Academics and policymakers generally agree that the financial system can benefit from additional supervision or regulation that addresses issues of systemic risk. Furthermore, there are no metrics for gauging whether such measures are a prescription for curing the current crisis or are a policy framework for preventing the next crisis, since financial markets are constantly innovating and responding to regulation and oversight. The European Union has taken a number of steps to improve financial supervision among its members, including: strengthening the roles of advisory Committees in the areas of securities, banking, and insurance regulators; adopting regulations on credit rating agencies; providing funding in support of international accounting standards; and considering a measure to register hedge funds. The United States has chosen to take a different approach that could potentially strengthen the role of the Federal Reserve and create a new consumer watchdog agency, among other proposals. EU finance ministers also disagree over strict new regulations that would have imposed restrictions on American hedge funds operating in Europe. The actions EU leaders take are important to the United States, because EU members comprise some of the largest financial centers in the world, their financial markets are well developed, and European financial firms are often competitors to those in the United States. The economic and financial crises, however, have exposed deep philosophical differences among EU members over the most effective policy course to pursue to address the financial crisis and the economic downturn and problems of integration and consistency across countries. The financial crisis has made EU members especially concerned about the size and structure of financial systems and they are pursuing changes to the international financial system. Financial systems have become large, complex, interconnected structures that have grown so large that some observers question whether the current financial system is compatible with maintaining financial stability. In various ways, globalized financial markets challenge the effectiveness of the current framework of financial market supervision and coordination that is based on national interests. As part of the overall EU effort to achieve financial and economic integration, the EU members have adopted such Directives as the Directive on Financial Services and the Financial Services Action Plan (FSAP).The integration of the financial services sector across borders, however, has been uneven, with integration progressing faster in the money, bond, and equity markets, and slower in the banking sector where much of the focus on international cooperation is being directed. European Central Bank . Financial Stability Table . The basis of this architecture involves implementing measures that EU members have announced as well as providing for: (1) continued support for the financial system from the European Central Bank and other central banks; (2) rapid and consistent implementation of the bank rescue plan that has been established by the member states; and (3) decisive measures that are designed to contain the crisis from spreading to all of the member states. In order to remedy this obstacle, the report offered a two-level approach to reforming financial market supervision in the EU. In addition to continuing to perform the functions currently assigned to these committees, the new European Authorities would (1) have the authority to resolve disputes between national supervisors regarding financial institutions operating across national borders; (2) be responsible for the licensing and direct supervision of some specific EU-wide institutions; (3) play a decisive role in the interpretation and development of technical standards; (4) be responsible for establishing supervisory standards and practices; (5) work closely with the ESRC to assure that the ESRC can carry out its responsibilities for macro-prudential supervision; (6) facilitate exchanges of information in crisis situations and act as a mediator when necessary; and (7) represent EU interests in bilateral and multilateral discussions relating to financial supervision. Second, the EC intends to move to reform those areas where European or national regulation is insufficient or incomplete by proposing a number of items, including: (1) a comprehensive legislative instrument that establishes regulatory and supervisory standards for hedge funds, private equity and other systemically important market players; (2) a White Paper on the necessary tools for early intervention to prevent a similar crisis; (3) measures to increase transparency and ensure financial stability in the area of derivatives and other complex structured products; (4) legislative proposals to increase the quality and quantity of prudential capital for trading book activities and complex securitization; (5) proposals to address liquidity risk and excessive leverage; and (6) a program of actions to establish a more consistent set of supervisory rules. The financial crisis has demonstrated that financial markets are complex, highly integrated and interconnected.
The global financial crisis has sparked a debate over the cause and impact of the crisis. Academics and policymakers are searching for changes in the financial system that can correct any perceived weaknesses in the structure of regulation, the content of regulations, and the coverage of financial instruments and activities. Since the onset of the crisis, numerous proposals have been advanced to reform or amend the current financial system to help restore economic growth. In the United States, the Obama Administration has proposed a plan to overhaul supervision of the U.S. financial services sector. Senator Collins introduced S. 664, the Financial System Stabilization and Reform Act of 2009, with a companion measure, H.R. 1754, that was introduced by Representative Castle in the House of Representatives. The measures would create a Financial Stability Council and grant the Federal Reserve the authority to examine the soundness and safety of the financial system posed by bank holding companies. On March 16, 2010, Senator Dodd unveiled a proposal to reform financial markets that would include a Consumer Financial Protection Bureau within the Federal Reserve; a Financial Stability Oversight Council; new authority to liquidate banks; new regulations for credit rating agencies; new limits on banks' trading activities; and renovation of some federal banking legislation. Other measures include: S. 1682 (Senator Cantwell), the Derivatives Market Manipulation Prevention Act of 2009; S. 1803 (Senator Merkley), the Federal Reserve Accountability Act of 2009; S. 2756 (Senator Warner) the Financial Services Systemic Risk Oversight Council Act of 2009; H.R. 3795 (Representative Frank), the Over-the-Counter Derivatives Markets Acts of 2009; H.R. 3968 (Representative Ellison), to amend the Bank Holding Company Act; and H.R. 3996 (Frank), to improve financial stability. The crisis has underscored the fact that national and international financial markets have become highly integrated, and problems in one market can trigger contagion that can spread both among countries and into economic sectors to affect businesses, employment, and household well being. Increasingly, however, coordination among European capitals and between Europe and the United States has proven to be elusive.
Similarly, governments in Europe are considering what, if any, changes they should make to their national financial systems. Along with the United States and other countries, European countries also are considering changes to the international systems of financial supervision and regulation in order to ensure prosperity through the smooth operation of domestic and international financial systems. This process may include reconsidering the roles and responsibility of the central banks in the post-financial crisis era. Various organizations and groups are advancing a large number of recommendations and prescriptions. Some goals for any such adjustments may include providing an institutional structure for oversight and regulation that is robust, comprehensive, flexible, and politically feasible while providing appropriate incentive structures to preclude excessive risk-taking. Of course, there are no guarantees that amending the current system or employing a different regulatory and supervisory structure will preclude a repeat of the most recent financial crisis given that financial markets and institutions are continually growing, innovating, and responding to government- and market-imposed constraints.
This report addresses the European perspectives on a number of proposals that are being advanced for financial oversight and regulation in Europe. The European experience may be instructive because financial markets in Europe are well developed, European firms often are competitors of U.S. firms, and European governments have faced severe problems of integration and consistency across the various financial structures that exist in Europe.