Financial
governance in Europe is obviously a hot topic these days. Every day,
we can read in the financial press the latest news on
- how European banks are doing;
- whether Euro zone countries are able to pay their debt;
- if and how the whole project of a unique European currency can be rescued.
In this
discussion, we can read about ever new mechanisms, facilities, and
rescue funds that are created by Euro zone and/or EU members. I
voluntarily admit that I feel a little bit lost in all these
shortcuts used to designate the different institutions.
In this
article, I would like to summarize which basic institutions have been
created so far and what their respective purpose is.
I. Protection
of Euro zone member states' solvability
European
Financial Stability Facility (EFSF)
The EFSF has
been created on October 19, 2011 by an international treaty. It
constitutes a limited liability company under Luxemburg Law and has
its registered office in Luxemburg.
The purpose
of the EFSF is to grant financial assistance to beneficiary member
states to protect their solvency. It can do so by
- purchasing bonds in the primary or secondary market;
- granting precautionary facilities or facilities to finance the re capitalization of financial institutions in a Euro area member state by a loan to the government of such member state.
The EFSF is
backed by irrevocable and unconditional guarantees of the member
states totalling 780 BEUR.
It shall be
liquidated on June 30, 2013.
European
Financial Stabilization Mechanism (EFSM)
The EFSM was
put in place in May 2010 to preserve financial stability in the EU.
It grants
financial assistance to a member state which is experiencing, or is
seriously threatened with, a severe economic or financial disturbance
caused by exceptional occurrences beyond its control. Such financial
assistance may be granted in form of a loan or credit line.
European
Stability Mechanism (ESM)
The ESM is
an international financial institution that has been created by the
ESM treaty signed on February 2, 2012. It has full legal personality;
its principal office is in Luxemburg and it may establish a liaison
office in Brussels.
The
authorized capital of the ESM is 700 BEUR. Such capital is divided
into paid-in shares (80 BEUR) and callable shares (620 BEUR). Annex I
of the ESM treaty defines the proportion of authorized capital that
each ESM member state shall contribute. Germany and France are the
biggest contributors with 27 % and 20 % respectively.
The purpose
of the ESM is to protect the financial stability of the Euro area by
providing funding and other financial support to ESM members which
face severe financing problems. It can support its member states
through
- granting precautionary financial assistance in the form of a precautionary conditioned credit line;
- granting loans under the condition that a macro-economic adjustment program has been put in place;
- purchasing bonds of an ESM member state on the primary market;
- arranging for operations on the secondary market.
II. Banking
Regulation – European System of Financial Supervisors (ESFS)
The ESFS is
a network of national and Union supervisory authorities whose main
objective is to ensure that the rules applicable to the financial
sector are adequately implemented to preserve financial stability and
to ensure confidence in the financial system as a whole and
sufficient protection for the customers of financial services.
European
Systematic Risk Board (ESRB)
The ESRB is
based in Frankfurt am Main. Its purpose is to ensure the
macro-prudential oversight of the Union's financial system. It
- collects and analyzes all relevant and necessary information;
- identifies and prioritizes systemic risks;
- renders warnings and recommendations and monitors them.
European
Banking Authority (EBA)
With the
creation of the EBA, the EU wants to face the shortcomings in the
areas cooperation and coordination among national supervisors of the
EU financial market. In other words, it wants to ensure an integrated
European supervision of the EU financial market.
The EBA has
its seat in London and has legal personality as well as
administrative and financial autonomy. It shall
- improve the functioning of the internal market;
- ensure a high, effective, and consistent level of regulation and supervision;
- protect public values such as the stability of the financial system;
- foster dialogue and cooperation with supervisors outside the EU.
The EBA is
best known for carrying out stress tests of European banks.
European
Insurance and Occupational Pensions Authority (EIOPA)
The objective of the EIOPA is to protect the public interest by
contributing to the short, medium and long-term stability and
effectiveness of the EU financial system. More specifically, it deals
with the activities of insurance undertakings, reinsurance
undertakings, financial conglomerates, institutions for occupational
retirement provision and insurance intermediaries.
It has legal
personality and its seat is situated in Frankfurt am Main.
European
Securities and Markets Authority (ESMA)
The
objective of the ESMA is the same as EIOPA's objective, e.g. to
protect the public interest by contributing to the short, medium and
long-term stability and effectiveness of the EU financial system.
However, as its name indicates, its focus is on protecting the
stability of securities markets.
The ESMA has
legal personality and it has its seat in Paris.
Joint
Committee of the European Supervisory Authorities
The purpose
of the Joint Committee is to settle cross-sectoral disagreements
between the European Supervisory Authorities.
Resources:
- EFSF Framework Agreement dated October 19, 2011
- Treaty establishing the European Stability Mechanism dated February 2, 2012
- EU Regulation 1092/2010 establishing the European Systematic Risk Board
- EU Regulation 1093/2010 establishing the European Banking Authority
- EU Regulation 1094/2010 establishing the European Insurance and Occupational Pensions Authority
- EU Regulation 1095/2010 establishing the European Securities and Markets Authority
