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Apr 26

Yotam Dar’s Guide To The European System of Financial Supervision & Regulation

Reading Time: 4 mins

There is no doubt that financial regulation and monetary policy are difficult subjects to comprehend. Yet, despite their complexities, it’s important to keep in mind that the various bodies and regulatory frameworks that oversee our financial systems make up the bedrock of the economy, which allows our society to function (and prosper). 

However, due to a couple of years of uncertainty caused by a global pandemic, the European economy is currently under stress, as evidenced by record-high inflation levels (currently estimated at 7.5 percent by the European Central Bank). Furthermore, the increased prevalence of consumer fraud and financial scams means that both businesses and individuals are looking to regulators to bring these things under control and provide more stability and safety. 

What is financial regulation, and why is it important?

If the financial system doesn’t work, the rest of the economy will fail. Of course, we cannot allow that to happen, so we put measures such as financial regulations to protect, preserve, and maximize the financial system’s effectiveness.  

In general, financial regulation refers to a collection of rules and laws that firms operating in the financial sector must follow, including banks, financial brokers, pension providers, insurance companies, and credit unions. With that said, the regulators have far more on their plate than merely establishing laws as they are tasked with things such as investigating fraud, keeping markets efficient and transparent, ensuring customers are treated fairly, and promoting healthy competition between financial services providers.  


The European System of Financial Supervision (ESFS)

The European System of Financial Supervision, established in 2010, is a network of three European Supervisory Authorities (ESAs), the European Systemic Risk Board, and national authorities. Its primary responsibility is to ensure that financial supervision is consistent and appropriate across the EU, encompassing both macro -and micro-prudential oversight. Macroprudential supervision entails monitoring the entire financial system. Its principal goal is to prevent or mitigate financial system risks. Micro-prudential supervision refers to the supervision of individual institutions, such as banks, insurance companies, or pension funds. 


The European Systemic Risk Board (ESRB)

The ESRB contributes to the prevention and mitigation of systemic risk, as well as the containment of the spread of financial instability. To illustrate what they do, on March 24, 2022, the General Board of the European Systemic Risk Board conducted its 45th regular meeting, reviewing the impact of the Ukraine conflict on financial markets, such as heightened volatility and a sharp drop in asset prices. The board members also discussed increasing inflation, cyber security risks, and the significance of a consistent regulatory approach at the meeting. 


The three European supervisory authorities (ESAs)

While ongoing supervision of financial institutions remains the responsibility of national supervisory authorities, the ESAs are tasked with developing and implementing a single regulatory framework and convergent supervisory practice across the EU. The ESAs’ specific duty is to assist EU organizations during the legislative process, set regulatory standards, and coordinate national supervisory authorities. The following is a breakdown of the areas in which each ESA operates: 

The European Banking Authority (EBA)

The EBA’s purpose is to contribute to financial stability across the EU while also ensuring the integrity, efficiency, and orderly operation of the EU banking sector. Its purpose is to provide a uniform regulatory and supervisory framework for the whole banking sector throughout the 27 EU Member States to maintain an efficient, transparent, and stable Single Market that benefits consumers, businesses, and the EU economy. 

The European Securities and Markets Authority (ESMA)

The ESMA, based in Paris, is in charge of macroprudential monitoring of securities and markets in the European Union. This means that ESMA is responsible for supervising all financial market activity. Its four major functions promote supervisory convergence, actively supervise specific financial entities, assess risk to financial stability, markets, and investors, and develop a financial market rule book. 

The European Insurance and Occupational Pensions Authority (EIOPA)

The EIOPA aims to foster financial stability and confidence in the insurance and pensions markets. The EIOPA has been given the authority to develop draft regulatory technical standards, issue guidelines and recommendations, make individual decisions addressed to competent authorities or financial institutions in specific cases, and develop common methodologies for assessing the effect of product characteristics and distribution processes.


The European Central Bank

Finally, the European Central Bank (ECB), located in Frankfurt, serves as the central bank for the euro, Europe’s single currency. Its principal job is to safeguard the euro’s purchasing power and, as a result, to preserve price stability in the eurozone.  By keeping inflation low and predictable, consumers are able to plan, save, and spend more effectively. This builds trust in the system, and also helps in supporting economic growth and job creation. 


In summary

All of these regulatory bodies are in existence to assist in establishing trust and confidence in the numerous financial markets, products, and systems with which we engage on a daily basis. As a result, these regulatory organizations aid in protecting both consumers and businesses by stabilizing the economy and creating a place for firms to thrive, produce value, and keep the system running smoothly. It will be interesting to see how these regulators navigate through the current crises standing before them, including the ongoing conflict in Ukraine, sky-high inflation prices, and of course, the global pandemic, which is still causing massive amounts of uncertainty in the eurozone.

Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. 


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