Europe's Regulatory Response to the Financial Crisis: The European System of Financial Supervisors
| Author | Robert Wyse Jackson |
| Position | LLB (Dub), LLM (Corporate and Securities Law) Candidate, London School of Economics |
| Pages | 161-184 |
EUROPE'S
REGULATORY
RESPONSE
TO
THE
FINANCIAL
CRISIS:
THE
EUROPEAN
SYSTEM
OF
FINANCIAL SUPERVISORS
ROBERT
WYSE
JACKSON*
There
is
nothing
more
difficult
to
carry
out,
nor
more
doubtful
of
success,
nor
more
dangerous
to
handle,
than
to
initiate
a
new
order
of
things.
For
the
reformer
has
enemies
in
all
those
who
profit
by
the
old
order,
and
only
lukewarm
defenders
in
all
those
who
would
profit
by
the
new
order,
this
lukewarmness
arising
partly
from
fear
of
their adversaries
...
and
partly
from
the
incredulity
of
mankind,
who
do
not
truly
believe
in
anything
new
until
they
had
actual
experience
of
it.
Niccolo
Machiavelli,
The
Prince.
The
Financial
Crisis
The
recent financial crisis,
considered
by
many
to
be
the
worst
since
the
Great
Depression,
caused economic
devastation
in
the
global
financial
markets.
The
negative consequences
of
the
crisis were
widespread
and
resulted
in
the
collapse
of
large
financial
institutions,
the
provision
of
emergency funding
by
national governments
to
institutions operating
within
the
financial
markets
and
a
downturn
in
stock
markets around
the
world.
The
reasons
for
the
failure
of
the
global
financial
system
are
numerous,
but
include
overextension
of
credit
resulting
from
low
interest
rates,
excessive
leverage
by
financial
firms
in
conducting
their commercial
practises,
several
asset
bubbles
in
the
property
and
securities markets
and
the
failure
of
credit rating
agencies
and
investors
to
perform
comprehensive
due
diligence
on
financial
products traded
in
the
markets.
2
Evident
from
the
financial crisis
is
the failure
of
national authorities
to
adequately
supervise
and
regulate
irresponsible commercial
practises
by
*
LLB
(Dub), LLM (Corporate
and
Securities
Law)
Candidate,
London
School
of
Economics.
The
author
would
like
to
thank Eoin
Sreenan
for
his
helpful comments
on
an
earlier
draft
of
this
article.
1
See
Howard Davies,
The
Financial
Crisis:
Who
is
to
Blame
(Polity,
2010); George Soros,
The
New
Paradigm
of
Financial
Markets:
The
Credit
Crisis
of
2008
and
What
it Means
(Public Affairs,
2008);
and
Steven
Schwarz,
"Keynote Address:
Understanding
the
Subprime
Financial
Crisis"
(2009)
60
South
Carolina
Law
Review
549.
2
Yuliya Demyank
and
Otto
Van
Hemert,
Understanding
the
Subprime
Mortgage
Crisis
id=
1020396>
(visited
30
January
2011).
C
2011
Robert
Wyse
Jackson
and
Dublin University
Law
Society
Trinity
College
Law
Review
participants
in
the
global markets.'
The
years
prior
to
the
financial
crisis
had
seen
financial
institutions
grow
in
size
and
complexity,
and
it
was
evident
that
they
were
increasingly engaged
in
high profit commercial
activities
at
the
expense
of
sensible
risk management practises.
For
example,
the
practise
of
regulatory
arbitrage
became
pervasive
in
the
financial
markets.
Market
participants would
securitise
financial assets
to
take
them
off
their
balance
sheet
and thus
avoid
burdensome
capital
adequacy
requirements
despite the
fact
that
in
many
cases,
default
risk
was
not
transferred
away
from the
company.
4 The
European
and
global
regulatory
frameworks
were
not
developed
to deal
with
these
hazardous
practises that
became
prevalent
in
the
increasingly complex global
financial
system.' As
a
result,
deficiencies
in
the
global
regulatory
structures
tasked
with
supervising
the
financial
markets
were
callously
exposed
by
the
crisis.
This
has
compelled national governments
to review
6
and
restructure
their
supervisory regimes.
This article aims
to
provide
an
overview
of
the
new
European
regulatory
bodies
tasked
with
strengthening
and
safeguarding
Europe's
financial
system.
It
will
consider
whether
Europe will
be
effective
in
remedying
the
weaknesses
of
the
pre-crisis regulatory
structures
and
conclude
that
the new
European
System
of
Financial
Supervisors
(ESFS)
will
address
many
of
the
deficiencies
of
the old
system.
The
first section
of
this
article
considers
European regulatory
supervision prior
to
the
financial crisis.
The
second
section
briefly
reviews
the
de
Larosibre
report,
which
provided
the
framework
for
the
new
European
supervisory
bodies.
The
third
section examines
the
European
Systemic
Risk
Board
(ESRB)
and
analyses how effective
it
will
be
as
a
macro-prudential
supervisor
of
the
European
financial
markets.
The
fourth
section
focuses
on
the
European
Supervisory
Authorities
(ESAs)
as
micro-
prudential
supervisors
and
harmonisers
of
European
financial
law.
The
powers conferred
on these
Authorities
will
also
be
discussed.
European
Regulatory
Supervision:
Pre
Financial
Crisis
3
Andrew
Lo,
"Regulatory Reform
in
the Wake
of
the
Financial
Crisis
of
2007-2008"
(2009)
1(1)
Journal
ofFinancial
Economic
Policy
4.
4
Lord Turner,
The
Turner
Review:
A
Regulatory
Response
to
the
Global
Banking
Crisis
March
2009,
as
commissioned
by
the
Financial
Services
Authority
30
January
2011).
5
Stijn
Claessens, Giobanni
Dell'Ariccia,
Deniz Igan and
Luc
Laevan,
Lessons
and
Policy
Implications
from
the
Global
Financial
Crisis
(2010)
IMF
Working
Paper
WP/10/44,
presented
at
the
50th Panel Meeting
of
Economic Policy,
Tilburg,
October
23-24, 2009.
6
See Dodd-Frank
Wall Street
Reform
and
Consumer
Protection Act,
HR
4173
for United
States
regulatory reform.
[Vol. 14
162
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