Banking Supervision in Integrated Financial Markets: Implications for the EU



inefficient exchange of information. Hence, the solution consists of changing
their incentives such that they consider the negative repercussions abroad.

In practice, EU legislation has eliminated legal barriers to the exchange
of information between national supervisory authorities, opening up the op-
portunity of cooperation. The common device of organizing cooperation on a
bilateral basis are voluntary Memoranda of Understanding (MoU), already in
place between many national supervisory authorities in the EU (see section
2). However, the network of bilateral MoUs does not properly align super-
visors’ incentives as they fail to force supervisors to exchange information
in a timely and adequate manner.11 This is due to their implicit character
without a proper sanction mechanism.

As centralization on the EU level does not seem to be politically feasible
at the time being, a suitable approach seems to strengthen coordination of
national supervisory authorities beyond the existing system of MoUs.12 I
suggest to implement coordination in the form of a ”Supervisory Coordina-
tion Authority” on the EU level.13 National supervisory authorities would
then be accountable to this new institution.14 The institution would evaluate
the national supervisory process and could intervene when national and in-
ternational interests come into conflict with each other. For its interventions
to be credible and effective, the ”Supervisory Coordination Authority” would
have the right to levy sanctions against the national supervisory authorities
which do not comply with the supranational rules.

However, countries are always hesitant to transfer rights to the suprana-
tional level. Hence, in order to find political approval, such a new institution
could build on existing EU instances which may have already established a
reputation in the field of supervision. The instances which come into ques-
tion are the Groupe de Contact, the Banking Supervision Committee (BSC),
and the Banking Advisory Committee (BAC). The Groupe de Contact is a
forum of supervisory experts for the exchange of views on individual institu-
tions and market developments and the assessment of trends in the banking
sector. The BSC is based at the European Central Bank. It has a double
mandate from the Governing Council, i.e. (1) to assist the European Sys-
tem of Central Banks in contributing to the measures undertaken by the

11See Enria and Vesala (2002) for further details on the incentive constraints of MoUs.

12 For arguments regarding a supranational approach to supervision in the EU see Lannoo
(2000) and Speyer (2001).

13For a related paper see N’Daw (2001), who proposes to institutionalize peer-monitoring
among national supervisors in the EU in order to overcome incentive and information
deficits.

14For the related discussion on the political accountability of the supervisory authority
see Quintyn and Taylor (2002).

16



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