2012.

857 Ibid., Section II.1.

858 COM(2012) 510.

859 COM(2012) 511.

244

• a proposal for a Regulation of the European Parliament and of the Council

“amending Regulation (EU) No 1093/2010 establishing the European

Supervisory Authority (European Banking Authority) as regards its

interaction with Council Regulation (EU) No…/… conferring specific tasks on

the European Central Bank concerning policies relating to the prudential

supervision of credit institutions”.860

In the above-mentioned Announcement, the Commission called on the European

Parliament and the (ECOFIN) Council to proceed with the following:861

(i) Firstly, to reach agreement by end-2012 on the two (2) above-mentioned

Regulation proposals, as a first step in the creation of a European Banking Union.

This could play a decisive role in assigning directly to the European Stability

Mechanism (ESM)862

the recapitalisation of credit institutions exposed to insolvency

and, consequently, reducing the public debt of Member States in which such credit

institutions are incorporated. This prospect is explicitly mentioned in the above-

mentioned 29 June 2012 Euro Area Summit Statement:

“When an effective single supervisory mechanism is established, involving the ECB,

for banks in the euro area the ESM could, following a regular decision, have the

possibility to recapitalize banks directly.”863

(ii) Secondly, to approve, also by end-2012, the proposals for the Regulations and

Directives (of the European Parliament and of the Council) on:

• amending the applicable framework on micro-prudential regulatory

intervention in the banking system,864

860

COM(2012) 512.

861 COM(2012) 510, section 4.

862 The ESM, based on an Intergovernmental Treaty signed by the seventeen (17) euro area

Member States, has fully replaced the European Financial Stability Mechanism, fully operative

since October 2012. For more details on both facilities, see Stephanou (2012), pp. 17-20.

863 Euro Area Summit Statement, 29 June 2012, first paragraph, fourth sentence. The

underlying premise is to avoid the transfer of consequences of improper national supervisory

practices onto the European level and, consequently, to the taxpayers of other Member States.

It should be noted, however, that the Finance Ministers of certain Member States (in particular,

Germany, the Netherlands and Finland) argued that “direct bank recapitalisation by the ESM

should take place based on an approach that adheres to the basic order of first using private

capital, then national public capital and only as a last resort the ESM” (Joint Statement of the

Ministers of Finance of Germany, the Netherlands and Finland, 25 September 2012).

864 This regulatory framework is based on two legal acts of the European Parliament and of the

Council:

(a) Directive 2006/48/EC “relating to the taking-up and pursuit of the business of credit

institutions (recast)” (OJ L 177, 30.6.2006, pp. 1-200) (also known as the ‘Capital

Requirements Directive’ or ‘CRD’), as amended by:

• Directive 2007/44/EC (OJ L 247, 21.9.2007, pp. 1-16),




245

• setting up a new framework on macro-prudential regulatory intervention in

the banking system, reflecting (in both cases) the relevant proposals of the

Basel Committee on Banking Supervision (also known as the ‘Basel III

framework’),865

• establishing pan-European rules on the recovery and resolution of ailing credit

institutions (and investment firms),866

and

• amending the existing regulatory framework867

on deposit guarantee

schemes.868

(iii) Finally, to examine, in the medium term, how to shape the conditions for the

establishment of:

• a single resolution authority for unviable credit institutions,

• a single resolution fund for covering funding gaps, provided that a decision is

made in favour of the resolution of unviable credit institutions, and

• a single deposit guarantee scheme,

enabling the completion of the European Banking Union.

(c) On the basis of the Commission’s proposals, the Council and the European

Council have duly worked towards finalising the relevant institutional framework. On

21 March 2013, compromise texts on both Regulations were presented by the three

corresponding European institutions in the ‘trialogue’ phase.

• Directive 2009/111/EC (OJ L 302, 17.11.2009, pp. 97-119, also known as ‘CRD II’),

and

• Directive 2010/76/EC (OJ L 329, 14.12.2010, pp. 3-35, also known as ‘CRD III’).

(b) Directive 2006/49/EC “on the capital adequacy of investment firms and credit

institutions (recast)” (OJ L 177, 30.6.2006, pp. 201-255), as applicable.

865 COM(2011) 452 final, and COM(2011) 453 final. More particularly:

• the proposal for a Regulation of the European Parliament and of the Council “on

prudential requirements for credit institutions and investment firms” (also known as

‘Capital Requirements Regulation’, hereinafter ‘CRR’), and

• the proposal for a Directive of the European Parliament and of the Council “on the

access to the activity of credit institutions and the prudential supervision of credit

institutions and investment firms and amending Directive 2002/87/EC of the European

Parliament and of the Council on the supplementary supervision of credit institutions,

insurance undertakings and investment firms in a financial conglomerate” (hereinafter

‘CRD IV’).

For a detailed overview of the rules included in the Basel III regulatory framework, see Gortsos

(2012b), pp. 264-281.

866 COM(2012) 280.

867 Directive 94/19/EC of the European Parliament and of the Council (OJ L 135, 31.5.1994, pp.

5-14), as amended by Directive 2009/14/EC (OJ L 68, 13.3.2009, pp. 3-7).

868 COM(2010) 369 final. For more details on the currently applicable European banking law,

see Tridimas (2011), and Gortsos (2012a).

246

4. The subject of the present section

The subject of the present section of this study is to provide a systematic overview (and,

partly also, analysis) of the main provisions of the two above-mentioned Regulation

proposals (based on these compromise texts), expected to be adopted in the coming

months, i.e.:

• a (longer) proposal for a Regulation of the Council on “conferring specific

tasks on the European Central Bank concerning policies relating to the

prudential supervision of credit institutions‒ (hereinafter ‘Council Regulation

proposal’), and

• a (shorter) proposal for a Regulation of the European Parliament and of the

Council “amending Regulation (EU) No. 1093/2010 establishing a European

Supervisory Authority (European Banking Authority) regarding its interaction

with Council Regulation No.../… conferring specific tasks on the European

Central Bank concerning policies relating to the prudential supervision of

credit institutions‒ (hereinafter ‘European Parliament and Council

Regulation proposal’).

247

TABLE 12

Towards a European Banking Union: Elements of change and continuity

(italics denote new elements)

Financial policy instruments Authorities/rules

1. Authorisation and micro-prudential

supervision of credit institutions • ‘Single supervisory mechanism’: European

Central Bank (Article 127, para. 6 TFEU), and

national supervisory authorities

• Single rulebook (adopted by the European

Parliament and the ECOFIN Council

(Regulations), the European Commission

(technical standards), and the EBA (guidelines

and recommendations))

2. Micro- and macro-prudential regulation

of credit institutions

Single rulebook

3. Macro-prudential oversight of the

financial system

European Systemic Risk Board

4. Reorganisation and winding-up of credit

institutions

National authorities and mutual recognition between

Member States

5. Resolution of credit institutions • Single resolution authority

• Single rulebook

• Single European resolution fund

6. Operation of deposit guarantee schemes • Single European deposit guarantee system

• Single rulebook

7. Last resort lending No specific legal provision – de facto: national central

banks (Emergency Liquidity Assistance (ELA) in the

euro area)

8. Provision of subsidies to systemically

important credit institutions (recapitalisation

in the context of a ‘taxpayers’ solution’)

Potentially the ESM (conditioned on the provisions

pertaining to resolution)

248

B. The main elements of the proposed institutional framework

1. General overview

The new institutional framework, as set out in the provisions of the two above-

mentioned Regulation proposals, includes five (5) main elements, which reflect

specific policy choices:

• conferring specific tasks on the ECB concerning the micro-prudential

supervision of certain financial firms, in transfer from national supervisory

authorities (see below, under 2),

• specifying the financial firms, mainly credit institutions, with regard to which

these specific tasks will be conferred on the ECB (under 3),

• establishing a ‘single supervisory mechanism’ in relation to the exercise of the

specific tasks conferred on the ECB (under 4),

• incorporating this ‘single supervisory mechanism’ in the European System of

Financial Supervision (ESFS), without, in principle, touching upon the current

tasks of the newly (2011) established European Banking Authority (under 5),

and

• creating ‘Chinese walls’ within the ECB, in order to ensure the effective

separation of its monetary and other tasks from its (future) supervisory tasks

(under 6).

In addition, the Council Regulation lays down three (3) 'cooperation principles' for the

ECB:

(a) The ECB will have to co-operate closely with the authorities empowered to

resolve credit institutions, including in the preparation of resolution plans.869

(b) Subject to Articles 1, 4 and 5, the ECB wil have to co-operate closely with any

public financial assistance facility including the European Financial Stability Facility

(EFSF) and the European Stability Mechanism (ESM), in particular where such a

facility has granted or is likely to grant, direct or indirect financial assistance to a credit

institution which is subject to Article 4.870

(c) The ECB and the national competent authorities of non-participating Member

States will have to conclude a Memorandum of Understanding (to be reviewed on a

regular basis) describing, in general terms, how they will cooperate with one another in

the performance of their supervisory tasks under European banking law in relation to

the institutions defined in Article 2.871

The ECB will also have to conclude Memoranda of Understanding with the national

competent authority of each non-participating Member State that is home to at least

one global systemically important institution, as defined in Union law. Each

Memorandum will have to be reviewed on a regular basis and be published, subject to

appropriate treatment of confidential information.872

869 Council Regulation proposal, Article 3, para. 3.


871 Ibid., Article 3, para. 4a, first sub-para.

872 Ibid., Article 3, para. 4, second and third sub-paras..

249

2. Deciding on the actor: conferment on the European Central Bank of specific tasks relating to the micro-prudential supervision of certain financial firms

First of all, the Council Regulation proposal includes a ‘vertical’ transfer, from the

Member States to the European Union, of specific tasks concerning policies relating to

the micro-prudential supervision of credit institutions,

“with a view to contributing to the safety and soundness of credit institutions and the

stability of the financial system within the EU and each Member State, with full regard

and duty of care for the unity and integrity of the internal market based on equal

treatment of credit institutions with a view to preventing regulatory arbitrage.”873

Among various alternative options that might have been implemented, the Commission

opted for conferring the relevant ‘specific tasks’ on the ECB.874

As a result, the legal

basis chosen for the Council Regulation was Article 127, para. 6, TFEU.875

Accordingly, once the Council Regulation is adopted, the scope of the ECB’s tasks will

be significantly broadened, since its tasks will consist of the following:

• the main tasks set out in Article 127, para. 2, TFEU, most notably the

definition and implementation of the monetary policy of the Union, as the core

of the European System of Central Banks (hereinafter ‘ESCB’),

• other duties set out in the TFEU (including those under Article 128 TFEU

concerning the issuance of euro banknotes and coins),

• the specific tasks assigned to it according to Council Regulation 1096/2010

(as already mentioned based on Article 127, para. 6 TFEU) concerning the

macro-prudential oversight of the European financial system in the context of

the functioning of the European Systemic Risk Board, which is one of the

components of the ESFS, and

• the specific tasks to be conferred upon it according to the Council Regulation

proposal concerning issues of micro-prudential supervision of certain financial

system participants (the proposed new category of tasks, also based on Article

127, para. 6, TFEU).

873 Council Regulation proposal, Article 1, first sub-papa., first sentence.

874 Ibid.

The alternative options were:

• either assigning micro-prudential supervision to one or more of the European

Supervisory Authorities-members of the ESFS, or

• creating a new pan-European supervisory authority.

875 In reality, the European Commission did not have any choice but to opt for this particular

legal basis, since the Euro Area Summit of 29 June 2012 had decided that:

“the Commission will present proposals on the basis of Article 127(6) for a single supervisory

mechanism shortly” (ibid., first point, second sentence).

This decision was also confirmed by the European Council of the same day (European Council Conclusions, 28/29 June 2012, paragraph 4(b), in finem).

250

TABLE 13

ECB's tasks following the adoption of the Council Regulation proposal

Category of ECB

tasks

Legal basis Implementation

in euro area

Member States

Implementation

in Member States

with a derogation

1. Basic tasks Article 127, para.

2 TFEU

Yes No

2. Other tasks Several TFEU

articles

Yes As a rule, no

3. Specific tasks on

macro-prudential

supervision over the

European financial

system

Regulation

1096/2010 of the

Council (based on

Art. 127, para. 6,

of the TFEU)

Yes Yes

4. Specific tasks on

micro-prudential

supervision over

credit institutions

(new)

Council

Regulation under

preparation

(based on Article

127, para. 6 of the

TFEU)

Yes Under the

conditions of the

‘close

cooperation’

procedure

251

3. Setting the perimeter: specific tasks conferred on the European Central Bank exclusively in relation to the micro-prudential supervision of certain credit

institutions

(a) The conferment upon the ECB of specific tasks in relation to the micro-

prudential supervision of financial firms is proposed to cover exclusively:

• credit institutions,876

and

• two categories of holding companies:

� ‘financial holding companies’, in the context of the conduct of

consolidated supervision of banking groups,877

and

� ‘mixed financial holding companies’, in the context of the conduct of

supplementary supervision on financial conglomerates878

including credit

institutions, respectively.879

Excluded are explicitly the credit institutions referred to in Article 2 of the Capital

Requirements Directive (2006/48/EC), which are excluded from its field of

application.880

By contrast, micro-prudential supervision will remain an exclusive national

competence in relation to the following types of financial firms, which are regulated

under European financial law:881

• financial institutions (e.g., leasing, factoring and credit companies),882

including, since 2009, electronic money institutions,883

• payment institutions,884

876

Council Regulation proposal, Article 2, point 3, with a reference to Article 4, point 1, of

Directive 2006/48/EC.

877 Ibid., Article 2, point 4, with a reference to Article 4, point 19, of Directive 2006/48/EC.

878 Ibid., Article 2, point 6, with a reference to Article 2, point 5, of Directive 2002/87/EC of

the European Parliament and of the Council “firms in a financial conglomerate and amending

Council Directives 73/239/EEC, 79/267/EEC, 92/49/EEC, 92/96/EEC, 93/6/EEC and

93/22/EEC, and Directives 98/78/EC and 2000/12/EC of the European Parliament and of the

Council” (OJ L 35, 11.2.2003, pp. 1-27).

879 According to Article 127, para. 6 TFEU, the Council may confer specific tasks upon the

ECB relating to the micro-prudential supervision of other types of financial institutions, as well.

It is worth mentioning that the wording of Article 127, para. 6 “credit institutions and other

financial institutions” is inconsistent with the provisions of existing EU banking law (Directive

2006/48/EC), since the definition of financial institutions is different from that of credit

institutions.

880 Council Regulation proposal, Article 1, second sub-para., first sentence.

881 Ibid., Article 2, point 5, with a reference to Article 2, point 15, of Directive 2002/87/EC.

882 For a detailed definition of the term ‘financial institution’ under EU financial law, see

Article 4, para. 5 of Directive 2006/48/EC.

883 Electronic money institutions were included among financial institutions (although initially

falling under credit institutions) by means of Article 20 of Directive 2009/110/EC.

884 For a detailed definition of the term ‘payment institution’ under EU financial law, see Article

4, para. 4 of Directive 2007/64/EC of the European Parliament and of the Council (OJ L 319,

5.12.2007, pp. 1-35).

252

• investment firms,885

UCITS management companies,886

and alternative

investment fund managers (mainly hedge funds),887

• central counterparties,888

as well as

• insurance and reinsurance undertakings, the micro-prudential supervision of

which could not have been conferred on the ECB without prior amendment of

Article 127, para. 6 TFEU, as mentioned above.

(b) The scope of the relevant provisions covers mainly (but not exclusively) credit

institutions incorporated in euro area Member States (hereinafter ‘participating

Member States’).889

Specific provisions apply also to:

• branches in participating Member States of credit institutions incorporated in

non-euro participating Member States (i.e., Member States with a derogation,

see under C 1.2 below),

• credit institutions incorporated in non-euro participating Member States which

have opted for this regime, i.e., for specific (supervisory) tasks to be performed

by the ECB over their credit institutions according to the so-called 'close

cooperation' procedure (under C 1.3).

(c) The Commission’s proposal was to submit, on a gradual basis, all credit

institutions incorporated in participating Member States under the regime of the ECB’s

specific tasks. Nevertheless, certain Member States, including Germany, the

Netherlands and Finland, voiced their opposition to all credit institutions incorporated

within their jurisdiction being subjected to the ECB’s micro-prudential supervision,

pointing out that the micro-prudential supervision of smaller credit institutions, mainly

those without cross-border activity doing business exclusively at local level (e.g.,

Sparkassen in Germany), should remain with national authorities.

Accordingly, Article 5 of the Council Regulation proposal (as in the March 2013

compromise text) introduces a ‘two-tier system’ with regard to the distribution of

powers within the Single Supervisory Mechanism:

(ca) The ECB will be responsible for the micro-prudential supervision of

‘significant’ credit institutions, financial holding companies or mixed financial holding

companies. In particular:

(i) Unless justified by particular circumstances to be specified in the methodology,

as 'significant' will be considered those meeting any one of the following conditions:

885

For a detailed definition of the term ‘investment firm’ under EU financial law, see Article 4,

para. 1, point 1 of Directive 2004/39/EC of the European Parliament and of the Council (OJ L

145, 30.4.2004, pp. 1-44).

886 For a detailed definition of the term ‘UCITS management company’ under EU financial law,

see Article 2, para. 1, point (b) of Directive 2009/65/EC of the European Parliament and of the

Council (OJ L 302, 19.11.2009, pp. 32-96).

887 For a detailed definition of the term ‘alternative investment fund manager’ under EU

financial law, see Article 4, para. 1, point (b) of Directive 2011/61/EU of the European

Parliament and of the Council (OJ L 174, 1.7.2011, pp. 1-73).

888 As explicitly mentioned in the Council Regulation proposal, Article 1, second sub-para,

last sentence.

889 Ibid., Article 2, point 1.

253

• the total value of their assets exceeds €30 billion,

• the ratio of their total assets over the GDP of the participating Member State

of establishment exceeds 20%, unless the total value of its assets is below €5

billion, or

• following a notification by their national competent authority that it considers

such institutions of significant relevance with regard to the domestic economy,

the ECB takes a Decision confirming such significance, following a

comprehensive assessment by the ECB, including a balance-sheet assessment,

of these credit institutions.890

(ii) The ECB may also, on its own initiative, consider an institution to be of

significant relevance where it has established banking subsidiaries in more than one

participating Member States and its cross-border assets or liabilities represent a

significant part of its total assets or liabilities subject to the conditions laid down in the

methodology.891

(iii) Those for which public financial assistance has been requested or received

directly from the EFSF or the ESM.892

(iv) In any case, the three (3) most significant credit institutions in each

participating Member State, unless justified by particular circumstances.893

(v) Finally, when necessary to ensure consistent application of high supervisory

standards, the ECB may at any time, on its own initiative after consulting with national

authorities or upon request by a national competent authority, decide to exercise

directly itself all the relevant powers for one or more other credit institutions, including

in the case where financial assistance has been requested or received indirectly from

the EFSF or the ESM.894

In principle, the ECB will assume its specific tasks 12 months after the entry into force

of the Council Regulation (presumably in September 2013).895

(cb) The ‘less significant’ credit institutions, financial holding companies and

mixed financial holding companies will continue to be supervised directly by their

national authorities, subject to the ECB’s Regulations, Guidelines and general

instructions, within the framework of the ‘single supervisory mechanism’.896

890

Ibid., Article 5, para. 4, third sub-para.

891 Ibid., Article 5, para. 4, fourth sub-para.

892 Ibid., Article 5, para. 4, fifth sub-para.

893 Ibid., Article 5, para. 4, sixth sub-para.

894 Ibid., Article 5, para. 5(b).

895 Ibid., Article 27, para. 2, first sentence.

896 Ibid., Article 5, para. 5(a), first sub-para.

254

TABLE 14

Setting the perimeter: specific tasks conferred on the European Central Bank

exclusively in relation to the micro-prudential supervision of certain credit institutions

A. The perimeter in respect of different types of financial firms

Included Excluded

• credit institutions

• ‘financial holding companies’, in the

context of the conduct of

consolidated supervision of banking

groups,

• ‘mixed financial holding companies’,

in the context of the conduct of

supplementary supervision on

financial conglomerates including

credit institutions

• financial institutions (e.g., leasing,

factoring and credit companies), including,

since 2009, electronic money institutions

and payment institutions

• investment firms, UCITS management

companies, and alternative investment fund

managers (mainly hedge funds), as well as

• insurance and reinsurance undertakings

B. The perimeter in respect of Member States

Euro area Member States Non-participating Member States

Yes Specific rules on:

• branches in participating Member States of

credit institutions incorporated in non-

participating Member States

• credit institutions incorporated in non-

participating Member States which have

opted for this regime, i.e. for specific

(supervisory) tasks to be performed by the

ECB over their credit institutions

255

TABLE 14 (continued)

Setting the perimeter: specific tasks conferred on the European Central Bank

exclusively in relation to the micro-prudential supervision of certain credit institutions

C. The perimeter in respect of specific credit institutions

1. In principle: those that meet any one of the following conditions:

• the total value of their assets exceeds €30 billion,

• the ratio of their total assets over the GDP of the participating Member State of

establishment exceeds 20%, unless the total value of their assets is below €5 billion , or

• following a notification by their national competent authority that it considers such

institutions of significant relevance with regard to the domestic economy, the ECB takes

a Decision confirming such significance following a comprehensive assessment by the

ECB, including a balance-sheet assessment, of these credit institutions.

2. The ECB may also, on its own initiative, consider an institution to be of significant relevance

where it has established banking subsidiaries in more than one participating Member States and

its cross-border assets or liabilities represent a significant part of its total assets or liabilities

subject to the conditions laid down in the methodology.

3. Those for which public financial assistance has been requested or received directly from the

EFSF or the ESM.

4. In any case, the three most significant credit institutions in each Member State, unless justified

by particular circumstances.

5. When necessary to ensure consistent application of high supervisory standards, the ECB may at

any time, on its own initiative after consulting with national authorities or upon request by a

national competent authority, decide to exercise directly itself all the relevant powers for one or

more other credit institutions, including in the case where financial assistance has been requested

or received indirectly from the EFSF or the ESM .

256

4. Establishment of a ‘single supervisory mechanism’ in relation to the performance of the specific tasks conferred on the ECB

The specific tasks to be conferred on the ECB will be carried out within the framework

of a ‘single supervisory mechanism’ (hereinafter ‘SSM’). This mechanism, not an

authority and with no legal personality, will consist of two (2) pillars:897

• the ECB, and

• the competent national supervisory authorities, not necessarily national central

banks, given that in many euro area Member States, micro-prudential

supervision has been assigned to independent national authorities (other than

the central bank) (hereinafter ‘national competent authorities’).898

As a result, these tasks will be carried out based on the ‘decentralisation principle’,

according to which national competent authorities will be the ECB’s ‘executive arm’,

exactly as in the case of euro area Member State central banks in the context of the

implementation (and not definition of course) of the single monetary policy (for more

detail see below, under C 2).899

The national competent authorities will carry out day-

to-day inspections, while all tasks not conferred on the ECB will remain with them.

In addition, the ECB will work in coordination with national competent authorities on

the micro-prudential supervision of the less significant credit institutions (as mentioned

above, under B 3).

5. The ‘single supervisory mechanism’ as part of the European System of

Financial Supervision (ESFS)

(a) The provisions of the two above-mentioned Regulation proposals are aimed at

incorporating the SSM in the ESFS, which is in operation since 1 January 2011.900

In

this respect:

• the SSM will become responsible for the micro-prudential supervision of

credit institutions,

• the ESRB will continue to be responsible for the macro-prudential oversight

of the European financial system, including the ECB (to which specific tasks

have been assigned as already mentioned), and

• the ‘European Banking Authority’ (hereinafter ‘ΕΒΑ’) established by

Regulation (EU) 1093/2010 of the European Parliament and of the Council901

will continue to be responsible for contributing to the evolution of European

banking law, as well as discharging the specific supervisory tasks conferred

on it, in accordance with the provisions of its statutory Regulation.

897

Ibid., Article 2, point 6a, and Article 5, para. 1, first sentence.

898 Ibid., Article 2, point 2.

899 Statute of the ESCB and of the ECB, Article 14.3, point (a).

900 On the composition of the ESFS, see Gortsos (2011), pp. 10-14.


November 2010 “establishing a European Supervisory Authority (European Banking

Authority), amending Decision No 716/2009/EC and repealing Commission Decision

2009/78/EC”, OJ L 331, 15.12.2010, pp. 12-47.

257

Within this context, the ECB is called upon to cooperate closely with the three

‘European Supervisory Authorities’, i.e.:

• the EBA,

• the European Insurance and Occupational Pensions Authority (hereinafter

‘EIOPA’) established by Regulation (EU) 1094/2010 of the European

Parliament and of the Council,902

and

• the European Securities and Markets Authority (hereinafter ‘ESMA’)

established by Regulation (EU) 1095/2010 of the European Parliament and

of the Council.903

It is also called upon to cooperate closely with the ESRB and the other authorities

which form part of the ESFS.904

Where necessary, the ECB will have to enter into Memoranda of Understanding with

competent authorities of Member States responsible for markets in financial

instruments. Such Memoranda must be made available to the European Parliament,

the Council and the competent authorities of all Member States.905

For the purposes of this Regulation, the ECB will participate in the Board of

Supervisors of EBA, under the conditions set out in Article 40 of Regulation 1093/2010.

906 It is also provided that the ECB will have to carry out its tasks under this

Regulation without prejudice to the competence and the tasks of EBA, ESMA, EIOPA

and the ESRB.907

(b) In accordance with the proposed regulatory framework, the ECB will not take

on the EBA’s tasks (nor on the tasks of the other components of the ESFS). According

to Article 3, para. 2a:

"The ECB shall carry out its tasks in accordance with this Regulation and without

prejudice to the competence and the tasks of EBA, ESMA, EIOPA and the ESRB".

902

Regulation (EU) No 1094/2010 of the European Parliament and of the Council of 24

November 2010 “establishing a European Supervisory Authority (European Insurance and

Occupational Pensions Authority), amending Decision 716/2009/EC and repealing Commission

Decision 2009/79/EC”, OJ L 331, 15.12.2010, pp. 48-83.


November 2010 “establishing a European Supervisory Authority (European Securities and

Markets Authority), amending Decision No 716/2009/EC and repealing Commission Decision

2009/77/EC”, OJ L 331, 15.12.2010, pp. 84-119.

904 Council Regulation proposal, Article 3, para. 1, first sub-para.

905 Ibid., Article 3, para. 1, second sub-para.


907 Ibid., Article 3, para. 2a.

258

It was, however, deemed necessary to introduce changes to certain provisions of

Regulation 1093/2010 in order to bring EBA’s functions (basically a regulatory, rather

than supervisory, authority)908

in line with the ECB’s function as a (future) supervisory

authority over credit institutions.909

In this context, the proposal for a Regulation of the

European Parliament and of the Council includes amendments to Regulation

1093/2010 on several aspects, such as:

(i) the reassessment of EBA’s concrete tasks,910

(ii) EBA’s powers as regards action in emergency situations and mediation

between competent authorities in cross-border situations,911

and its powers to

collect information from its national competent authorities,912

(iii) EBA’s Board of Supervisors, and in particular:

• the composition of its two ‘independent panels’, their voting modalities

and rules of procedure,913

• the independence of the Board of Supervisors’ members,914

and

• the voting modalities in the Board of Supervisors,915

as well as

(iv) the term of office of the members of EBA’s Management Board.916

908

This is why the author is of the view that these are ‘quasi’-supervisory authorities (Gortsos

(2011), pp. 15-16). To put this into perspective, there are two innovative elements which point

to a tendency for a gradual, albeit substantial, further strengthening of these Authorities’ powers

vis-à-vis national competent authorities:

(a) First of all, a partial reversal can be seen in the EBA’s (as well as the other

Authorities’) right to replace national competent authorities, if the latter fail to comply with the

European Commission’s opinions or EBA’s decisions, as laid down in Articles 17-19 of

Regulation (EU) No 1093/2010.

(b) Furthermore, the supervision of credit rating agencies operating in the European Union

has been specifically (and directly) assigned to ESMA, in accordance with Regulation (EU) No

1060/2009 of the European Parliament and of the Council ‘on credit rating agencies’ (OJ L 302,

17.11. 2009, pp. 1-31), as modified by Regulation (EU) No 513/2011 (OJ L 145, 31.5.2011, pp.

30-56) (ibid., p. 16-17).

909 The legal basis of this Regulation proposal is Article 114 TFEU, which is also the legal

basis of Regulation (EU) No 1093/2010.

910 European Parliament and Council Regulation proposal, Article 1, point 1, amending

Article 1 of Regulation (EU) No1093/2010.

911 Ibid., Article 1, points 2 and 3, amending Article 18(1) of Regulation 1093/2010, and adding

a new paragraph (3a) to Articles 18 and 19.

912 Ibid., Article 1, point 4 (amending Article 35, paras. 1-3 of Regulation (EU), No 1093/2010).

913 Ibid., Article 1, point 5 (amending Article 41 of Regulation (EU No 1093/2010).

914 Ibid., Article 1, point 6 (new paragraph added to Article 42 of Regulation (EU) No

1093/2010).

915 Ibid., Article 1, point 7, amending Article 44, para. 1 of Regulation (EU) No 1093/2010 and

adding a new paragraph 4(a).

916 Ibid., Article , para. 8 (amending Article 45, para. 1, of Regulation (EU No 1093/2010).

259

Furthermore, in view of future developments, the Commission has to submit, by 1

January 2016, a report on the suitability of the voting modalities of EBA’s Board of

Supervisors, the composition of the above-mentioned independent panels and the

composition of EBA’s Management Board.917

(c) It should also be pointed out that Article 7 of the Council Regulation proposal stipulates that, without prejudice to the respective competences of the

Member States and the other Union institutions and bodies, including the EBA, in

relation to the tasks conferred on the ECB by this Regulation, the ECB may develop

contacts and enter into administrative arrangements with:

• supervisory authorities,

• international organisations. and

• the administrations of third countries,

always subject to appropriate coordination with EBA.918

Those arrangements will not create legal obligations in respect of the EU and its

Member States.919

6. Creation of ‘Chinese walls’

In the author’s view, the creation of ‘Chinese walls’ within the ECB is an essential

element in order to ensure the effective separation of its monetary and other tasks from

its (future) supervisory tasks.

It is worth noting that although micro-prudential supervision over credit institutions

has historically been the main competence of central banks in many countries (with the

exception of a few central European states), in the course of the last twenty years, an

ever increasing number of countries across the world have assigned this supervision to

independent authorities other than the central bank.920

This was based on the rationale that the exercise of supervisory powers by the central

bank may give rise to conflicts of interest as far as the achievement of its monetary

objectives is concerned (not least in terms of maintaining price stability).921

However,

this trend tends to be reversed in the aftermath of the recent international financial

crisis as a result of the relevant failures attributed to independent supervisory

authorities in many states.922

The Council Regulation proposal lays down the following two (2) principles in this

respect:

917

Ibid., Article 2.

918 Ibid., Article 7, first sentence.

82 Ibid., Article 7, second sentence.

920 See Herring and Carmassi (2008).

921 For a more detailed overview of arguments in favour and against the principle of separation

of monetary and supervisory competences in central banks, see the fundamental work of

Goodhart and Schoenmaker (1993), as well as Goodhart (2000).

922 See Davies and Green (2010), pp. 187-213.

260

(a) When carrying out the specific tasks conferred upon it by the Regulation, the

ECB must pursue exclusively the objectives set therein.923

(b) The ECB must also carry out these tasks ‘separately’ from both the tasks

relating to the definition and implementation of the single monetary policy and its

other tasks, avoiding any interference between them. In this respect, Article 18, para. 2, of the Regulation provides the following:

“The ECB shall carry out the tasks conferred upon it by this Regulation without

prejudice to and separately from its tasks relating to monetary policy and any other

tasks. The tasks conferred upon the ECB by this Regulation shall neither interfere with,

nor be determined by, its tasks relating to monetary policy The tasks conferred upon

the ECB by this Regulation shall moreover not interfere with its tasks in relation to the

European Systemic Risk Board or any other tasks. The ECB shall report to the

European Parliament and to the Council as to how it has complied with this provision.

The tasks conferred by this Regulation to the ECB shall not alter the ongoing

monitoring of the solvency of its monetary policy counterparties. The staff involved in

carrying out the tasks conferred on the ECB by this Regulation shall be

organisationally separated from, and subject to, separate reporting lines from the staff

involved in carrying out other tasks conferred on the ECB.”

For the above purposes, the ECB will have to undertake the following:

(a) Adopt and make public any necessary internal rules, including rules regarding

professional secrecy and information exchanges between the two areas of functions.924

(b) Ensure that the operation of the Governing Council is completely

differentiated as regards monetary and supervisory functions. Such differentiation must

include strictly separated meetings and agendas.925

(c) Create a 'mediation panel'.926

This panel:

• will resolve differences of views on the part of competent authorities of

interested participating Member States regarding an objection of the

Governing Council to a draft Decision by the Supervisory Board,927

• include one member per participating Member State, chosen by each Member

State among the members of the Governing Council and the Supervisory

Board, and

• decide by simple majority, with each member having one vote.928

In this respect, the ECB has to adopt and make public a Regulation setting up such a

mediation panel and its rules of procedure.929

923

Council Regulation proposal, Article 18, para. 1.

924 Ibid., Article 18, para 3.

925 Ibid., Article 18, para 3a.

926 Ibid., Article 18, para 3b, first sentence.

927 Ibid., Article 18, para 3b, second sentence.

928 Ibid., Article 18, para 3b, third sentence

929 Ibid., Article 18, para 3b, fourth sentence

261

C. In particular: the specific tasks conferred on the ECB and their

discharge within the framework of the ‘single supervisory mechanism’

1. Individual specific tasks conferred on the ECB

1.1 Specific tasks in relation to credit institutions incorporated in participating Member States


The Council Regulation proposal confers on the ECB an extensive range of specific

tasks in relation to credit institutions incorporated in participating Member States,

covering principal areas of micro-prudential supervision, as well as micro- and macro-

prudential regulation. More particularly, the ECB will be assigned tasks in relation to

such credit institutions in accordance with the provisions of:

• the above-mentioned Directives 2006/48/EC and 2006/49/EC of the European

Parliament and of the Council, as these will be replaced in the course of the

coming months (and definitely before the full entry into operation of the SSM)

by the above-mentioned proposals for a Regulation of the European Parliament

and of the Council (hereinafter ‘CRR’), and a Directive of the European

Parliament and of the Council (hereinafter ‘CRD IV’), and

• the above-mentioned proposal for a Directive of the European Parliament and

of the Council on the recovery and resolution of unviable credit institutions,

and, more specifically, its provisions on recovery measures.

With regard to the conferment of specific tasks upon the ECB, the Council Regulation

sets out the following general principles:

(a) When fulfilling its tasks according to this Regulation, and without prejudice to

the objective to ensure the safety and soundness of credit institutions, the ECB must

have full regard to the different types, business models and sizes of credit

institutions.930

(b) No action, proposal or policy of the ECB will, directly or indirectly,

discriminate against any Member State or group of Member States as a venue for the

provision of banking or financial services in any currency.931

(c) The provisions of this Regulation are without prejudice to:

• the responsibilities and related powers of the national competent authorities of

the participating Member States to carry out supervisory tasks not conferred

on the ECB by it,932

and

• the responsibilities and related powers of the national competent or designated

authorities933

of the participating Member States to apply macro-prudential

tools not provided for in relevant acts of European banking law.934

930

Ibid., Article 1, third sub-para.

931 Ibid., Article 1, fourth sub-para.

932 Ibid., Article 1, fifth sub-para.

933 As 'national designed authorities' are defined in this Regulation those within the meaning of

European banking law (ibid., Article 2, point 6a).

934 Ibid., Article 1, sixth sub-para.

262

1.1.2 Analytical presentation of the specific tasks

(a) The proposed specific tasks conferred on the ECB with regard to credit

institutions established in participating Member States are, in principal, the

following:935

(i) Granting of authorisation and withdrawal of authorisation of credit

institutions,936

subject to the provisions of Article 13 of this Regulation.937

(ii) For credit institutions established in a participating Member State, which are

willing to establish a branch or provide cross-border services in a non-participating

Member State, the performance of tasks which would fall upon the competent authority

of the home Member State under existing EU banking law.938

(iii) Assessment of applications for the acquisition and disposal of 'qualifying

holdings' in a credit institution,939

except in the event of a bank resolution,940

subject to

the provisions of Article 13a of this Regulation. 941

(iv) Ensuring compliance on the part of credit institutions with EU banking law

provisions with regard to

• own funds requirements including securitisation,942

• limits on large credit exposures,943

• liquidity,944

• leverage,945

and

• public disclosure of information on those matters (‘Pillar 3’ of the current

regulatory framework).946

(v) Ensuring compliance by credit institutions with the provisions of EU banking

law provisions, as to the existence of:

935

Council Regulation proposal, Article 4, para. 1. The range of the tasks as in the March

2013 compromise text is narrower than in the proposal of the Commission in September 2012.

936 Directive 2006/48/EC, Articles 6-18, to be modified by Articles 9-21 of CRD IV.

937 On the provisions of Article 13 of this Regulation, see below, under D 3.1.


939 According to Article 2, point 6b of the Council Regulation proposal, qualifying holding

means such a holding as defined in Directive 2006/48/EC, Articles 4, point 11. .


941 On the provisions of Article 13a of this Regulation, see below, under D 3.2.

942 Directive 2006/48/EC, Articles 56-105, to be modified by Articles 22-375 and 393-399 of

CRR.

943 Directive 2006/48/EC, Articles 106-119, to be modified by Articles 376-392 of CRR.

944 CRR, Articles 400-415.

945 Ibid., Articles 416-417.

946 Directive 2006/48/EC, Articles 144-149, to be modified by Articles 418-440 of CRR.

263

• robust corporate governance arrangements, including fit-and-proper

requirements as regards persons responsible for the management of credit

institutions, risk management processes, internal control mechanisms,

remuneration policies and practices,947

as well as

• effective internal capital adequacy assessment processes, including Internal

Ratings Based models.948

(vi) Conduct of supervisory reviews of credit institutions, including, where

appropriate, in coordination with EBA, stress tests and their possible publication, in

order to determine whether the arrangements, strategies, processes and mechanisms put

in place by credit institutions and the own funds held by these institutions ensure a

sound management and coverage of their risks.949

(vii) Ad hoc imposition, on the basis of relevant findings and in accordance with

EU banking law provisions (‘Pillar 2’ of the current regulatory framework), of :

• specific additional own funds requirements, disclosure obligations, and

liquidity requirements, as well as,

• ther measures in the cases specifically made available to competent

authorities by European banking law.950

(viii) As regards the micro-prudential supervision of banking groups on a

consolidated basis:

• supervision on a consolidated basis over credit institutions’ parent companies

incorporated in a participating Member State (including over financial holding

companies and mixed financial holding companies), and

• participation in the supervision on a consolidated basis, including in colleges

of supervisors without prejudice to the participation of national competent

authorities of participating Member States in these colleges as observers, in

relation to parent companies not established in one of the participating

Member State.951

(ix) In the area of supplementary supervision of financial conglomerates

(according to the provisions of Directive 2002/87/EC):952

• participation in supplementary supervision in relation to the credit institutions

included in such financial conglomerates, and

• assuming the tasks of a coordinator where the ECB is appointed as the

coordinator for a financial conglomerate in accordance with the criteria set out

in relevant European financial law.953

947

Directive 2006/48/EC, Article 22, to be modified by Articles 72-74 and complemented by

Articles 86-91 of CRD IV.

948 Ibid., Article 123, to be modified by Articles 72-91 of CRD IV.

949 Council Regulation proposal, Article 4, para. 1(g). .

950 Directive 2006/48/EC, Article 124, to be modified by Articles 92-105 of CRD IV.

951 Ibid., Articles 125-143, to be modified by Articles 106-121 of CRD IV.

952 For more details on this Directive’s provisions, see Gortsos (2010).


264

(x) Finally, carrying out supervisory tasks in relation to recovery plans and early

intervention, where a credit institution or group in relation to which the ECB is the

consolidating supervisor does not meet or is likely to breach the applicable micro-

prudential supervision requirements, and, only in the cases explicitly stipulated by

European banking law for competent authorities, structural changes required from

credit institutions to prevent financial stress or failure, excluding any resolution

powers.954

(b) In addition to the above-mentioned, Article 4a provides the following in this

regard:

(i) Whenever appropriate or deemed required, and without prejudice to para. 2,

the national competent or designated authorities of the participating Member States

will have to apply requirements for capital buffers to be held by credit institutions, at

the relevant level, according to the provisions of relevant European banking law, in

addition to own funds requirements referred to in Article 4 (1c), including:

• countercyclical buffer rates, and

• any other measures aimed at addressing systemic or macro-prudential risks

provided for, and subject to the procedures set out, in the Directives

2006/48/EC and 2006/49/EC in the cases specifically set out in relevant

European banking law.955

Ten (10) working days prior to taking such a Decision, the concerned authority must

duly notify its intention to the ECB. Where the ECB objects, it must state its reasons in

writing within five (5) working days. The concerned national competent authority must

duly consider the ECB's reasons prior to proceeding with the Decision, as

appropriate.956

(ii) The ECB may, if deemed necessary, instead of the national competent or

national designated authority of the participating Member State, apply:

• higher requirements for capital buffers than applied by the national above

national authorities to be held by credit institutions at the relevant level in

accordance with European banking law, in addition to own funds

requirements referred to in Article 4(1c), including countercyclical buffer

rates, subject to the conditions set out in paras. 3 and 4, and

• more stringent measures aimed at addressing systemic or macro-prudential

risks at the level of credit institutions, subject to the procedures set out in the

Directives 2006/48/EC and 2006/49/EC in the cases specifically set out in the

relevant European banking law.957

Any national competent or designated authority may propose to the ECB to act under

para. 2, in order to address the specific situation of the financial system and the

economy in its Member State.958

954 European Parliament and Council Directive Proposal on the recovery and resolution of credit institutions, articles 4-8 and 23-25.


956 Council Regulation proposal, Article 4a, para. 1.


958 Ibid., Article 4a, para. 2a.

265

If the ECB intends to act in accordance with para. 2, it must cooperate closely with

the designated authorities in the Member States concerned when considering to take

any action. In particular, it has to notify its intention to the concerned national

competent or designated authority ten (10) working days prior to taking such a decision.

Where any of the concerned authorities objects, it must state its reasons in writing

within five (5) working days. The ECB must duly consider those reasons prior to

proceeding with the decision as appropriate.959

When carrying out the tasks referred to in para. 2, the ECB must take into account the

specific situation of the financial system, economic situation and the economic cycle in

individual Member States or parts thereof.960

959

Ibid., Article 4a, para. 2b.


266

TABLE 15

The specific tasks conferred upon the ECB with regard to credit institutions incorporated in participating Member States

Specific task Provisions of the

existing European

banking law (CDR)

Provisions of the

upcoming

European banking

law

Specific provisions

of the proposal of the

Council Regulation

on the establishment

of the SSM

Granting of authorisation and

withdrawal of authorisation of

credit institutions

Articles 6-18 CRD IV, Articles

9-21

Article 13

For credit institutions

established in a participating

Member State, which are

willing to establish a branch or

provide cross-border services in

a non-participating Member

State, the performance of tasks

which would fall upon the

competent authority of the

home Member State under

existing EU banking law

Articles 23-28

CRD IV, Articles

33-46

Assessment of applications for

the acquisition and disposal of

'qualifying holdings' in credit

institutions, except in the event

of a bank resolution


22-27

Article 13a

Own funds requirements,

including securitisation

Articles 56-105 CRR, Articles 22-

375, and 393-399

Limits on large credit exposures Articles 106-119 CRR, Articles 376-

392

Liquidity requirements CRR, Articles 400-

415

Leverage ratio CRR, Articles 416-

417

Public disclosure of

information on these matters

('Pillar 3')

Articles 144-149 CRR, Articles 418-

440

Ensuring compliance by credit

institutions with the provisions

of EU banking law provisions,

as to the existence of robust

corporate governance arrange-

ments

Article 22

CRD IV, Articles

72-74, and 86-91

267

TABLE 15 (continued)

The specific tasks conferred upon the ECB

Specific task Provisions of the

existing European

banking law (CDR)

Provisions of the

upcoming European

banking law

Specific

provisions of the

proposal of the

Council

Regulation on the

establishment of

the SSM

Ensuring compliance by credit

institutions with the provisions

of EU banking law provisions,

as to the existence of effective

internal capital adequacy

assessment processes, including

Internal Ratings Based models

Article 123

CRD IV, Articles 72-

91

Conduct of supervisory reviews

of credit institutions, including,

where appropriate, in

coordination with EBA, stress

tests and their possible

publication

Article 4, para.1

(g)

Ad hoc imposition of

additional requirements ('Pillar

2’ of the current regulatory

framework)

Article 124

CRD IV, Articles 92-

105

Specific tasks on the micro-

prudential of banking groups on

a consolidated basis


106-121

Specific tasks in the area of

supplementary supervision of

financial conglomerates

Directive

2002/87/EC

CRR, Articles 114-

121

Carrying out supervisory tasks

in relation to recovery plans

and early intervention

Proposal Regulation

on the recovery and

resolution of credit

institutions, Articles

4-8 and 23-25

Tasks with regard to macro-

prudential regulation

CRD IV, Articles

122-132

Article 4a, para. 2

268

1.2 Specific tasks concerning branches in participating Member States of credit institutions incorporated in non-euro participating Member States

As regards credit institutions incorporated in non-euro participating Member States,

which have established a branch or provide cross-border services in a participating

Member State (in accordance with the provisions of EU banking law),961

it is provided

that the ECB will carry out the specific tasks mentioned above in cases where national

authorities are competent, as host supervisors, in accordance with the provisions of

European banking law.962

1.3 Specific tasks in relation to credit institutions incorporated in non-euro participating Member States

1.3.1 Establishment of a 'close cooperation' procedure

Credit institutions incorporated in a 'non-euro participating Member State' (i.e., a

Member State with a derogation, whose currency is not the euro963

) may also be subject

to the supervisory authority of the ECB, once the procedure of ‘close cooperation’

provided for in Article 6 has been established. This ‘close cooperation’ procedure will

be established by a ECB Decision, if a non-euro participating Member State so wishes,

provided that the other requirements under Article 6, para. 2, are met. In particular:

(a) Within the limits set out in Article 6, the ECB may carry out the tasks in the

areas referred to in Article 4, paras. 1 and 2 and in Article 4a in relation to credit

institutions established in a non-euro participating Member State, where a close

cooperation has been established between the ECB and the national competent

authority of that Member State in accordance. To that end, the ECB may address

instructions to the national competent authority of the non-participating Member

State.964

(b) The close cooperation between the ECB and the national competent authority

of a non-euro participating Member State will be established by a Decision of the ECB,

where the following conditions are met:965

(i) The Member State concerned notifies the other Member States, the

Commission, the ECB and the EBA the request to enter into a close cooperation with

the ECB in relation to the exercise of the tasks referred to in Article 4 and Article 4a

with regard to all credit institutions established in it in accordance with Article 5 (on

the cooperation within the SSM).

(ii) In the notification, the Member State concerned will have to undertake the

following:

• ensure that its national competent authority or national designated authority

will abide by any Guidelines or requests issued by the ECB, and

961

Directive 2006/48/EC, Articles 23-28, as modified by Articles 35-39 of the CRD IV.

962 Council Regulation proposal, Article 4, para. 2. See Directive 2006/48/EC, Articles 29-37,

to be modified by Articles 40-46 of the CRD IV.

963 The Regulation uses, inconsistently, three terms: 'non-euro participating' Member States,

'non-participating' Member States and Member States whose currency is not the euro.



269

• provide all information on the credit institutions established in it that the ECB

may require for the purpose of carrying out a comprehensive assessment of

those.

(iii) The Member State concerned has adopted relevant national legislation to

ensure that its national competent authority will be obliged to adopt any measure in

relation to credit institutions requested by the ECB, in accordance with Article 6,

para. 5 (see just below, under (c)).

This Decision must be published in the Official Journal of the European Union and

will apply fourteen (14) days after such publication.966

(c) Where the ECB considers that a measure relating to the tasks referred to in

para. 1 (see just above, under (a)) should be adopted by the national competent

authority of a concerned Member State in relation to a credit institution, financial

holding company or mixed-financial holding company, it will have to address

instructions to that authority, specifying a relevant timeframe. That timeframe will be

no less than 48 hours, unless earlier adoption is indispensable to prevent irreparable

damage. The competent authority of the concerned Member State must take all the

necessary measures in accordance with the obligation referred to in para. 2(c) (see just

above, under (b)(iii)).967

1.3.2 Suspension or termination of a 'close cooperation' procedure

(a) The ECB may decide to issue a warning to a Member State concerned that the

close cooperation will be suspended or terminated if no decisive corrective action is

undertaken if in the opinion of the ECB:

• the conditions set out in Article 6, para. 2(a) to (c) are no longer met by that

Member State (see just above, under 1.3.1 (b)), or

• the national competent authority of that Member State does not act in

accordance with the obligation referred to in para. 2(c).968

If no such action has been undertaken fifteen (15) days after the notification of such a

warning, the ECB may suspend or terminate the close cooperation with that Member

State by a relevant Decision.969

Such a Decision must be notified to the Member State concerned and be published in

the Official Journal of the European Union. It must indicate the date from which it

applies, taking due consideration of supervisory effectiveness and legitimate interests

of credit institutions.970

966



968 Ibid., Article 6, para. 6, first sub-para.


970 Ibid., Article 6, para. 6, third sub-para.

270

(b) Equally, a non-euro participating Member State may request the ECB to

terminate the close cooperation at any time after the lapse of three (3) years of the

publication in the Official Journal of the European Union of the Decision adopted by

the ECB for its establishment of the close. The request must explain the reasons for the

termination, including, when relevant, potential significant adverse consequences as

regards the fiscal responsibilities of the Member State. In this case, the ECB must

immediately proceed to adopt a Decision terminating the close cooperation and

indicate the date from which it will apply within a maximum period of three months,

taking due consideration of supervisory effectiveness and legitimate interests of credit

institutions.

The Decision must be published in the Official Journal of the European Union.971

(c) If a non-euro participating Member State notifies the ECB, in accordance with

Article 19, par. 3 (on the operation of the Supervisory Board), of its reasoned

disagreement with an objection of the Governing Council to a draft Decision of the

Supervisory Board, the Governing Council will, within a period of thirty (30) days,

undertake the following:

• give its opinion on the reasoned disagreement expressed by the Member State,

and

• confirm or withdraw its objection, duly stated.972

If the Governing Council confirms its objection, the non-participating Member State

may notify the ECB that it will not be bound by the potential Decision related to a

possible amended draft Decision by the Supervisory Board.973

The ECB must then consider the possible suspension or termination of the close

cooperation with that Member State, taking due consideration of supervisory

effectiveness, and take a Decision in that respect.974

In this respect, the ECB has take

into account, in particular, the following considerations:

• whether the absence of such suspension or termination could jeopardize the

integrity of the SSM or have significant adverse consequences as regards the

fiscal responsibilities of the Member State,

• whether such suspension or termination could have significant adverse

consequences as regards the fiscal responsibilities in the Member State which

has notified the objection in accordance with Article 19, para 3,

• whether or not it is satisfied that the national competent authority concerned

has adopted measures which, in the ECB's opinion:

� ensure credit institutions in the Member State which notified its objection

according to the previous subparagraph are not subject to a more

favourable treatment than credit institutions in the other participating

Member States,

971

Ibid., Article 6, para. 6a.

972 Ibid., Article 6, para. 6ab, first sub-para.

973 Ibid., Article 6, para. 6ab, second sub-para.

974 Ibid., Article 6, para. 6ab, third sub-para.

271

� are equally effective as the Decision of the Governing Council under the

previous sub-para. in achieving the objectives referred to in Article 1 of

this Regulation and in ensuring compliance with relevant Union law.975

The ECB has to include these considerations in its Decision and communicate them to

the Member State concerned.976

(d) If a non-euro participating Member State disagrees with a draft Decision of

the Supervisory Board, the following procedure applies:

• the Member State has to inform the Governing Council of its reasoned

disagreement within five (5) working days of receiving the draft Decision,

• the Governing Council must then decide about the matter within five (5)

working days, taking fully into account those reasons, and explain in writing

its Decision to that Member State,

• the Member State may request the ECB to terminate the close cooperation with

immediate effect and will not be bound by the ensuing Decision.977

(e) A Member State which has terminated the close cooperation with the ECB

may not enter into a new close cooperation before the lapse of three (3) years from the

date of the publication in the Official Journal of the European Union of the ECB

Decision terminating the close cooperation.978

1.4 Regulatory powers

For the purpose of carrying out the tasks conferred upon it by this Regulation, and with

the objective of ensuring high standards of supervision, the ECB will have to apply all relevant legal acts which constitute sources of European banking law, and

where this law is composed of Directives or Regulations, the national legislation

transposing those Directives or implementing the Member States' options available

under those Regulations.979

To that effect, the ECB will have the power to adopt

Guidelines and Recommendations, and take Decisions.980

This regulatory power must to subject to and in compliance with the relevant

European banking law and in particular any legislative and non-legislative act,

including those referred to in Articles 290 and 291 TFEU.981

In particular, it will be

subject to:

• binding regulatory and implementing technical standards developed by EBA

and adopted by the Commission in accordance with Articles 10 to 15 of Regulation 1093/2010,

975

Ibid., Article 6, para. 6ab, fourth sub-para.

976 Ibid., Article 6, para. 6ab, fifth sub-para.

977 Ibid., Article 6, para. 6abb.

978 Ibid., Article 6, para. 6b.


980 The ECB’s regulatory power is based on Article 132, para. 1 TFEU.

981 Council Regulation proposal, Article 4, para. 3, second sub-para, first sentence.

272

• Article 16 of that Regulation on Guidelines and Recommendations, and

• the provisions of the EBA Regulation on the European supervisory

handbook.982

Where necessary, the ECB will have to:

• contribute in any participating role to the development of draft regulatory

technical standards or implementing technical standards by EBA in

accordance with Regulation 1093/2010, or

• draw the attention of EBA to a potential need to submit to the Commission

draft standards amending existing regulatory or implementing technical

standards.983

The ECB may also adopt Regulations only to the extent necessary to organise or

specify the modalities for carrying out its tasks.984

Before adopting a Regulation, the

ECB must conduct open public consultations and analyse the potential related costs

and benefits, unless such consultations and analyses are disproportionate in relation to:

• the scope and impact of the Regulation concerned, or

• the particular urgency of the matter, in which case the ECB has to justify the

urgency.985

2. The manner in which the specific tasks are to be performed within the

framework of the ‘single supervisory mechanism’

As already mentioned (under B 4 above), the specific tasks to be assigned to the ECB

will be performed (according to Article 5 of the Council Regulation proposal) within

the framework of the SSM, consisting of the ECB and the national competent

authorities (and not necessarily the national central banks) of the participating Member

States.986

The same Article of this Regulation lays down the following specific

provisions (establishing, among others, the ‘decentralisation principle’):

(a) Both the ECB and national competent authorities will be subject to a ‘duty of

cooperation in good faith’, and an obligation to exchange information. Without

prejudice to the ECB’s power to receive directly or have direct access to information

reported, on an ongoing basis, by credit institutions, the national competent authorities

will, in particular, provide the ECB with all information necessary for the purposes of

carrying out the tasks conferred upon the ECB. National competent authorities will

have to assist the ECB on its request with the preparation and implementation of any

acts relating to the specific tasks to be conferred on it.987

982

Ibid., Article 4, para. 3, second sub-para, second sentence.

983 Ibid., Article 4, para. 3, fourth sub-para.

984 Ibid., Article 4, para. 3, second sub-para, third sentence.




273

(b) Where appropriate and without prejudice to the responsibility and

accountability of the ECB for the tasks conferred on it, the national competent

authorities will:

• be responsible for assisting the ECB with the preparation and implementation

of any acts relating to these tasks concerning all credit institutions, including

assistance in verification activities,

• have to follow the instructions given by the ECB when performing these

tasks.988

(c) With regard to the credit institutions referred to in para. 4, and within the

framework defined in para. 7, the following provisions will apply:989

(i) The ECB will have to issue Regulations, Guidelines or general instructions to

national competent authorities, according to which the tasks defined in Article 4,

excluding letters (a) and (b) thereof, are performed and supervisory decisions are

adopted by national competent authorities. Such instructions may refer to the specific

powers in Article 13b, para. 2, for groups or categories of credit institutions for the

purposes of ensuring the consistency of supervisory outcomes within the SSM.

(ii) When necessary to ensure consistent application of high supervisory

standards, the ECB may at any time, on its own initiative after consulting with national

authorities or upon request by a national competent authority, decide to exercise

directly itself all the relevant powers for one or more credit institutions referred to in

paragraph 4, including in the case where financial assistance has been requested or

received indirectly from the EFSF or the ESM.

(iii) The ECB will exercise oversight over the functioning of the system, based on

the responsibilities and procedures set out in this Article, and in particular paragraph

7(b);

(iv) The ECB may at any time make use of the powers referred to in Articles 9 to

12.

(v) The ECB may also request, on an ad hoc or continuous basis, information

from the national competent authorities on the performance of the tasks carried out by

them under this Article.

(d) Without prejudice to the provisions of para. 5, national competent authorities

will have to carry out and be responsible for:

• the tasks referred to in Article 4, para 1, under (aa), (c), (f), (g), (i), and (k)

(see above, under C 1.1.2), and

• adopting all relevant supervisory decisions with regard to the credit

institutions referred to in para. 4,

within the framework and subject to the procedures referred to in para. 7.990

988




274

Without prejudice to Articles 9-12, the national competent and designated authorities

will maintain the powers, in accordance with national law, to:

• obtain information from credit institutions, holding companies, mixed holding

companies and undertakings included in the consolidated financial situation of

a credit institution, and

• to perform on site inspections at those.991

The national competent authorities will have to:

• inform the ECB, in accordance with the framework set out in para. 7, of the

measures taken according to this paragraph and closely coordinate those

measures with the ECB,992

and

• report to the ECB on a regular basis on the performance of the activities

performed under this Article.993

(e) The ECB will have, in consultation with national competent authorities of

participating Member States, and on the basis of a proposal from the Supervisory

Board, adopt and make public a framework to organise the practical modalities of

implementation of this Article. This framework will have to include, at least, the

following:994

(i) The specific methodology for the assessment of the criteria referred to in para.

4, sub-paras 1 to 3 and the criteria under which para. 4, sub-para. 4( ceases to apply

to a specific credit institution and the resulting arrangements for the purposes of

implementing paragraphs 5 and 6.

These arrangements and the methodology for the assessment of the criteria referred to

in para, 4, subparas. 1 to 3 will have:

• to be reviewed to reflect any relevant changes, and

• ensure that, where a credit institution has been considered significant or less

significant, that assessment will only be modified in case of substantial and

non transitory changes of circumstances, in particular circumstances relating to

the situation of the credit intitution relevant for that assessment.

(ii) The definition of the procedures, including time-limits, and the possibility to

prepare draft Decisions to be sent to the ECB for consideration, for the relation

between the ECB and the national competent authorities regarding the supervision of

credit institutions not considered as less significant in accordance with in para. 4.

(iii) The definition of the procedures, including time-limits, for the relation

between the ECB and the national competent authorities regarding the supervision of

credit institutions considered as less significant in accordance with in para. 4. Such

procedures must, in particular, require national competent authorities, depending on the

cases defined in the framework, to:

991

Ibid., Article 5, para. 6, second sub-para, first sentence.

992 Ibid., Article 5, para. 6, second sub-para, second sentence.



275

• notify the ECB of any material supervisory procedure,

• further assess, on ECB request, specific aspects of the procedure, and

• transmit to the ECB material draft supervisory decisions on which the ECB

may express its views.

(f) Whenever the ECB is assisted by national competent authorities or designated

authorities for the purpose of exercising the tasks conferred on it by this Regulation,

the ECB and the national competent authorities will have to comply with the

provisions set out in European banking law in relation to the allocation of

responsibilities and cooperation between competent authorities from different Member

States.995

995


276

D. Investigatory and specific supervisory powers of the ECB


(a) The Council Regulation proposal’s provisions in Articles 8-15 detail the

ECB’s and national competent authorities’ investigatory powers and specific

supervisory powers. In that respect:

• Article 8 contains some general principles (see below, under 1(b) and (c)),

• Articles 9-12 refer to the investigatory powers, including requests for

information, general investigations, on-site inspections, and the authorisation

by a judicial authority (under 2), and

• Articles 13-15 refer to the supervisory powers, such as those with regard to

authorisation and the assessment of acquisitions of qualifying holdings, the

powers of host authorities and cooperation in the case of consolidated

supervision, and the right to impose administrative sanctions (under 3).

(b) Article 8 states that, for the exclusive purpose of carrying out the tasks

conferred upon it by Article 4, paras. 1, 2 and Article 4a, para. 2 (see above, under

C 1.1), the ECB:

• will be considered, as appropriate, the competent authority or the designated

authority in the participating Member States as established by the provisions

of European banking law,996

and

• will have all the powers and obligations set out in this Regulation (in

particular, those provided for in Articles 9-15), including all the powers and

obligations, which national competent authorities and national designated

authorities have according to the provisions of European banking law, unless

otherwise provided for by this Regulation.997

To the extent necessary to carry out these tasks, the ECB may require, by way of

instructions, those national (competent and designated) authorities to make use of their

powers, under and according to the conditions set out in national law, where this

Regulation does not confer such powers on the ECB. Those national authorities must

fully inform the ECB about the exercise of these powers.998

The ECB is required to exercise the above-mentioned powers in accordance with the

acts referred to in Article 4, para. 3, first sub-para. (see above, under C 1.4). In

addition, in the exercise of their respective supervisory and investigatory powers, the

ECB and the national competent authorities must cooperate closely.999

(c) With regard to credit institutions established in Member States with a

derogation which have entered into a close cooperation, in accordance with the

provisions of Article 6, the ECB must exercise its powers in accordance with the

provisions of that Article, by derogation from the above-mentioned, under (b).1000

996

Ibid., Article 8, para. 1, first sub-para.





277

2. Investigatory powers

2.1 Requests for information

Without prejudice to the powers referred to in Article 8, para. 1 (as mentioned just

above, under 1), and subject to the conditions set out in European banking law, the

ECB may require the following legal or natural persons, subject to Article 4 (on the

tasks conferred upon it), to provide all information that is necessary in order to carry

out the tasks conferred upon it by this Regulation, including information to be provided

at recurring intervals and in specified formats for supervisory and related statistical

purposes:

• credit institutions established in participating Member States,

• financial holding companies established in participating Member States,

• mixed financial holding companies established in participating Member

States,

• mixed-activity holding companies established in participating Member

States,1001

as well as

• persons 'belonging' to these entities, and third parties to whom these entities

have outsourced functions or activities.1002

All these persons will have a duty to supply the information requested, since the

provision of this information will not be deemed to be a breach of professional

secrecy.1003

Where the ECB obtains information directly from these persons, it must

make it available to the national competent authorities concerned.1004

2.2 General investigations

In order to carry out the tasks conferred upon it by this Regulation, and subject to other

conditions set out in European banking law, the ECB may conduct all necessary

investigations of any person referred to in Article 9, para. 1, established or located in a

participating Member State (as mentioned just above, under 2.1). To that end, the ECB

has the right:

• to require the submission of documents,

• to examine the books and records of these persons and take copies or extracts

from such books and records,

• to obtain written or oral explanations from these persons or their

representatives or staff, and

1001

According to Article 4, point (20) of Directive 2006/48/EC of the European Parliament and

of the Council, as 'mixed-activity holding company' is defined a parent undertaking, other than

a a financial holding company, a credit institution or a mixed financial holding company within

the meaning of Article 2, point (15) of Directive 2002/87/EC of the European Parliament and

of the Council (on the supplementary supervision of financial conglomerates), the subsidiaries

of which include at least one credit institution.




278

• to interview any other person who consents to be interviewed for the purpose

of collecting information relating to the subject matter of an investigation.1005

These persons will be subject to investigations launched on the basis of a Decision of

the ECB.1006

The Regulation provides also that, when a person obstructs the conduct of the

investigation, the national competent authority of the participating Member State

where the relevant premises are located has to afford, in compliance with national law,

the necessary assistance including, in the cases referred to in Articles 11 and 12 (see

just below, under 2.3. and 2.4) facilitating the access by the ECB to the business

premises of the legal persons referred to in Article 9, para. 1(a) to (f).1007

2.3 On-site inspections

In order to carry out the tasks conferred upon it by this Regulation and subject to other

conditions set out in European banking law, the ECB may, according to Article 12 (see

just below, under 2.4) and subject to prior notification to the national competent

authority concerned, conduct all necessary on-site inspections at the business premises

of:

• the legal persons referred to in Article 9, para. 1 (see just above, under 2.1)

and

• any other undertaking included in consolidated supervision, where the ECB is

the consolidating supervisor in accordance with Article 4, para. 1(i) (see

above, under C 1.1).1008

With regard this ECB's investigatory power, the following rules are being established:

(a) The ECB may carry out an on-site inspection without prior announcement to

those legal persons, if the proper conduct and efficiency of the inspection so

require.1009

(b) The legal persons referred to in Article 9, para. 1 will be subject to on-site

inspections on the basis of a Decision of the ECB.1010

(c) The officials of and other persons authorised by the ECB to conduct an on-site

inspection may enter any business premises and land of the legal persons subject to an

investigation Decision adopted by the ECB, and have all the powers stipulated in

Article 10, para. 1, with regard to general investigation (see just above, under 2.2).1011








279

(d) Officials and other accompanying persons authorised or appointed by the

national competent authority of the Member State where the inspection is to be

conducted will, under the supervision and coordination of the ECB, actively assist the

officials of and other persons authorised by the ECB, enjoying the same powers as the

latter. Officials of the national competent authority of the participating Member State

concerned will also have the right to participate in the on-site inspections.1012

(e) Where the officials of and other accompanying persons authorised or

appointed by the ECB find that a person opposes an inspection ordered according to

the above, the national competent authority of the participating Member State

concerned will afford them the 'necessary assistance' in accordance with national law,

including, to the extent necessary for the inspection, the sealing of any business

premises and books or records. If such a power is not available to the national

competent authority concerned, it will use its powers to request the necessary

assistance of other national competent authorities.1013

2.4 Authorisation by a judicial authority

If an on-site inspection provided for in Article 11, paras. 1 and 2 or the assistance

provided for in Article 11, para. 5 (see just above, under 2.3) requires authorisation by

a judicial authority according to national rules, such authorisation has to be applied

for.1014

Where such authorisation is applied for, the national judicial authority must

control that:

• the Decision of the ECB is authentic, and

• the coercive measures envisaged are neither arbitrary nor excessive having

regard to the subject matter of the inspection.1015

In its control of the proportionality of the coercive measures, the national judicial

authority may ask the ECB for detailed explanations, in particular relating to:

• the grounds the ECB has for suspecting that an infringement of the acts

referred to in Article 4, para. 3, first sub-para., has taken place,

• the seriousness of the suspected infringement, and

• the nature of the involvement of the person subject to the coercive

measures.1016

However, the national judicial authority may not review the necessity for the

inspection or demand to be provided with the information on the ECB's file, the

lawfulness of the ECB's Decision being subject to review only by the Court of Justice

of the European Union.1017

1012






1017 Ibid., Article 12, para. 2, third and fourth sentences. On the judicial control of the ECB's

acts, see Article 35 of the Statute of the ESCB and of the ECB.

280

3. Specific supervisory powers

3.1 Authorisation of credit institutions

3.1.1 Granting of an authorisation

Any application for an authorisation to take up the business of a credit institution to be

established in a participating Member State has to be submitted to the national

competent authority of the Member State where the credit institution is to be

established in accordance with the requirements set out in relevant national law.1018

In

this case:

(a) If the applicant complies with all conditions of authorisation set out in the

relevant national law of that Member State, the national competent authority must take,

within the period provided for by relevant national law, a draft decision to propose to

the ECB to grant the authorisation. The draft decision will be notified to the ECB and

the applicant for authorisation.

(b) Otherwise, the national competent authority must reject the application for

authorisation.1019

The draft decision will be deemed to be adopted by the ECB, unless the ECB objects

within a maximum period of 10 working days, extendable once for the same period in

duly justified cases. The ECB may object to the draft decision only where the

conditions for authorisation set out in relevant Union law are not met. It has to state the

reasons for the rejection in writing.1020

The decisions taken according to the above-mentioned must be notified by the national

competent authority to the applicant for authorisation.1021

3.1.2 Withdrawal of an authorisation

(a) Subject to the provisions of Article 13, para. (2a) (see just below, under (b)),

the ECB may withdraw the authorisation in the cases set out in European banking law

under the following conditions:

(i) Firtly, on its own initiative, following consultations with the national

competent authority of the participating Member State where the credit institution is

established.1022

These consultations must, in particular, ensure that before taking

Decisions regarding withdrawal, the ECB allows sufficient time for the national

authorities to decide on the necessary remedial actions, including possible resolution

measures, and takes these into account.1023

(ii) Secondly, on a proposal from the national competent authority of the

participating Member State where the credit institution is established.1024

In that case:

1018




1021 Ibid., Article 13, para. 1c.

1022 Ibid., Article 13, para. 2, first sub-para, first sentence.

1023 Ibid., Article 13, para. 2, first sub-para, second sentence.

1024 Ibid., Article 13, para. 2, first sub-para, first sentence.

281

• the national competent authority has to submit a proposal to the ECB to that

end, and

• the ECB has to take a Decision on the proposed withdrawal taking full account

of the justification for withdrawal put forward by the national competent

authority.1025

(b) As long as national authorities remain competent to resolve credit institutions,

in cases where they consider that the withdrawal of the authorisation would prejudice

the adequate implementation of or actions necessary for resolution or to maintain

financial stability, they must duly notify their objection to the ECB explaining in detail

the prejudice that a withdrawal would cause. In those cases:

(i) The ECB must abstain from proceeding to the withdrawal for a period

mutually agreed with national authorities. The ECB can choose to extend that period if

it is of the opinion that sufficient progress has been made.

(ii) Nevertheless, if the ECB determines, by a reasoned Decision, that proper

actions necessary to maintain financial stability have not been implemented by the

national competent authority, the withdrawal of the authorisation must apply

immediately.1026

3.2 Assessment of acquisitions of qualifying holdings

Any notification of an acquisition of a qualifying holding in a credit institution

established in a participating Member State or any related information (without

prejudice to the exemptions provided for in Article 4, para, 1(b)) must be introduced

with the national competent authority of the Member State where the credit institution

is established in accordance with the requirements set out in relevant national law

based on the acts referred to in Article 4, para. 3, first sub-para., and not with the

ECB.1027

The national competent authority is required to:

• assess the proposed acquisition,

• forward the notification and a proposal for a decision to oppose or not to

oppose the acquisition, based on the criteria set out in the acts referred to in

Article 4, para. 3, first sub-para., to the ECB, at least ten (10) working days

before the expiry of the relevant assessment period, as defined in European

banking law, and

• assist the ECB in accordance with the provisions of Article 5 (on the

cooperation within the Single Supervisory Mechanism).1028

1025

Ibid., Article 13, para. 2, second sub-para.




282

It is up to the ECB to decide whether to oppose the acquisition:

• on the basis of the assessment criteria set out in European banking law, and

• in accordance with the procedure and within the assessment periods set out

therein.1029

3.3 Supervisory powers

(a) Article 13b of this Regulation provides that, for the purpose of carrying out its

tasks referred to in Article 4, para. 1, and without prejudice to other powers conferred

on it, the ECB has the powers set out in Article 13b, para. 2 (see just below, under b), to require any credit institution, financial holding company or mixed financial holding

company in a participating Member States to take the necessary measures, at an early

stage, to address relevant problems in any of the following three (3) circumstances:

(i) The credit institution does not meet the requirements of the acts referred to in

Article 4, para. 3, first sub-para.

(ii) The ECB has evidence that the credit institution is likely to breach the

requirements of the acts referred to in the same Article, within the next 12 months.

(iii) The arrangements, strategies, processes and mechanisms implemented by the

credit institution and the own funds and liquidity held by it do not ensure a sound

management and coverage of their risks, based on a determination in the framework of

a supervisory review in accordance with Article 4, para. 1(g).1030

(b) Notwithstanding the provision set out in Article 8, para. 1 (see above, under

1), the ECB's powers have been determined as follows:

• to require institutions to hold own funds in excess of the capital requirements

laid down in the acts referred to in Article 4, para. 3, first sub-para., related

to elements of risks and risks not covered by the relevant Union acts,

• to require the reinforcement of the arrangements, processes, mechanisms and

strategies,

• to require institutions to present a plan to restore compliance with supervisory

requirements according to the acts referred to in Article 4, para. 3, first sub-para., and set a deadline for its implementation, including improvements to

that plan regarding scope and deadline,

• to require institutions to apply a specific provisioning policy or treatment of

assets in terms of own funds requirements,

• to restrict or limit the business, operations or network of institutions or to

request the divestment of activities that pose excessive risks to the soundness

of an institution,

• to require the reduction of the risk inherent in the activities, products and

systems of institutions,

1029

Ibid., Article 13a, para. 3.

1030 Ibid., Article 13b, para. 1.

283

• to require institutions to limit variable remuneration as a percentage of net

revenues when it is inconsistent with the maintenance of a sound capital base,

• to require institutions to use net profits to strengthen own funds,

• to restrict or prohibit distributions by the institution to shareholders, members

or holders of Additional Tier 1 instruments, where the prohibition does not

constitute an event of default of the institution,

• to impose additional or more frequent reporting requirements, including

reporting on capital and liquidity positions,

• to impose specific liquidity requirements, including restrictions on maturity

mismatches between assets and liabilities,

• to require additional disclosures, and

• to remove, at any time, members from the management body of credit

institutions who do not fulfil the requirements set out in the acts referred to in Article 4, para. 3, first sub-para.

1031

3.4 Powers of host authorities and cooperation on consolidated supervision

(a) Between participating Member States, the procedures set out in European

banking law for credit institutions wishing to establish a branch or to exercise the

freedom to provide services by carrying on their activities within the territory of

another Member State and the related competences of home and host Member States

will apply only for the purposes of the tasks not conferred upon the ECB by Article

4.1032

(b) The provisions set out in European banking law in relation to the cooperation

between competent authorities from different Member States for conducting

supervision on a consolidated basis will not apply to the extent that the ECB is the only

competent authority involved.1033

(c) In fulfilling its task, as defined in Articles 4 and 4a (see above, under C

1.1.2), the ECB is required to respect the following:

• a fair balance between all participating Member States according to the

provisions of Article 5, para. 8, and

• in its relationship with non-euro participating Member States, the balance

between home and host Member States as established in European banking

law.1034

1031

Ibid., Article 13b, para. 2.




284

3.5 Administrative sanctions

(a) For the purpose of carrying out the tasks conferred upon it by this Regulation,

where credit institutions, financial holding companies, or mixed financial holding

companies, intentionally or negligently, breach a requirement under relevant directly

applicable legal acts which constitute sources of European baning law in relation to

which administrative pecuniary sanctions are available to national competent

authorities under the provisions of European banking law, the ECB may impose the

following administrative pecuniary sanctions:

• up to twice the amount of the profits gained or losses avoided because of the

breach if those can be determined,

• up to 10% of the total annual turnover, as defined in European banking law, of

a legal person in the preceding business year, or

• such other pecuniary sanctions as may be provided for in European banking

law.1035

The ECB is required to publish any such sanction, whether it has been appealed or not,

in the cases and in accordance with the conditions set out in European banking law.1036

Where the legal person is a subsidiary of a parent undertaking, the relevant total

annual turnover referred to above will be the total annual turnover resulting from the

consolidated account of the ultimate parent undertaking in the preceding business

year.1037

The sanctions applied must be effective, proportionate and dissuasive. In determining

whether to impose a sanction and in determining the appropriate sanction, the ECB has

to act in accordance with Article 8, para. 2a (see above in this Section of the study,

under 1(b), in finem).1038

The ECB must apply these provisions in accordance with the

acts referred to in Article 4, para. 3, first sub-para., including the procedures

contained in Council Regulation 2532/98 "concerning the powers of the European

Central Bank to impose sanctions",1039

as appropriate.1040

(b) In the cases not covered by the above-mentioned (under (a)), the ECB may,

where necessary, require national competent authorities to open proceedings with a

view to taking action in order to ensure that appropriate sanctions are imposed in

accordance with:

• the acts referred to in Article 4, para. 3, first sub-para., and

• any relevant national legislation conferring specific powers which are not

required by European banking law, as in force.

1035





1039 OJ L 318, 27.11.1998, pp. 4-7.


285

The sanctions applied by national competent authorities must be effective,

proportionate and dissuasive as well.1041

The above will be applicable, in particular:

• to pecuniary sanctions to be imposed on credit institutions, financial holding

companies or mixed financial holding companies for breaches of national law

transposing relevant EU Directives, and

• to any administrative sanctions or measures to be imposed on members of the

management board of a credit institution, financial holding company or mixed

financial holding company or any other individuals who under national law

are responsible for a breach by a credit institution, financial holding company

or mixed financial holding company.1042

(c) Without prejudice to the above-mentioned under (a) and (b), for the purposes

of carrying out the tasks conferred on it by this Regulation, in case of breaches of ECB

Regulations or Decisions, the ECB may impose sanctions in accordance with Council Regulation 2532/98.

1043

1041

Ibid., Article 15, para. 5, first sub-para.



286

E. Organisational principles: an overview

1. General overview

The Council Regulation proposal’s provisions in Article 19 provide for the creation

and operation, within the ECB‒s framework, of an ‘internal body’, the Supervisory

Board, responsible for “planning and executing” the ECB’s specific tasks (see below,

under 2). The Regulation also includes specific provisions on:

• the institutional independence of the ECB (including the members of its

Supervisory Board) and the national competent authorities acting within the

SSM with regard to the specific tasks conferred upon the ECB,1044

• the accountability of the ECB before the European Parliament, national

Parliaments, and the Council,1045

• the professional secrecy of the members of the Supervisory Board and of the

ECB staff carrying out the specific tasks to be conferred upon the ECB, as well

as the exchange of information,1046

• the ECB’s obligation to devote the necessary financial and human resources to

the exercise of the specific tasks to be conferred upon it,1047

• its budget and annual accounts,1048

• its power to roll the cost of micro-prudential supervision over to credit

institutions subject to supervision (‛supervisory fees’),1049

and

• the exchange and secondment of staff, under the responsibility of the ECB,

with and among national competent authorities.1050

1044

Council Regulation proposal, Article 16. The ECB’s institutional independence, in

relation to its main tasks, is laid down in Article 130 of the TFEU.

1045 Ibid., Article 17, 21 and 23, para. 2. The ECB’s accountability, in relation to its main tasks,

is laid down in Article 284, para. 3, of the TFEU.






287

2. The Supervisory Board


The planning and execution of the tasks conferred upon the ECB will be fully

undertaken by an internal body, the Supervisory Board.1051

As specified in the

Explanatory Memorandum of the Council Regulation proposal, as submitted by the

Commission in September 2012, the ECB Governing Council will be ultimately

responsible for taking Decisions, but may decide to delegate certain tasks or decision-

making powers to the Supervisory Board.1052

2.2 Composition


The Supervisory Board will be composed of:

• its Chair and Vice-Chair, appointed in accordance with para. 2,

• four (4) representatives of the ECB, appointed in accordance with para. 2a,

and

• one representative of the national authority competent for the supervision of

credit institutions in each participating Member State (hereinafter 'Supervisory

Board').1053

The four (4) representatives of the ECB appointed by the Governing Council are not

allowed to perform duties directly related to the monetary function of the ECB. All the

ECB representatives will have voting rights.1054

Where the competent authority is not a central bank, the member of the Supervisory

Board may decide to bring a representative from the Member State's central bank.1055

For the purposes of the voting procedure set out in para. 2ab, the representatives of the

authorities of any one Member State will together be considered as one member.1056

All members of the Supervisory Board are required to act in the interest of the Union

as a whole.1057

The appointments for the Supervisory Board will have to respect the

principles of gender balance, experience and qualification.1058

1051

Consequently, the Supervisory Board is not promoted to an ECB body, obviously in order

to avoid an amendment to the TFEU.

1052 Explanatory Memorandum, section 4.5.2, fourth sentence, along with Article 19, para. 3.

1053 Ibid., Article 19, para. 1, first sub-para., first sentence.


1055 Ibid., Article 19, para. 1, second sub-para., first sentence.

1056 Ibid., Article 19, para. 1, second sub-para., second sentence.

1057 Ibid., Article 19, para. 1, first sub-para., second sentence.


288

2.2.2 Specific provisions for the Chair and the Vice-Chair

(a) After hearing the Supervisory Board, the ECB will submit a proposal for the

appointment of the Chair and the Vice-Chair to the European Parliament for

approval.1059

Following the approval of this proposal, the Council will adopt an

implementing Decision to appoint the Chair and the Vice-Chair.1060

(b) The Chair will be chosen on the basis of an open selection procedure, on

which the European Parliament and the Council must be kept duly informed, from

among individuals of recognised standing and experience in banking and financial

matters and who are not members of the Governing Council.1061

(c) The Vice-Chair will be chosen from among the members of the Executive

Board of the ECB.1062

The Council will act by qualified majority without taking into

account the vote of the members of the Council which are non-euro participating

Member States.1063

(d) Once appointed, the Chair will be a full-time professional and will not be

allowed to hold any offices at national competent authorities.1064

The term of office

will be five (5) years and not be renewable.1065

(e) If the Chair no longer fulfils the conditions required for the performance of his

duties or has been guilty of serious misconduct, the Council may, following a proposal

by the ECB, which has been approved by the Parliament, adopt an implementing

Decision to remove him from office.1066

The Council will act by qualified majority,

without taking into account the vote of the members of the Council which are non-euro

participating Member States.1067

For these purposes, the European Parliament or the

Council may inform the ECB that they consider that the conditions for the removal of

the Chair from office are fulfilled, to which the ECB has to respond.1068

2.2.3 Observers

A representative of the European Commission (but not of the EBA as was provided for

in the Commission’s proposal) may participate, as observer, in the meetings of the

Supervisory Board upon invitation.1069

Observers wiil not have an access to

confidential information relating to individual institutions.1070

1059

Ibid., Article 19, para. 2, first sub-para., first sentence.

1060 Ibid., Article 19, para. 2, first sub-para., second sentence.

1061 Ibid., Article 19, para. 2, first sub-para., third sentence.

1062 Ibid., Article 19, para. 2, first sub-para., fourth sentence.

1063 Ibid., Article 19, para. 2, first sub-para., fifth sentence.



1066 Ibid., Article 19, para. 2aa, first sub-para., first sentence.

1067 Ibid., Article 19, para. 2aa, first sub-para., second sentence.

1068 Ibid., Article 19, para. 2aa, second sub-para.



289

TABLE 16

The composition of the Supervisory Board

• Chair

• Vice-Chair

• four (4) representatives of the ECB

• one representative of the national authority competent for the supervision of

credit institutions in each participating Member State

• obsrevers

2.3 Decision-taking procedures

Decisions of the Supervisory Board will be taken by a simple majority of its members,

with each member having one vote. In case of a draw, the Chair will have a casting

vote.1071

Exceptionally, the Supervisory Board will take Decisions on the adoption of

Regulations according to Article 4, para. 3, of this Regulation, on the basis of a

qualified majority of its members, as defined:

• in Article 16, para, 4, of the Treaty on European Union, and

• in Article 3 of the Protocol (No 36) on transitional provisions for the

members representing the participating Member States' authorities.

Each of the four (4) representatives of the ECB appointed by the Governing Council

will have a vote equal to the median vote of the other members.1072

2.4 Duties

Without prejudice to the provisions of Article 5, the Supervisory Board will have the

following duties:

• carry out preparatory works regarding the supervisory tasks conferred upon the

ECB, and

• propose to the Governing Council of the ECB complete draft Decisions to be

adopted by the latter, according to a procedure to be established by the

ECB.1073

1071

Ibid., Article 19, para. 2ab.



290

The draft Decisions will be transmitted at the same time to the national competent

authorities of the Member States concerned.1074

A draft Decision will be deemed

adopted unless the Governing Council objects within a period to be defined in the

procedure mentioned above but not exceeding a maximum period of ten (10) working

days.1075

However, if a non-euro participating Member State disagrees with a draft Decision of

the Supervisory Board, the procedure set out in Article 6, para. 6abb will apply.1076

In

emergency situations the above-mentioned period will not exceed 48 hours.1077

If the

Governing Council objects to a draft Decision, it has to state the reasons for doing so in

writing, in particular stating monetary policy concerns.1078

In the case that a Decision is

changed, following an objection by the Governing Council, the non-euro participating

Member State may notify the ECB of its reasoned disagreement with the objection. In

this case the procedure set out in Article 6, para 6ab will apply.1079

2.5 The Steering Committee

The Supervisory Board, voting in accordance with the rule set out in para. 2ab, will

establish a Steering Committee from among its members with a more limited

composition to support its activities, including preparing the meetings.1080

The Steering

Committee will have no decision-making powers.1081

It will be chaired by the Chair or,

in the exceptional absence of the Chair, the Vice-Chair of the Supervisory Board.1082

The composition of the Steering Committee will ensure a fair balance and rotation

between national competent authorities.1083

It will consist of no more than ten (10)

members including the Chair, the Vice-Chair and one additional representative from

the ECB.1084

The Steering Committee will execute its preparatory tasks in the interest of the Union

as a whole and will work in full transparency with the Supervisory Board.1085

1074

Ibid., Article 19, para. 3, second sentence.



1077 Ibid., Article 19, para. 3, fifth sentence.

1078 Ibid., Article 19, para. 3, sixth sentence.

1079 Ibid., Article 19, para. 3, seventh sentence.

1080 Ibid., Article 19, para. 4a, first sub-para.

1081 Ibid., Article 19, para. 4a, second sub-para., first sentence.

1082 Ibid., Article 19, para. 4a, second sub-para., second sentence.

1083 Ibid., Article 19, para. 4a, second sub-para., third sentence.

1084 Ibid., Article 19, para. 4a, second sub-para., fourth sentence.

1085 Ibid., Article 19, para. 4a, second sub-para., fifth sentence.

291

2.6 The Secretariat

The activities of the Supervisory Board will be supported by a Secretariat. This support

will include preparing the meetings on a full time basis.1086

2.7 Institutional aspects

The Governing Council will adopt internal rules setting out in detail its relation with

the Supervisory Board.1087

The Supervisory Board will also adopt its rules of procedure,

voting in accordance with the rule set out in para. 2ab.1088

Both sets of rules public

have to be made public.1089

The rules of procedure of the supervisory board will have

to ensure equal treatment of all participating Member States.1090

1086






292

F. Final remarks

(a) The European Commission’s proposals tabled on 12 September 2012 initiated

a process – on the basis of the political decisions taken on 29 June – that will bring

about a significant breakthrough in the functioning of the banking system in the euro

area, without TFEU amendment.1091

Although the implementation timeframe for the

proposals is still pending, there is no doubt that the micro-prudential supervision of

certain credit institutions incorporated in euro area Member States is going to be

conferred on the ECB, which will carry out the relevant specific tasks in cooperation

with the national competent (supervisory) authorities, along with the other tasks

already conferred upon it (particularly in relation to the definition and implementation

of the single monetary policy in the euro area and the contribution to macro-prudential

oversight of the European financial system).

These proposals are the first substantial step for the creation of a European Banking

Union, the final stage of which will include setting up – as already mentioned in

Section A of this article – at euro area level:

• a single supervisory authority over certain credit institutions (the ECB, as

stipulated in the Council Regulation proposal),

• a single resolution authority,

• a single resolution fund for covering funding gaps, provided that a decision is

made for the resolution of unviable credit institutions, and

• a single deposit guarantee scheme (which could be combined with the single

resolution authority, by creating a ‘European Deposit Insurance and

Resolution Authority’ or EDIRA).

(b) Once the Council Regulation is adopted in its current form, the ECB will be

asked to submit proposals, inter alia, for:

• a Framework Regulation with regard to the SSM perimeter and the relations

between the ECB and the national supervisory authorities (according to

Article 5 of the Council Regulation proposal),

• a Decision on close cooperation (according to Article 6 of the Council

Regulation proposal),

• a Regulation on supervisory fees,

• a Regulation on sanctions, and

• a Regulation setting up a mediation panel and its rules of procedure

(according to Article 18, para. 3b of the Council Regulation proposal).

1091

In the author’s view, it would be necessary, for reasons of legal certainty, to amend Article

3, para. 1(c) TFEU, in order to specify that the Union now has exclusive competence on

micro-prudential supervision over credit institutions incorporated in the euro area. The author

understands, however, that such an amendment could be deemed excessive (particularly given

the political difficulties that would arise from amending the TFEU merely for this reason), since

the conferment upon the ECB of specific tasks concerning micro-prudential supervision of

credit institutions may reasonably be argued to be based on Article 107, para. 6 TFEU, and

thus covered, to a great extent, by the existing institutional framework of the EU.

293

(c) There is no doubt that the above-mentioned proposals constitute a

development of utmost importance to the EU internal market, and beyond. Once the

authorisation and micro-prudential supervision of participating credit institutions is

assigned to the ECB, government influence over credit institutions in these Member

States will be significantly weaker.

The conditions under which credit institutions will invest in sovereign bonds will

change substantially in future, since banks’ dependence on Member States (where

applicable) will be kept under bounds.1092

Weaning national banking systems from

government influence could thus become an important springboard for creating

institutional conditions that could lead to an EU fiscal union, provided the necessary

political will exists.

(d) In accordance with the above-mentioned provisions of the Council Regulation

proposal, mergers and acquisitions in the banking sector will be subject to approval by

the ECB rather than national competent authorities. With this in mind, the European

banking landscape will be shaped at supranational level in the next few decades, and,

most definitely, this decade. In the author’s view, this would lead to a greater degree of

concentration in the European banking system and, as a result, to a very significant

decline in the number of credit institutions operating across euro area Member States.

(e) The ECB’s function as supervisory authority over participating credit

institutions will have many positive effects. Without doubt, the ECB has the necessary

expertise for discharging supervisory tasks over euro area credit institutions,

particularly taking account of:

• its unquestionably successful contribution to the management of the recent

international financial crisis, and

• its substantial contribution to addressing the current fiscal crisis in the euro

area.

In this respect, the provisions of the Council Regulation proposal are positively

evaluated by the author.

(f) However, these proposals need to be treated with some scepticism as well.

There are two main reasons for this:

(i) Conferring supervisory competences over financial system participants to a

monetary authority generally raises issues of potential conflicts of interests,

particularly putting into question the ECB’s ability – in its capacity as

monetary authority – to consistently pursue its primary objective of

maintaining price stability.1093

1092

Here, it is worth pointing out the need to amend, in due course, the provisions of Directive

2006/48/EC (to be modified by the CRR), which stipulate, in relation to the calculation of

capital requirements for credit risk, that claims on Member State governments in the form of

bonds have a zero percent risk weight. The experience from the ‘voluntary’ haircut on Greek

government bonds (see Stephanou (2012), pp. 25-28) has shown that these provisions are now

ineffective (apart from the fact that credit institutions are given perverse incentives when

implementing capital adequacy rules).

1093 Article 127, para. 1, first sentence TFEU.

294

(ii) One cannot preclude the (undesirable) eventuality of one or more

systemically important financial institutions under ECB supervision becoming

insolvent in the first few years of the ECB’s term of office as supervisory

authority – which might also be attributed to a deficient performance of its

duties.1094

In that case, the ECB’s reliability as monetary authority would be

strongly called into question (not in terms of substance, but from a political

point of view), with all the negative consequences that this would entail for

the sustainability of the euro area.

(g) In conclusion, there must be quite an efficient planning of the institutional,

organisational and operational framework governing the ECB’s exercise of supervisory

tasks over euro area credit institutions, including most notably ‘Chinese walls’ (as

detailed above, under B 6), in order to ensure that the ECB’s stature as institutional

body is fully safeguarded. At the end of the day, the onus of the successful

performance of these tasks will be on the ECB itself.

1094

This is, of course, a visible risk for all central banks with statutory competence on micro-

prudential supervision over credit institutions, and it is one of the main concerns as to the

assignment of such competencies to central banks.

295

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