Marina Barata, Master's in Law
The debate on the structure and functioning of the European financial system is necessarily linked to the discussion regarding the financial supervision models.
This is not a recent issue, since it resurfaces with every financial crisis, but it is still relevant, especially if we take into account that the globalization movement brings along a greater propensity for instability in the financial sector given the risk of contagion, systemic risk or the domino effect.
Financial globalisation has gradually, in the name of synergies and competitive advantages, blurred the boundaries between the various sectors of financial activity, allowing the financial conglomerates to emerge.
Today, in addition to the traditional credit function of banking — raising savings or other repayable funds and transferring them on own account to other economic agents through loans or other forms of financing — Banks can provide investment services, operate on the stock exchange, invest in own account in real estate, and mediate insurance.
In the insurance sector, insurance companies have been explicitly legal recognized as financial institutions and we also seen the imposition of the legal duty to deposit in own accounts of banks the assets representing some technical reserves.
Therefore, in this environment of bancassurance and of assurbanque, we can identify a financial conglomerate when a group of companies provides several interlinked financial services (allfinance) in three sectors — the Banking sector, the Stock Exchange sector and the Insurance sector —, subject to the same and only control, not infrequently a holding company or Sociedade de Gestão de Participações Sociais (S.G.P.S) which is neither a credit institution or financial company nor an investment company or insurance company.[i]
This phenomenon of financial conglomerates has posed delicate problems of consolidated control and coordination in supervision and regulation. These problems are intensified by the growing concentration of large cross-sector financial groups with national, European, and international presence.
Globalisation affects the European financial stability, as market integration generates greater interdependence of those involved.
Systemic or contagion risk calls for a legal framework of control and supervision that guarantees stability for the financial system as a whole.
When due attention is paid to systemic issues, it becomes clear that is important to have a perspective of the whole euro area, since the behaviour of these complex large financial groups is likely to affect money and capital markets, as well as payment and settlement systems, far beyond national borders.
There is a need for the sectoral supervisory authorities to cooperate more closely with each other and to coordinate their actions.
The establishment of the European single market and the creation of the single currency have led to the harmonisation of supervisory rules by various Member States that led to the creation of the European supervisory system.
In this system there are three major models:
– The model of cooperation and coordination, where there is a Coordinating Authority that comprises three authorities responsible for the sectoral supervision of banks, investment firms and insurance companies. This is the traditional supervisory model adopted by Portugal, where Banco de Portugal (Bank of Portugal) supervises the banking sector, the Comissão dos Valores Mobiliários (Portuguese Securities Market Commission) supervises the activity of the Stock Exchange and the Autoridade de Supervisão de Seguros e Fundos de Pensão (Portuguese Insurance and Pension Funds Supervisory Authority) supervises the insurance and reinsurance activity. These three sectoral supervisory authorities participate in Conselho Nacional de Supervisores Financeiros (the National Council of Financial Supervisors) which is the coordinating authority for the sector.
– The Twin Peaks model devised by Micheal Taylor is based on the existence of two autonomous and independent supervisory authorities, but with transversal powers over the entire financial system, where one entity has prudential supervision powers and the other has behavioural supervision powers. This is the model chosen by Belgium and the Netherlands.
– The single supervisor model is based on the existence of a single authority responsible for integrated regulation and supervision of the banking, securities, and insurance sectors. In this unitary model, or of a single supervisor, the supervision, both prudential and behavioural, is carried out, in most of the countries that have adopted this system, by the respective National Central Banks.
Each model has its advantages and disadvantages, and it is up to each member state to adopt the model that best suits its supervisory and regulatory needs.
The role of National Central Banks (NCBs) in the prudential supervision of credit institutions in the euro area is a recurrent debate among EU Member States.
In this regard, the European Central Bank has issued a press release with a general vision of the debate on this matter in the euro area, where presents arguments supporting the preservation of a fundamental role for NCBs in prudential supervision in euro area countries[ii].
From the Eurosystem’s perspective, when considering the institutional framework that gave rise to the introduction of the euro, the arguments in favour of NCBs participation in prudential supervision becomes more apparent. The NCBs may benefit from their traditional focus on systemic risk and, in particular, from their knowledge as members of the Euro system regarding the money and securities market and the market infrastructures, in addition to the euro area. The very nature of NCBs which are, simultaneously, components of an EU body and national institutions could be an advantage.
The ECB concludes the press release by admitting that other solutions could prove to be quite effective, provided that the NCBs were granted a wide-ranging operational involvement in prudential supervision.
The debate remains open and it is certain that, regardless of the model chosen, the Member States have a duty to coordinate supervisory activity in order to avoid financial crises that will no longer be only national.
[i] Silva, Calvão da, 2012: Banca, Bolsa e Seguros, Tomo I – Direito Europeu e Português, Coimbra: Almedina, 3rd edition.
[ii] See European Central Bank Press Relase, 2001: THE ROLE OF CENTRAL BANKS IN PRUDENTIAL SUPERVISION, Accessed 29/07/2020, https://www.ecb.europa.eu/pub/pdf/other/prudentialsupcbrole_en.pdf.
Pictures credits: Finance business by Pikist.