Saturday, March 17, 2012

Euro Zone Financial Governance – EFSF, EFSM, ESM, and ESFS

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.


  • 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