European supervision is key to the construction of a single market for capital

The Savings and Investment Union (SIU) project is undoubtedly the most important financial project in the European Union since the single currency. It is our generation’s responsibility to make it succeed. Other than that, we will face a steep decline in the EU’s financial independence and ability to fund its political choices. None of us should take this risk and we must join forces and get over our reluctances and second thoughts : whoever is in charge now should make everything in their power to facilitate its adoption.

Is it perfect ? Maybe not. But it is historical ; and the cost of failure would be terrible.

Is it difficult ? Maybe. Especially where supervision is concerned.

Surreal criticism is sometimes heard about the Market Integration and Supervision (MISP) reform in supervision proposed by the European Commission : it is as if the current system were perfect, and some malevolent troll in Brussels had decided to degrade it. Fake news. The current architecture is far from perfect ! 

It is fueling fragmentation in the financial system, creating unnecessary administrative burden, higher financing costs for the economy, and regulatory arbitrage.

It is far from perfect in terms of financial stability: dilution of supervisory responsibilities is never a good idea, and it is currently the case for large pan-European financial entities and market infrastructures.

It is also sub-optimal in terms of investor protection : passporting with insufficient supervisory convergence and limited skin in the game paves the way to misunderstanding and mis-selling.

Fixing market supervisory framework is necessary, and the MISP is a very moderate, yet well calibrated step forward. Let us hope we will not need a financial crisis to adopt it. A swift adoption is needed.

Criticism is harsh on the risk of bureaucracy and higher costs with a more centralized supervision. Some are taking the example of the SSM and voicing nostalgia on the good old days of national banking supervisors. It was so much nicer ! Or was it so ? Who would question that the European banking sector is now much sounder than in 2008 ? Of course the unfinished Banking Union, with its old-fashioned obstacles to equity and liquidity circulation in pan-European banking groups, is frustrating. But the progresses in terms of financial stability are undoubtably there. 

As regards market supervision, more centralization and supervisory convergence is a key condition to better regulation and simplification. Absurdly precise and prescriptive rules are only necessary to try and prevent supervisory divergences. Fixing supervision would dramatically reduce the need for this and allow a more outcome-based approach.

Is bureaucracy unavoidable? Why couldn’t ESMA become a good European supervisor ? 

Of course it needs to develop its supervisory culture, and it needs to do that efficiently. The French AMF and the Dutch AFM made proposals for that in a paper published on July 22.

But governance is of the essence and we need to be creative there. European financial supervisory institutions often lack sociological diversity in their governance. While many national supervisors benefit from diverse competences and professional backgrounds on their boards. Those prove to play a challenging but constructive role in these authorities, making sure they remain aware of the realities of the activities they are regulating. Why not try this at European level ? We could imagine a balanced and diverse governance for the future ESMA. Let us imagine an innovative formula : 1/3 of permanent directors, 1/3 of representatives of the Colleges of national supervisors, and 1/3 of independent qualified personalities. These independent board members, appointed by European institutions, would not have to be permanent - which tends to lead to the appointment of professional supervisors only. They could contribute their diverse expertise and experiences to a new ESMA.  This could reassure investors and the industry on this new ESMA. 

There are concerns around the risk of loss of competence and local knowledge. NCAs will indeed need to support a smooth ramp up of ESMA’s capacity and culture - through secondments, mutualization of resources, building up a supervisory culture. But that should not contradict the fact that there should be no room for double supervision. We need a clear European responsibility in supervision.

To conclude on a note of hope, Europe remains one of the most powerful and innovative place in the world, as it has been for centuries. We are at a time where we have an opportunity to move decisively to make European markets fit for the future. Let us mobilize to create a single European market for capital that will enable us to finance our political priorities. This is the project of our generation and we have to deliver on it now.