The Institutional Change of Supervisory System of European Union Financial Market

Mindaugas Puidokas, Algis Junevičius

Abstract


Purpose. The global financial crisis caused public discussions on efficiency of activity of financial sector supervisors at macro and micro levels. The authors of completed researches notice that modern supervisory institutions failed to assess properly the degree of risk in the financial system (Levine, 2010; McCarthy, Poole..., 2010). Therefore, the European Union institutions and Member States have launched an unprecedented reform of the activity model of supervisory institutions. These changes taking place in the financial systems of institutional structures, both at the national and integrational levels, raised the question: will they be able to ensure greater stability of financial markets?

In consideration to this, the major aim of this article is to identify and assess the institutional changes of supervisory system of the EU financial market. The special attention in this research is paid to the banking union, which should be based on a more integrated approach and complement the single currency area and the internal market.

Methodology. The logical method is used for making substantiated generalization of collected facts and formulating transitional and final research conclusions. The method of systematic (document) analysis is applied seeking to evaluate systemically the efficiency of activity of financial sector supervising institutions in the EU. The generalization method, together with a logical, helped to identify the general and major features and characteristics of the mechanisms, which were analysed in this paper.

Results. During the process of analysis of existing literature on the subject the changes and development trends of institutional framework for financial supervision in the EU were identified and assessed. In this paper the problematic aspects of financial market supervision were defined and the changes that have occurred before and after financial crisis in the system of financial supervision revealed. Authors identified the macro and micro-prudential supervisory measures used for reforming the financial sector and presented specific recommendations and proposals.

The theoretical contribution. The research showed that the consequences of instability of the financial institutions can become a burden on the state and its taxpayers. The priority is ensuring the stability of the financial sector in time and at the lowest cost. This can be achieved by strict regulation and supervision, also by cooperation among the responsible institutions and the coordination of their actions, by applying preventive measures for resolution of troubled institutions. On the other hand, the results of the research confirm that European Banking Union (EBU) brought serious changes for Member States of Eurozone in this field. After final creation of the new financial market supervision model - a more integrated approach will be applied. The creation of Single Supervisory Mechanism (SSM) for Eurozone will have no negative impact on competitiveness of banking sectors of Member States, which are not in the Eurozone. The analysis in this paper shows that these countries can even benefit after the SSM creation. The new system will significantly contribute to greater stability in those countries. This impact does not depend on the decisions, which are made by the states, which can belong to the Banking Union only as associate members.

Practical implications. The proposals for supervisory and regulatory institutions are submitted on the basis of this research. Its results show that recent integrated supervision models failed to respond quickly and effectively to financial crisis. The analysis results confirmed that a simple European System of Financial Supervision (ESFS) is not sufficient to prevent the fragmentation of the European financial market. Some developed mechanisms do not perform their functions, because of their internal structure complexity and the size of the EU banking sector.  Permanent conflicts of interests among the EU and national supervisors impacted the necessity of creation of a new and supranational bank sector supervision and resolution system. Therefore the clear balance and division of competences among European and national supervision authorities it is urgently needed. It is appropriate to establish a fair and balanced cost-sharing mechanism too.

Keywords: European System of Financial Supervision, Banking Union, single supervisory mechanism, single resolution mechanism.

Paper type: Theoretical paper.


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