THE TORTUOUS PATH TO THE EUROPEAN SYSTEM OF FINANCIAL SUPERVISION
The regulatory response to the financial crisis has necessitated (and it still is necessitating) the adoption of a vast array of legal reforms. However, some of the elements of these reforms have departed from their originally intended design. One example of such departures comes from the United States. Commenting on the rule named after him, following the adoption of the Dodd-Frank Act, Paul Volcker stated that “[I]t doesn’t have the purity I was searching for.” This paper aims to show that this outcome is not unique to the American experience. In fact, on the other side of the Atlantic, deviations have also occurred during the process that has led to the establishment of the European System of Financial Supervision (“ESFS”) and they have made it more complex than it was initially contemplated.
II. The structure of the ESFS in the early projects
Scholars and market associations already envisioned the ESFS before the financial crisis. The academic debate on the future structure of the European supervisory framework has been in lively progress since the beginning of the 2000s. This debate had initially focused on two main forces that, according to one scholar, could drive a change in the European institutional design, that is to say “the trend towards unification of supervisory authorities at the level of the Member States and the possible centralization of supervisory functions at the EU level.”
Many papers have been written about these topics. The limited scope of this article does not allow for a detailed account of the solutions proposed in these papers. According to a paper published in 2004, two models prescribed the adoption of a specific body with a European mandate. One of these models provided for the assignment of a pan-European mandate to the home supervisor of each financial institution, whereas the other advocated the need for a pan-European supervisor within an ESFS composed of national authorities. Interestingly, both models supported the establishment of “a decision-making body or agency at the centre” of the system. These two models were based on the example of the European System of Central Banks (“ESCB”), since both make several references to the ESCB’s structure.
In addition to scholarly proposals, market associations also pushed for certain reforms. Following the release of two papers in October 2003 and June 2004, the European Financial Services Round Table (“EFR”) issued a report, in June 2005, on the various options to reform the European financial regulation (hereinafter the EFR Report). The EFR Report focused mainly on the implementation of the “lead supervisor model”, complemented by the creation of colleges of supervisors. However, the EFR Report explicitly regarded these proposals as short-term solutions, treating the establishment of the ESFS as a longer-term option. According to the EFR Report, the ESFS should have been based on the model of the ESCB. In other words, the ESFS should have been centered on a European Financial Services Authority. This authority would have played, within the ESFS, almost the same role that the European Central Bank (“ECB”) plays within the ESCB.
III. The ESFS according to the de Larosière Report and the Commission’s proposals
The financial crisis provided the political momentum to undertake a comprehensive reform of the supervisory framework that existed at the European level. In order to accomplish this aim, the European Commission entrusted a group of experts with the task of providing recommendations about the way in which this reform could best be pursued. This group of experts, chaired by Jacques de Larosière, released its final report on February 25, 2009.
The de Larosière Report drew on the distinction between two levels of supervision: micro-prudential and macro-prudential. The micro-prudential perspective is the traditional form of financial oversight and focuses on the solvency of individual financial institutions. In contrast, the macro-prudential perspective is concerned about the stability of the financial system as a whole. However, the de Larosière Report plainly acknowledges that the micro and macro-prudential levels of supervision are interdependent.
According to the de Larosière Report, the ESFS should be established at the micro-prudential level only and it should be characterized by a largely decentralized structure. Indeed, the de Larosière Report does not provide that the ESFS should have a central authority, as in the case of the ESCB. Instead, it suggests that the ESFS should constitute an integrated network of European supervisors, working in cooperation with the three new authorities that would replace the Level 3 Lamfalussy committees. Along the lines of this structure, the de Larosière Report suggests that each of the three new authorities should be managed by a board comprised of the Chairs of the national supervisory authorities.
As already mentioned, the de Larosière Report provides that the new macro-prudential authority, the European Systemic Risk Council, should formally reside outside of the ESFS. However, in order to preserve the interdependence between the micro-prudential and the macro-prudential perspectives, the de Larosière Report advocated binding cooperation mechanisms allowing regular flows of information on micro-prudential developments and early warnings between these two levels of supervision. In addition, it suggested a connection between the ESFS and the European Systemic Risk Council. This link, nonetheless, is unidirectional in the Report. In other words, the Report suggested that the Chairs of the micro-prudential authorities would be members of the macro-prudential body’s board, but it does not provide that the Chair of the European Systemic Risk Council should participate in the micro-prudential authorities’ boards. The de Larosière Report also proposed that the ECB should be considerably involved in macro-prudential supervision and excluded from micro-prudential supervision. Accordingly, the Report proposed that the ECB should have no role in the internal organization of the micro-prudential authorities apart from its participation as an observer in the supervisory colleges.
The European Commission’s proposals, published in September 2009, essentially maintained the structure of the ESFS as outlined in the de Larosière Report. One significant change was that the proposals provided for the presence of a representative of the European Systemic Risk Board (i.e. the new name chosen for the European Systemic Risk Council) as a non-voting member in the Board of Supervisors of each micro-prudential body. The European Commission further proposed the establishment of a Joint Committee of the European Supervisory Authorities to serve “as a forum in which the Authority shall cooperate regularly and closely and assure cross-sectoral consistency” with the other authorities. According to these proposals, the European Systemic Risk Board would be invited to participate in the Joint Committee as an observer. Finally, the proposals provided for the establishment of an Advisory Technical Committee within the European Systemic Risk Board.
IV. The final configuration of the ESFS
On September 22, 2010, exactly one year after the release of the legislative proposals by the European Commission, the European Parliament voted in favor of the proposed reform of financial supervision and the ECOFIN Council endorsed this decision on November 17, 2010. The legislative package on financial regulation and supervision was published in the Official Journal of the European Union on December 15, 2010. Although the legislative texts had been extensively amended between September 2009 and September 2010, the basic scheme outlined in the Commission proposals remained largely unaffected, subject, nevertheless, to some changes in the structure of the ESFS.
A first change was that, according to the regulations that entered into force in December 2010, the ESFS should include the European Systemic Risk Board (“ESRB”), in addition to the three micro-prudential authorities, the competent or supervisory authorities in the Member States, and the Joint Committee. However, as set out in the de Larosière Report and the European Commission’s proposals, no authority seems to have prominence over the others and, according to the solution eventually adopted, no central authority seems to exist. The regulations thus confirm the departure from some solutions envisaged in earlier proposals.
A second change was the establishment of an Advisory Scientific Committee within the ESRB, in addition to the Advisory Technical Committee, and the involvement of the Chairs and some Vice-Chairs of these Advisory Committees in the General Board of the European Systemic Risk Board. If this change was aimed at fostering the influence of external experts in the decision-making body, it might turn to be an additional complication with limited effectiveness, given that these experts are nominated by the same body they are expected to influence.
Another change occurred as regards the role of the Joint Committee of the European Supervisory Authorities. The regulations establishing the micro-prudential authorities provide that the Chair of the Joint Committee, who shall be chosen (on an annual rotational basis) from among the Chairs of the new micro-prudential authorities, shall be the second Vice-Chair of the ESRB. This change was probably aimed at strengthening the interdependence between the micro and macro-prudential oversight, but it seems a quite redundant provision, given that the Chairs of the micro-prudential authorities were already effectively involved in the ESRB.
Finally, the micro-prudential authorities have been officially entrusted with tasks that were not detailed in earlier documents. For instance, the European Commission’s proposals contained only a few general references to crisis management and resolution. In contrast, the regulations that entered into force in December 2010 explicitly charged the new micro-prudential authorities with tasks prescribed by the regulation itself or by other legislations, in order to confer on them an active role in resolution procedures and fill some of the gaps evidenced during the financial crisis.
In conclusion, the final institutional architecture of the ESFS can be basically described as follows. The ESFS is composed of several bodies; namely the three new micro-prudential authorities and the new macro-prudential board created at the European level, the Joint Committee of the European Supervisory Authorities and the competent or supervisory authorities in the Member States.
Micro-prudential supervision at the European level is to be carried out by three bodies with legal personality, jointly called the European Supervisory Authorities (“ESAs”), and working along sectoral lines. More precisely, they are the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority. The Boards of Supervisors of the ESAs are principally composed of the Chairs of the competent national supervisory authorities. The supervision of the ESAs is focused on the solvency of individual financial institutions and the tasks of the ESAs range from mere consultation with the European institutions to a potentially active role in crisis management.
Macro-prudential supervision at the European level is to be carried out by a single body without legal personality: the European Systemic Risk Board. The General Board of the ESRB is composed largely of members of the General Council of the ECB. The activity of the ESRB is logistically and administratively supported by the ECB and is focused on the detection of possible threats to the stability of the financial system as a whole. The ESRB is chaired, for the first five years, by the President of the ECB and the first Vice-Chair is elected, for a term of five years, from within the General Council of the ECB.
The interdependence of the micro and macro-prudential levels of supervision at the European level, as discussed above, is basically ensured by three main elements. First, binding cooperation mechanisms allow regular flows of information on micro-prudential developments and early warnings between the two levels of supervision. Second, the presence of the Chairpersons of the ESAs in the General Board of the ESRB and representatives of the ESRB in the ESAs’ Boards of Supervisors link the two levels of supervision. Third, the existence of a forum (i.e. the Joint Committee) helps to realize the cooperation among the ESAs and the ESRB.
V. Concluding remarks
This paper is not aimed at providing an exhaustive account of all the changes that occurred during the legislative process and that eventually led to the adoption of the package on financial regulation and supervision. Moreover, the limited scope of this paper does not allow inquiry as to whether specific changes in the structure of the ESFS can be justified by reasons of efficiency, legal obstacles or political interests. Nevertheless, it seems possible to conclude that the structure of the ESFS has become much more complex in the end than it was initially contemplated and it seems legitimate to wonder how this complexity might impact on its effectiveness. In a nutshell, it may be that, borrowing the words of Paul Volcker, the final structure of the ESFS does not have “the purity” originally envisioned.
[*] LL.M., Columbia Law School (2011). The author received a LL.B. at the Bocconi University of Milan in 2004, a M.Sc. in Law and Economics at the University of Siena in 2008 and a Ph.D. in Law and Economics at the University of Siena in 2010. He was a visiting scholar at the Boston University School of Law; at the moment he is an Honorary Fellow in Business Law at the University of Florence (Italy) and a Max Weber Fellow at the European University Institute. The author is grateful to Prof. Lorenzo Stanghellini, Dr. Fabio Recine and Dr. Phoebus Athanassiou for their very helpful comments on earlier drafts of this paper. All errors are the responsibility of the author.
 John Cassidy, The Volcker Rule – Obama’s economic adviser and his battles over the financial-reform bill, The New Yorker, July 26, 2010, available at http://www.newyorker.com/reporting/2010/07/26/100726fa_fact_cassidy (last visited Oct. 12, 2011).
 See Rosa Maria Lastra, The Governance Structure for Financial Regulation and Supervision in Europe, 10 Colum. J. Eur. L. 49, 50 (2003). On the one hand, the trend toward consolidation of the supervisory authorities was evidenced by the British and German initiatives which led to the establishment of a single supervisor (namely the British FSA in 2001 and the German BaFin in 2002). On the other hand, the debate about the centralization of supervision was triggered by the launch of the Euro in 1999.
 See for instance Giorgio Di Giorgio & Carmine Di Noia, Financial Market Regulation and Supervision: How Many Peaks for the Euro Area?, 28 Brook. J. Int’l L. 463 (2003); Donato Masciandaro, Unification in financial sector supervision: The trade-off between central bank and single authority, 12 J. Fin. Reg. & Compliance 151 (2004).
 For a snapshot of various models see generally Sander Oosterloo & Dirk Schoenmaker, A lead supervisor model for Europe, 9 The Financial Regulator 34 (2004), available at http://personal.vu.nl/d.schoenmaker/Lead%20Supervisor%20FR9.3.pdf (last visited Oct. 12, 2011).
 “(…) this European mandate can be created through some form of European system of financial supervisors, created by the national supervisors in tandem with a centralised body. Key supervisory decisions as well as the design of policy are done at the centre (in the same way as the ESCB takes decisions on monetary policy).” Id. at 41. See generally Dirk Schoenmaker, Central Banks and Financial Authorities in Europe: What Prospects?, in Handbook of Central Banking and Financial Authorities in Europe, (D. Masciandaro ed., 2005).
 The EFR is a Belgian based association consisting of chairmen and chief executives of leading European banks and insurance companies. See European Financial Services Round Table, www.efr.be (last visited Oct. 12, 2011).
 See generally EFR, On the Lead Supervisor Model and the Future of Financial Supervision in the EU, Brussels (2005) available at http://www.efr.be/documents%5Cpublication%5C22676EFRlsvfinal-June2005.pdf (last visited Oct. 12, 2011).
 In 2005, the EFR suggested as a possible longer-term option the establishment of “a European System of Financial Supervision (ESFS) with an ESCB-type structure, with a new EU-level institution (a European FSA, or EFSA) which would supervise the systemically relevant financial institutions that operate on a pan-European basis and would be the final authority on interpretation and implementation of EU financial market rules in cases of conflicts between national regulators.” See EFR, supra note 8 at 40.
 See Report by the High-Level Group on Financial Supervision in the EU Chaired by Jacques de Larosière (Feb. 25, 2009) [hereinafter de Larosière Report], available at http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf (last visited Oct. 12, 2011).
 For a more precise distinction between micro and macro-prudential supervision, see Claudio Borio, Towards a Macroprudential Framework for Financial Supervision and Regulation?, 49 CESifo Econ. Stud. 181, 183 (2003). In this respect, it is worth remembering that the roots of the macro-prudential approach to financial supervision can be traced back to the Cross Report on innovations in international banking released in 1986 by the Bank of International Settlements. See Ivo Maes, Alexandre Lamfalussy and the origins of the BIS macro-prudential approach to financial stability, 63 PSL Q. Rev. 265 (2010), available at http://scistat.cilea.it/index.php/PSLQuarterlyReview/article/viewFile/274/141 (last visited Oct. 12, 2011).
 See the de Larosière Report, supra note 11, at 38 (“Macro-prudential supervision cannot be meaningful unless it can somehow impact on supervision at the micro-level; whilst micro-prudential supervision cannot effectively safeguard financial stability without adequately taking account of macro-level developments.”).
 These committees (often simply referred as “Lamfalussy committees”) were the bodies charged with the implementation of the third level of the Lamfalussy process. As a background reference, see generally Duncan Alford, The Lamfalussy Process and EU Bank Regulation: Another Step on the Road of Pan-European Regulation?, 25 Ann. Rev. Banking & Fin. L. 389, (2006), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1341325 (last visited Oct. 12, 2011). More precisely, they were the Committee of European Banking Supervisors (CEBS), the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS), and the Committee of European Securities Regulators (CESR). The de Larosière Report suggests that the Level 3 Lamfalussy committees should be transformed into three new authorities charged with micro-prudential supervision, namely a European Banking Authority, a European Insurance Authority and a European Securities Authority. See the de Larosière Report, supra note 11, at 48, 55.
 See the de Larosière Report, supra note 11, at 55. This setting is considered proper by the authorities; thus any comparison with the internal organization of the ECB may seem inappropriate. However, it must be noticed that some similarities exist between the internal organization of the ECB and the organization of the micro-prudential authorities: in both cases, certain ruling bodies are made up of the Chairs of national institutions (i.e. the Governors of the national central banks compose the Governing Council and the General Council of the ECB; the Chairs of the national supervisory authorities compose the Boards of Supervisors of the European micro-prudential authorities).
 “While the Group supports an extended role for the ECB in macro-prudential oversight (as discussed below), it does not support any role for the ECB for micro-prudential supervision.” See id. at 43.
 Before the release of the proposals, the intention to follow the recommendations by the De Larosière Report was already clear in the Commission Communication on European Financial Supervision, COM (2009) 252 final, available at http://ec.europa.eu/internal_market/finances/docs/committees/supervision/communication_may2009/C-2009_715_en.pdf (last visited Oct. 12, 2011). See generally Pablo Iglesias Rodríguez, Towards a New European Financial Supervision Architecture, 16 Colum. J. Eur. L. Online 1 (2009), available at http://www.cjel.net/online/16_1-rodriguez (last visited Oct. 12, 2011).
 See European Commission, Reforming the European financial supervision system, available at http://ec.europa.eu/internal_market/finances/committees/index_en.htm#package (last visited Oct. 12 2011).
 See Article 1 of Regulation (EU) No 1092/2010, Article 2 of Regulation (EU) No 1093/2010, Article 2 of Regulation (EU) No 1094/2010, and Article 2 of Regulation (EU) No 1095/2010. The Commission’s proposals do not list the ESRB among the members of the ESFS. See Article 39 of COM(2009) 501 final – 2009/0142 (COD), Article 39 of COM(2009) 502 final – 2009/0143 (COD), and Article 39 of COM(2009) 503 final – 2009/0144 (COD).
 According to Article 12(2) and Article 13(2) of Regulation (EU) No 1092/2010, the Chair and the Vice-Chairs of the Advisory Scientific Committee and the Chair of the Advisory Technical Committee shall be nominated by the General Board following a proposal from the Chair of the ESRB.
 See Article 5 of Regulation (EU) No 1092/2010, Article 55 of Regulation (EU) No 1093/2010, Article 55 of Regulation (EU) No 1094/2010, and Article 55 of Regulation (EU) No 1095/2010. The Vice-Chairs of the European Systemic Risk Board, according to Article 5(6) of Regulation (EU) No 1092/2010, substitute the Chair “in order of precedence”. Thus, it seems that the second Vice-Chair is hierarchically subordinated to the first Vice-Chair.
 The second Vice-Chair of the ESRB recently declared before the European Parliament that he sees his duties mostly related to ensuring the smooth interaction between micro-prudential and macro-prudential oversight. See Introductory Statement by Andrea Enria, 2nd Vice Chair of the ESRB at the Hearing on the ESRB before the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, May 02, 2011 (available at http://www.esrb.europa.eu/news/pr/2011/html/sp110502_1.en.html, last visited Oct. 12, 2011).
 See, for instance, Whereas 34 and Article 66 of COM (2009) 501 final – 2009/0142 (COD); Whereas 33 and Article 66 of COM(2009) 502 final – 2009/0143 (COD), and Whereas 34 and Article 66 of COM(2009) 503 final – 2009/0144 (COD).
 See Article 6 of Regulation (EU) No 1092/2010. It is presumably for this reason that the schedule of the meetings of the General Council of the ECB and the schedule of the meetings of the General Board of the ESRB, at least in 2011 and 2012, coincide (see http://www.ecb.int/press/pr/date/2009/html/pr090508.en.html, http://www.ecb.int/press/pr/date/2011/html/pr110420.en.html, and http://www.esrb.europa.eu/news/schedule/html/index.en.html, last visited Oct. 12, 2011).
 See Article 4(4) of Regulation (EU) No 1092/2010 and, generally, Council Regulation (EU) No 1096/2010. In this respect, it is interesting to notice that the ESRB has its premises inside the Eurotower (see http://www.esrb.europa.eu/home/html/contacts.en.html, last visited Oct. 12, 2011).
 For an analysis of the legal obstacles to the reform of financial supervision in Europe, written largely in advance of the financial crisis, see generally Yannis V. Avgerinos, EU Financial Market Supervision Revisited: The European Securities Regulator, Jean Monnet Working Paper No. 7/03, (2003), available at http://centers.law.nyu.edu/jeanmonnet/papers/03/030701.html (last visited Oct. 12, 2011).