Introduction to the European System of Financial Supervision

One of the European responses to the financial crisis which started in 2007, was the creation of a new architecture for financial supervision in Europe. The new European supervisory structure came into force on January 1, 2011, less than two years after the publication of the “de Larosière report” which recommended the new structure in response to the financial crisis. With the goal of maintaining financial stability in Europe, the European System of Financial Supervision (ESFS) is built on a two pillar supervisory approach. One pillar refers to microprudential supervision and consists of three European Supervisory Authorities (ESAs) and the European Central Bank (ECB). The other, a macroprudential pillar, is the European Systemic Risk Board (ESRB) and the ECB. At the microprudential level, the European Banking Authority (EBA) is created for the banking sector, the European Securities and Markets Authority (ESMA) for securities markets, and the European Insurance and Occupational Pensions Authority (EIOPA) for the insurance and occupational pensions sector. Furthermore, a Joint Committee of the ESAs is established for coordinating the microprudential activities across Europe.

The three ESAs and the ECB coordinate supervision of, and regulations for, European markets and do not replace existing national competent authorities (NCA), which continue to be involved in the day-to-day supervision.

Abstract The financial crisis has demonstrated the need to rethink the conceptual approach of risk and data collection within the financial sector, by taking a holistic, economic and financial system wide perspective. As part of maintaining financial stability in Europe, three European-wide supervisory authorities, a new supervisory task for credit institutions for the European Central Bank, and one macroprudential body have been established, which are supplemented by a scheme of inter-governmental financial assistance. This chapter provides an overview of the new challenges to manage systemic risks in the European financial system, focusing on the required macro- and micro level statistics and the new institutional and conceptual framework for identifying systemic risk and calls for further research to understand the behavioral aspects of decision making and herding effects in financial markets and to look beyond traditional economic theory, which seems to have failed to predict the size, magnitude and the contagion effects of the recent financial crises. Despite the fact that it is too early yet to judge the performance of the new financial stability framework, the set-up is in our view likely to have a major positive impact on the European endeavor to safeguard financial stability, bringing back the needed trust and confidence in financial markets.

Keywords Keywords: Financial stability, financial markets, financial statistics, banking union, systemic risk.