What on earth is the

European Systemic Risk Council up to?



The de Larosičre Report of February 2009, followed by the European Directives translating its main findings into Community law, had flagged the significant role assigned to the ESRC. Indeed, the depth of the crisis that followed the Lehman bankruptcy, whose systemic effects had been widely underestimated at the time, showed the flagrant lack of analytical and coordination tools needed for effective crisis prevention. The ESRC was meant to warn early on the relevant authorities (European Council, Parliament, Commission and the three new market Authorities) of latent systemic risks and offer non binding “recommendations” on which they should act or – if not – at least explain their decision.


Since the establishment of the ESRC, the least that can be said is that the banking and sovereign debt crisis within the Eurozone has acquired an indisputable “systemic” character. The recent calls by the Commission for the creation of a “banking union”, by the President of the ECB for “political” initiatives aimed at arming the EU/EMU with credible means of re-establishing confidence or the warning by Commissioner Ollie Rehn of the risks of an implosion of the Eurozone, as well as the fears of “contagion” expressed by experts and the erratic behaviour of financial markets, all constitute as many irrefutable proofs of this deplorable state of affairs.


Should one, therefore, be astonished by the silence of the ESRC or is it – unfortunately – the proof that it is its flawed structure that is the cause of its apparent paralysis? The deafening silence of the European Parliament, meant to be kept informed of its deliberations, is also surprising. On this point I take the liberty of annexing to this short article, two analytical papers written respectively in March and June 2009, in which I already pointed out the imbedded weaknesses in both the de Larosičre and Commission proposals. They seem to me – quite to the contrary – to have lost absolutely nothing of their pertinence if one is to judge by the recent suggestions put forward by the Commission and numerous financial and political experts.


In the main, I drew attention to the lack of ambition in the proposals which recommended that essential regulatory and supervisory powers remain the prerogative of Member States, a factor currently widely recognised as inappropriate. I also pointed out the flawed structure of the ESRC, dominated by Central Bankers (with an inbuilt Eurozone majority) which could be the source of conflicts of interest for Council Members and deprived the Institution of the advice of representatives of other relevant sectors. This puts President Draghi in a particularly difficult position who, while being a key actor in managing the crisis, is simultaneously tasked with presiding over the ESRC and with formulating recommendations that could be at variance with ECB monetary policy. Finally, I concluded that it was essential that the politicians and the citizens be informed of the choices confronting the EU so that no one could shelter – should a new crisis develop – behind the unquestioned authority of the authors of the de Larosičre Report.


In the present context, it is urgent to take on board the structural impossibility of the ESRC to fulfil its mandate as defined. It is necessary to reform it in depth (along the lines developed in annexe 2), taking inspiration from the structure chosen by the United States when it established a similar institution in the aftermath of the 2008 financial crisis.


Brussels, June 4th 2012



Paul N. Goldschmidt

Director, European Commission (ret.); Member of the Advisory Board of the Thomas More Institute.





Annexe 1. (March 2009)


The de Larosičre Report: Preliminary commentary and analysis.


As we have been accustomed, the Report delivered to the European Commission by the High Level Group chaired by Jacques de Larosičre on financial supervision in the EU is both clear, precise and addresses in detail its mandate. At this juncture, comments will be limited to certain specific aspects rather than attempting an exhaustive analysis.


After reading the Report one is left with a slight feeling of disappointment, not because of the comprehensive analysis of the causes of the crisis or the detailed proposals concerning Regulatory reform (covered in Chapters I and II) but rather through a perception of a lack of ambition in the discussion of the Supervisory architecture both at European and global level (covered in Chapters III and IV).


This lack of ambition should not be attributed to the experts, whose competence is unchallengeable, but derives implicitly from the mandate. Indeed, in ordering the Report, the European Commission seems to have overlooked the eminently political character of the preliminary choices that need to be confronted in order to implement the indispensable reform of the regulatory and supervisory framework of the financial system.


These choices concern, among others:


a)      At European level, between the “inter-national” or “supra-national” character of the new architecture and its implications in terms of transfers of sovereignty. The answer opens up significantly different possibilities concerning the articulation of the reform proposals, be it at Eurozone or EU level as well as concerning the representation of either - or both - of these entities on the world stage.


b)      A parallel debate, being carried out this week end by the European Council, on the impact of the crisis on intra European solidarity raises the question of the accelerated admission of new Members into the Eurozone on more flexible criteria, which could, in turn, have far reaching implications on the subject of the Report. Indeed, one should compare the cost of support by the Union of countries experiencing difficulties - each retaining their monetary sovereignty - with the alternative cost of their integration into the Eurozone. It is not forbidden to believe that this latter option might prove more advantageous for all parties concerned. Accelerated integration would be reminiscent of the bold proposal of Chancellor Kohl to recommend parity between the East and West German Mark at the time of reunification; in present circumstances it is precisely boldness that Europe needs. To the expected outcry that such a proposal would generate from orthodox monetarists, one can oppose the following arguments:


-          Depreciation of the Euro versus the US dollar might be considered positively in these difficult times (viz. The British Pound).

-          The economic weight of Eastern European countries is relatively small (in relative terms far less than the weight of the GDR compared to the FRG).

-          The current benign inflationary climate limits immediate risks, allowing further economic convergence within rather than from outside EMU

-          That budgetary discipline will be all the more taken into account that the tools of monetary sovereignty have been transferred to the ECB.

-          That such an enlargement might encourage the last recalcitrant Member States to join EMU, giving considerably increased power to the Union on the international political economic and financial scene.


A refusal of Union solidarity, or the imposition of excessively onerous conditions for joining the Eurozone, would carry the risk of a break up of the Union, just at the very time when the single currency could prove itself to be a most efficient tool in the fight against protectionism.


c)      In addition, this political debate should foster renewed impetus towards a greater integration of economic policies within EMU, which has remained so far not much more than a pious hope. Its implementation would have a direct bearing on the efficiency and coherence of the regulatory and supervisory proposals contained in the Report.


The Report leaves the reader with the feeling that the Group was invited to abstain from any proposal that would imply an amendment to the Treaty (which after the difficulties encountered by the Constitutional and Lisbon Treaties may be understandable, though it limits severely the options available). If this were to be the case, then, for transparency’s sake, it should have been disclosed.


As things now stand, the Commission (and indirectly, both the Council and the European Parliament) has in hand an unchallengeable “reference document” which broadly discharges “political authorities” from their past responsibilities but which, on the other hand, engage heavily that of the Report’s authors with regard to the future.


One of the important lessons to be drawn from the Report is that both national and European political authorities should be put on top of the long list of people who are co-responsible for the crisis (cited in the Conclusion of the recent Interim Report delivered by the Lamfalussy Commission to the Belgian Government). Indeed, if many financial executives contributed directly to the crisis by partaking in questionable – or even reprehensible – actions or behaving with scant regard of ethical principles, it is also true that, by failing to create an appropriate regulatory framework, the legislator facilitated - through this sin of “omission” - the perpetrating of these very same abuses they now deplore.


As was the case at the time of the introduction of the Euro, which led to the implementation of the “Lamfalussy Process”, a similar outcome may be anticipated: at the time, several observers, including the undersigned, had pinpointed the complexities and potential deficiencies of the system. However, in the euphoria surrounding the successful introduction of the single currency and in the absence of any overt crisis, the legislator preferred to rely on “voluntary cooperation” between Member States in the fields of cross border regulation and supervision which, as is underlined by the Report, has dismally failed. As anticipated by the “Cassandra’s”, a full blown crisis of historic proportion was needed in order to reconsider the question. Greater political ambition at the time would undoubtedly have helped Regulators and Supervisors to anticipate the current crisis and, possibly to attenuate its impact, even if its origins are partly to blame on external factors.


However, what is new? The Report amounts essentially to an in depth updating of the Lamfalussy Framework without reconsidering the fundamental intergovernmental character of its architecture despite the fact that it has been identified as its main weakness. The intricacies of the suggested procedures augur future operational difficulties in a domain where speed of reaction can prove to be of the essence. In this way, the reforms may contain already the seeds of a future crisis.


This time around, however, witnessing the inefficiencies of the existing structures, it is hard to invoke the type of excuses used in 2002. The degree of systemic risk created by large participants in financial markets, and the fluidity of transmission mechanisms through the financial system have demonstrated, beyond any possible doubt, the interdependence of national financial markets and their inability to manage a crisis situation in isolation.


As far as macro prudential supervision is concerned, the Report proposes an integrated system at Union level under the aegis of a new “European Systemic Risk Council” (ESRC) which seems well suited for the purpose.


A fully integrated micro prudential regulatory/supervisory framework (even if operationally decentralised) seems equally called for, at least as far as the Eurozone is concerned. The proposed “European System of Financial Supervision” (ESFS) should benefit from a structural autonomy comparable to the European System of Central Banks. Non Eurozone Members could join the system on a voluntary basis (and would be required to do so when applying for membership). They would nevertheless be bound by minimum standards negotiated at global level and which should be incorporated into the “Acquis Communautaire”. They should also be subject to individual cooperation protocols negotiated with the ESFS to ensure the compatibility of data collection and the rule book between the ESFS and national Frameworks.


Such an approach is not only necessary to ensure coherence in the application and interpretation of the rules within the Eurozone, but also to promote an efficient representation of the “second largest reserve currency” on the world stage, as per the Report’s recommendation n N° 30.


Another area, which bears directly on the architecture of the system and which is only lightly touched upon in the Report (§233…) pertains to the size of entities and the specialisation of activities. The recommendations envisage the creation, of three new “Authorities” covering the Banking, Insurance and Securities sectors, with a possible alternative carve up along prudential and operational supervisory lines. There is, however, no discussion of the advantages that a “legal” separation at company level along business lines might provide in terms of reducing systemic risk compared with potential economic advantages inherent to total freedom. The gravity of the current crisis and the speed with which it has spread should give pause for thought as to whether, in the interests of the common good, the existence of entities of a size and complexity that make them difficult to control, should be tolerated.




The de Larosičre Report offers some extremely valuable insights on the origins of the crisis and identifies a number of useful suggestions to improve significantly the existing Regulatory framework.


As far as the architecture of supervisory arrangements at all levels, the proposals seem confined to the “politically correct” rather than considering structures that would be deemed the most desirable. This impression is confirmed by the text of § 218 that makes deeper integration of surveillance mechanisms fully dependant on further political integration of the EU.


There can be little doubt, however, that the value of this “High Level Report” would be greatly enhanced if it made explicit that a fundamentally intergovernmental architecture will never be able to deliver an optimal regulatory framework, at least as far as the Eurozone is concerned. It is crucial that the political authorities and citizens be informed on the choices to be confronted so that nobody will be able to take refuge – when the next crisis occurs – behind the unchallengeable authority of the authors of the current Report.


Brussels, March 1st 2009


Paul N. Goldschmidt

Director, European Commission (ret.), Member of the Advisory Council of the Thomas More Institute.




Annexe 2. (June 2009)


Communication on European Financial Supervision



The Commission has requested comments to their Communication on “European Financial Supervision” (COM (2009) 252 final) dated May 27th 2009.




In the “impact assessment”, document which forms an integral part of the Communication, the Commission makes a strong case for recommending an approach that is largely inspired by the de Larosičre Report. Having discarded the alternatives of a “Dynamic status quo”, the “Host country model” and the “Lead supervisor model” as inadequate, the discussion centres around two proposals: the “de Larosičre Report” and a “Single EU level supervisor”.


The Commission endorses the pragmatic assessment of the de Larosičre Report which, in order to achieve a broad consensus, recommends a progressive approach, subordinating the long term goal of a “Single EU Supervisor” model, to further progress in EU integration. The Commission recommends, however, considerable speeding up of the timetable aiming at implementing reforms by 2010.

Many commentators, including the undersigned, believe that the Single EU Supervisor model will “ultimately” impose itself. It is therefore suggested that, in parallel with the implementation of the reform outlined in the Communication through the adoption of an appropriate Directive applicable to the 27 Member States, consideration be given by the 16 participants in “European Monetary Union” to enter into a “reinforced cooperation agreement” which would establish a “Single Eurozone Supervisor” that would be fully compatible and integrated within the broader EU wide framework.


By accepting voluntarily to move immediately to a system of a “Single Eurozone Supervisor”, it would be possible to address with greater flexibility some of the problems discussed in more detail hereunder. At the same time, the ground would be laid for a long term smooth transition to a “Single EU Supervisor” model as new Member States join EMU (as they must under the terms of the Treaty if they do not benefit from a derogation).


In the following section we highlight some of the areas which, in our opinion, deserve further reflection. They pertain successively to the ESRC and the ESFS and contain proposals relating to the questions of the organisation of the “supervisory profession” as well as of “competencies”, both of which appear to have been overlooked.


  1. The European Systemic Risk Council (“ESRC”)


The new supervisory framework assigns to Central Banks a major role in addition to their current responsibilities. While recognizing their unquestioned competence and their institutional role and responsibility concerning monetary and financial stability, their dominance of the ESRC raises a number of questions.


A first potential “weakness” resulting from the composition of the ESRC is that all its Members are “ex-officio”, i.e. they are appointed on the basis of criteria that are not necessarily directly related to the specific role they need to play as Members of the ESRC. Consequently, it disallows the possibility of appointing Members to the ESRC whose personal experience, in either the private or public sector, could be of great relevance as well as providing a welcome diversification to the perceived “corporatist” mindset of Central Bankers.


Consideration should be given to modifying the composition of the ESRC so that it can benefit from competencies found outside of the existing monetary/regulatory institutional establishment to achieve a better balance in points of view represented. Should conferring “full” membership to “outsiders” prove unrealistic, the ESRC should at least be flanked by an “independent” high level Advisory Board in addition to the “technical advisory support Committee” referred to in p.7 of the Communication. This would provide a useful counterweight to the overwhelming influence of Central Banks as well as broaden the scope of the skills and experience available to conduct macro-prudential surveillance.


A second question concerns the potential for conflicts of interests developing within Central Banks. This results from the lack of uniformity of the existing regulatory architecture among Member States. Indeed, in some countries Central Banks perform the role of “supervisory authority” for the banking sector. In such cases it could prove difficult to reconcile the dual role of formulating recommendations with the obligation of implementing the findings.


Another aspect of possible conflicts of interest concerns the position of Central Banks that are Members of the Eurozone: on the one hand they are expected to exercise their “sovereign rights” on an equal footing with non Member State Central Banks as described in the Communication, while, on the other, they are bound by their Membership of the European System of Central Banks. This is of particular relevance in the areas of determining “monetary policy”, acting as “lender of last resort” or in playing a central role in “crisis management”1, where it would seem unlikely that the ESRC Members could vote recommendations on matters or measures addressed to the Eurozone or its Members which would not have already fully been taken into account by the ECB itself.


This raises another difficulty: as presently envisaged (one man one vote/simple majority), the voting power of the 16 Central Banks Member of the Eurozone plus the vote of the Chairperson and Vice-President of the ECB gives at all times an implicit “permanent” majority (18/33) to representatives of the EMU.


The proposed system provides EMU Members with the opportunity to “vote” recommendations affecting monetary policy of non Eurozone Members forcing them to “comply or explain”. This creates an “imbedded” bias that will be more than likely prove difficult to accept by the non EMU Member minority.


Another aspect concerning voting power relates to the “1 + 1” formula for each “national” delegation. While it aims at efficiency, it also reinforces unduly the weight of Central Banks in the ESRC.


A further area which might raise opposition, particularly on behalf of non EMU Members, is the proposal that the ECB perform the function of aggregating information collected by the three Supervisory Authorities forming the ESFS, for transmission to the ESRC. We suggest that, while the ECB is ideally suited to perform the function of Secretariat (including logistical support) to the ESRC, the specific task of aggregating the data collected by the ESFS Authorities from their National Members for transmission to the ESRC be assigned to a specially created “Directorate” of EUROSTAT, protected by adequate firewalls to ensure confidentiality.


Finally, the accountability of the ESRC is limited to “reporting” to the European Council, Parliament and Commission, leaving little room for any “constructive” oversight. This derives from the mandate together with the absence of legally binding powers.


Indeed, the proposals put the onus on the recipients of “recommendations” to act accordingly. It follows that it will be necessary to imbed in the legislation a clear trail of “responsibilities” for implementing ESRC recommendations: in addition to the reporting “obligation” to the ESRC by addressees of recommendations, appropriate powers should be conferred to the Commission to enforce these obligations and, if needed, accompanied by sanctions. The Commission or ECOFIN could, for instance, suspend uncooperative Member States from participation in ESRC deliberations. Failure to provide such safeguards would seriously compromise the credibility and efficiency of the ESRC.


  1. The European System of Financial Supervisors (“ESFS”):




It is suggested that “overarching ESFS Steering Committee” be given a “formal status” on par with the ESRC.


This is highly desirable in order to confer on the ESFS the formal authority needed to exercise its responsibilities, in particular in the following areas:


-          to ensure appropriate and effective coordination between the ESFS and the ESRC as more fully described in the Communication (p 14);

-          to coordinate activities involving more than one Authority such as:


o   Coordination of responses between Authorities in case of crisis.

o   Resolution of disputes between Authorities.

o   Coordination of supervision of conglomerates.

o   Ensuring progressive convergence of “supervisory approaches”.

o   Ensuring coordinated representation internationally.

o   Exercising supervision of specific entities (CRAs, etc.).


The ESFS, as a formal body, would only intervene in areas where the competence of more than one Authority is concerned. Rather than build an independent “operational” capacity, it should draw on the resources of its three constituting Authorities on an ad hoc basis to exercise its responsibilities with the logistical support of a Secretariat.


The ESRC should have observer status on the ESFS Steering Committee.




The Communication emphasises the need for the Authorities to have the “highest degree of independence” from their “national authorities”. This seems somewhat at variance with another recommendation that suggests that “rules be adopted by qualified majority based on Treaty weighting for Member States”.




The Communication defines the areas in which the ESFS and/or the three Authorities must be conferred the necessary authority to fulfil their mandate. These include:


Consistent application of EU rules


“The European Supervisory Authorities should have, in cases clearly specified in Community legislation, the means to ensure coherent application of Community legislation.”


Disagreement between national supervisors


“If, after a phase of conciliation, the latter have not been able to reach an agreement, the European Supervisory Authorities should, through a decision, settle the matter.”


Manifest breach of Community Law


“The European Supervisory Authorities, on their own initiative or upon request from one or more national supervisors or from the Commission, would investigate the issue and, if necessary, adopt a recommendation for action addressed to the relevant national supervisor.”


“In order to overcome inaction in relation to the implementation of Community law or delaying of action by national supervisors or in case of need for urgent action, the European Supervisory Authorities could also be empowered to adopt decisions directly applicable to financial institutions in relation to requirements stemming from EU Regulations relating to the prudential supervision of financial institutions and markets as well as the stability of the financial system.”


Coordinated response in crisis situations


“In specific crisis situations, the European Supervisory Authorities could have the power to adopt some emergency decisions (e.g. on short-selling) - the scope of these emergency procedures should be defined in Community legislation.”







“The framework for the exercise of the above competences will be specified exhaustively and in precise detail in the relevant sectoral legislation. The conferring of these competences will be in full conformity with Articles 226 and 228 of the Treaty. Without prejudice to the application of Community law, and recognising the potential liabilities that may be involved for Member States, decisions under the above mechanisms shall not directly impinge on the fiscal responsibilities of the Member States. Moreover, any decision by the European Supervisory Authorities or the Commission must be subject to review by the Community Courts.”


The above list of ESFS envisaged “enforcement powers” calls for the following remarks:


There seems to be excessive reliance on cooperation and coordination, particularly in the field of “emergency crisis response” where decisive actionable decision making is required. The Fortis case constituted a clear example of the disruption that can be created both by unilateral political decisions (nationalisation of the Dutch assets of the group) and by lengthy procedural delaying tactics (court actions to suspend urgent restructurings). The remedies suggest in the Communication would most likely have been ineffective.


The precise wording of the legislation pertaining to such powers will be a test of the political will of Member States to either pave the way towards the ultimate goal of a fully integrated EU Supervisory system, or to reinforce the powers and independence of National Supervisory Authorities.


Considering the stated objectives of the ESFS that include ensuring a common supervisory culture and consistent supervisory practices, we believe that these aims can only be achieved if supervision is organised formally as a “profession” and that access is subject to minimum common standards of qualification.


These aspects, omitted in the Consultation, deserve to be addressed more fully because there is widespread recognition that failures in the existing supervisory system contributed to the financial crisis. These were due, in part, to “nationalistic” responses by Regulators as well as to the great differences in the training and professional competencies of Supervisors.


We recommend a two pronged approach:


a)      The “International Institute of Chartered Supervisors”


As is the case regarding other professions, which exercise special responsibilities in sensitive areas (legal, medical, auditing...), supervision should be organised on a formal basis under the aegis of the “G 20” through the establishment of a dedicated Organisation. It should encompass global, regional and national sections. Sub-sections, reflecting the more specialised areas (corresponding to the three Authorities) could also be envisaged. It would aim at facilitating effective cooperation between supervisory authorities as well promote contacts between individual supervisors.


The Institute would be an appropriate venue for considering “improvements to existing regulations”, ensuring global “regulatory compatibility”, setting “harmonised professional standards” and agreeing on acceptable “professional qualifications”. In addition, the Institute should adopt a professional uniform “code of conduct” applicable to its Members.


Such a body would also provide a suitable structure in which professional standards can be enforced, (including appropriate sanctions when required) increasing sense of responsibility and accountability of supervisors. At the same time, an appropriate and a suitable distance can be maintained between the profession, the ordinary public judicial process and “political influence”.


Such an institution could be an essential building bloc in restoring public trust in the independence, professionalism and integrity of supervisory authorities.


b)     An International Training program.


A “Public/Private partnership should be developed between Public Authorities - the Institute referred too here above – Academia – and relevant private sector Professions to design a post graduate curricula covering the various aspects of “Financial Supervision” including ethical, legal, technical and governance issues.


The program would be open to holders of university degrees in subjects such as law, economics, accounting etc. as well as to active supervisors with a minimum of practical experience.


In the EU, first year programs should be designed to provide candidates with sufficient familiarity with “national” supervisory regimes, followed by a second year in which a “common curricula” would be dispensed by an appropriately selected Institution of Higher learning, which would draw heavily on competencies from both the public and private sector to strengthen its “Faculty”.


In order to provide additional practical experience, the Institute of Chartered Supervisors would organise at least two training periods of 6 months for each graduate to be performed, one with a Supervisor located in the same region and the other in a different one. In addition to providing invaluable experience, it would also develop better understanding of differences between regulatory regimes and create useful personal relationships that would facilitate cooperation between national supervisors.


It is inevitable that it will take at least a dozen years before obtaining the proposed post graduate “degree in supervision” can be made a compulsory requirement for being appointed to a supervisory position. Implementing the program should, nevertheless, be considered as a very high priority so as to achieve, over time, the stated objectives of more effective supervision.





There is a broad consensus that it is better rather than more regulation that is required. In order to achieve this objective, it is important to focus simultaneously on the regulatory framework (laws and regulations), the structural architecture (institutions and operating rules), and competencies (training). Accountability and enforceability will be key elements that must be deeply imbedded in the system at all levels.


The comments here above aim at drawing the attention of the Commission on elements contained in - or omitted from – the Communication which deserve to be considered in order to deliver an optimal framework compatible with the political realities.


The undersigned remains at the disposal of the Commission to develop further the ideas described herein.


Brussels, June 9th 2009


Paul N. Goldschmidt

Director, European Commission (ret); Member of the Advisory Board of the Thomas More Institute.

































Tel: +32 (02) 6475310                                 +33 (04) 94732015                         Mob: +32 (0497) 549259

E-mail: paul.goldschmidt@skynet.be                                            Web: www.paulngoldschmidt.eu