"Should the European Tier Play a Role in Prudential Supervision of Banks?"

Begg, Iann and Green, David. (1995) "Should the European Tier Play a Role in Prudential Supervision of Banks?". In: UNSPECIFIED, Charleston, South Carolina. (Unpublished)

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Abstract

Although the Treaty on European Union is, in many respects, an ambitious blueprint for European integration, it has little to say about a number of areas of public policy. In some of these areas, no clear guidance is given about whether responsibility for policy should remain with Member States or be re-assigned to the supranational tier. By contrast, the assignment of competences is entirely explicit in other fields. Thus, monetary union will see the transfer of responsibility for monetary policy from Member States to the European Central Bank (ECB), while fiscal policy will remain with Member States. The ECB, acting together with national Central Banks in what will be known as the European System of Central Banks (ESCB), will also have related responsibilities for assuring the viability of the European financial system. Yet even here there is ambiguity about where responsibilities will lie for different functions. Prudential supervision of banks - controls designed to assure the capital adequacy and liquidity of banks - is a good illustration of this. Thus, article 105 (5) of the Treaty states that the ESCB 'shall contribute to ... prudential supervision of credit institutions and the stability of the financial system' and in 105 (6) there is reference to the possibility that the ECB may be asked to undertake specific tasks in relation to 'prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings'. In the transition to EMU, the European Monetary Institute (EMI), which is the precursor to the ECB, is given the right to hold consultations on 'issues falling within the competence of the national central banks and affecting the stability of financial institutions and markets' (article 109f). This paper first reviews the case for supervision of banks and other credit institutions. The following section outlines a series of new problems for prudential supervisors and reviews recent relevant experience in the United States and elsewhere. The discussion then turns to an assessment of the arguments surrounding the extent of the involvement that an EU tier of government should have in this arena. Finally, a number of conclusions and proposals are presented.

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