Pozice K Dokumentu Evropské Unie

Position of the Czech National Bank

on the Communication from the Commission - European financial supervision

1. Generally on the proposed document

The document suffers from fundamental shortcomings, in particular:

- A detailed legislative framework has not been worked out; the Commission does not plan to issue one until autumn this year; - In contrast to what is stated in the Communication from the Commission, it is not entirely clear whether the basic European legislative framework (the Treaty) will need to be amended to achieve the proposed objective, nor is it clear what the impacts would be on the basic legislation of the Member States.

The decision-making on such extensive changes to the European supervisory structure should, in our opinion, be based on a complete set of documents (including a detailed proposal for legislative solutions and a draft structure respecting the Member States’ positions on the EFS document).

2. Position on “A New Supervisory Framework for the EU”

The proposal to create a new model of European financial supervision composed of two pillars (ESRC/ESRB and ESFS), involving a transfer of powers between European and national authorities, is not sufficiently justified either in this proposal or in the de Larosière report. Shortcomings in the conduct of supervision by some national authorities were just one of many factors contributing to the onset and spread of the current financial crisis. These shortcomings do not justify such deep and risky changes.

The overwhelming majority of crises have been caused by failures by the home supervisors of large financial institutions and by decisions made at head office level, not by insufficient communication and cooperation between home and host supervisors. In such cases, host supervisors and their actions have never worsened the situation of cross-border financial groups. On the contrary, in many cases, the actions taken by host supervisors and the treatment of subsidiaries as independent institutions have prevented such subsidiaries and their franchises from losing value. The failures by home supervisors have been due to their fragmented nature and to a plainly inappropriate culture in supervisory authorities (regulatory capture and the promotion of “own” national institutions and their short-term profit interests in order to support “national champions”). Building the new European supervisory framework on this culture may lead in the future to much more devastating crises rather than to crisis prevention.

Solutions should be sought primarily in simplifying the supervisory structure, which would also encourage supervisory cooperation and coordination of supervisory activities, and in integrating supervision at the national level, eliminating national discretions from the European financial market legislation, and supporting the exchange of information.

1 The following are particularly unacceptable:

- separating executive powers from responsibility for regulatory and supervisory intervention - placing limitations on the instruments available to national authorities responsible for financial stability, particularly in emergency situations - enforcing implementation of European legislation through the European Supervisory Authorities (ESAs) or the Commission instead of increasing the efficiency of the regular process of implementation of European legal regulations.

With reference to the reservations given below, we cannot accept the model of European financial market regulation and supervision proposed in the EFS document.

Commentary on the position

As regards the expediency and functionality of the proposed solution, the EFS text is based primarily on a one-sided (and in places possibly also deliberately biased) diagnosis of the causes of the current financial crisis, since it focuses on weaknesses in the supervision of large cross-border financial institutions. As shown in numerous analyses, including the one presented in the de Larosière report, these weaknesses were not the only, or even the main, factor contributing to the financial crisis. The factors that the EFS document fails to mention include, for example, fundamental shortcomings in risk management in some financial institutions, insufficient use of supervisory instruments, and a sectoral approach to regulation and supervision. The EFS document totally ignores the issue of delegation of responsibilities, simplifying it just to a transfer of supervisory tasks and powers to the European level.

The EU has a legislative system for approving European legal rules based on the principles of parliamentary democracy. If, however the system does not function adequately, particularly as regards transposition into the national legislation of the Member States, this shortcoming should not be replaced by binding decision-making by ESAs or the Commission via national supervisors. Efforts to achieve better harmonisation and timely transposition of European law must be made at the political level, i.e. in the Council, the Commission, the European Parliament and the European Court, and should not be substituted by powers vested in the proposed ESAs.

Macro-prudential regulation, financial stability and supervision of individual entities cannot be unequivocally separated. Most crises that hit one sector of the financial system and then spread to others are caused by problems having their origins in one or a few (significant) financial institutions.

3. Position on the European Systemic Risk Council/Board

The CNB’s position is essentially unchanged from its previous standpoint on the recommendations made in the de Larosière report. The CNB’s assent to the establishment of the ESRC hinges on clarification of further vital details in the mandate, procedures and composition of the ESRC/ESRB. The CNB still regards the EFS proposal as a point for further discussion. It should be stressed, however, that the CNB sees a role for the ESRC/ESRB only under a defined mandate of collecting data for

2 macroeconomic analyses as a basis for issuing opinions or non-binding recommendations.

Although further agreements between the Member States have been achieved at the European Council level in recent days, the CNB deems it necessary to express its opinion on the proposals that the Commission is making in the EFS document for the establishment, mandate and operation of the ESRC/ESRB.

It is important to distinguish between monitoring and analysis of the macroeconomic dimension of financial risks in the EU market and the macroeconomic dimension and macroeconomic impacts of regulation. The term macro-prudential regulation is misleading, since this dimension of financial regulation is covered by European legislation (EC directives and regulations of the Commission and of the European Parliament and the Council), national legislation implementing EC directives and other national legislation, and finally also by subordinate legal rules of individual Member States. The proposed ESRC/ESRB mandate does not consist in macro-prudential regulation, but in macro-prudential analysis and in the issuing of policy recommendations based on such analysis.

The problem with the structure of participation in ESRC/ESRB meetings only proves the need to integrate supervision at the national level as a precondition for further changes.

High independence in decision-making on financial stability (and monetary policy) issues must be maintained for central banks and cooperating national supervisors. The proposed modus operandi of the ESRC/ESRB, which equates de facto to the enforcement of ESRC/ESRB recommendations, is unacceptable in this regard, as it inadmissibly restricts decision-making by national institutions. ESRC/ESRB recommendations should therefore not be accompanied by any further formalised steps, for instance in the form of an “act or explain” principle.

In an issue as sensitive as financial stability, the issuing of any recommendations to national authorities and the assessment of the implementation of such recommendations and so on without the explicit approval of the national central bank or national supervisor(s) concerned may be counterproductive or even pose a threat to financial stability.

The description of the ESRC/ESRB’s activities is relatively “raw”. The ESRC/ESRB would issue recommendations. However, it is not clear what measures would be adopted or who the addressees would be. The ESRC/ESRB would issue recommendations and warnings directly or through the ECOFIN Council and the ESAs, but would not have the power to issue binding legal acts and would not have any legally binding powers. However, the addressees of recommendations and warnings would be expected to have a de facto “obligation” to act on them.

The EFS document also fails to specify whether the ESRC/ESRB will have legal personality, referring only to “a new independent body”.

3 4. Position on the European System of Financial Supervisors

The CNB rejects the proposed European System of Financial Supervisors primarily for the following reasons:  responsibility for the results of regulatory and supervisory measures cannot be separated from decision-making powers by way of transferring (some) powers to the ESAs (as this would lead to unaccountability);  the transfer of decision-making powers without a simultaneous transfer of fiscal responsibility in the event of wrong decisions at European level is unacceptable;  it is unacceptable to weaken national supervisory authorities’ powers, particularly in emergency situations, when they are directly responsible for maintaining financial stability;  the EFS document fails to define clearly the extent to which the ESAs’ opinions would be legally binding; an extensive definition could lead to conflict with national laws (and not only those relating to the financial market), which could conversely restrict the conduct of supervision.  the proposal fails to address the fundamental problem of the fragmented nature of national supervisory authorities organised more or less along sectoral lines.

The CNB simultaneously suggests increasing the efficiency of financial market supervision in the EU by means of the following measures:

 integrate financial regulation and supervision first at the national level, giving the lead role to central banks responsible for financial stability,  increase the efficiency of the activities of the Council, the Commission and the European Parliament in order to enhance the transposition of European legislation into Member States’ legal systems both in substantive terms and in terms of compliance with the set time schedule; national exceptions must be avoided in this transposition;  leave the mandate of the existing Lamfalussy level 3 Committees (3LCs) unchanged, but strengthen their role in monitoring the implementation of European legislation at national level, issuing standards and recommendations for the implementation of European legislation, and answering questions relating to implementation; greater weight should also be attached to the advice provided to the European Commission by the 3LCs on certain financial market issues.

Without major legislative changes it is impossible to transfer some powers to the ESAs while leaving full responsibility with the supervisory authorities of the Member States. Being endowed with powers to intervene against financial institutions, the ESAs could in certain cases make decisions that conflict with the national supervisor’s actions or contravene national laws.

Neither the de Larosière report, nor the EFS document provides a convincing rationale for the proposed changes or the transfer of powers. The EFS document treats the terms transfer of powers and tasks of supervision inaccurately and multifariously and essentially ignores the problem of the simultaneous transfer of fiscal responsibility, or rather only states unacceptably that the transfer of powers to the European level will not impinge on the fiscal responsibilities of the Member States.

4 A national supervisory authority is usually accountable to its national parliament, and in some cases partially to its national government (depending on the institutional set-up of financial regulation and supervision in the Member State concerned), and cannot simultaneously be accountable to the ESAs.

The new ESAs would be endowed with powers to issue interpretative guidelines which the national authorities would apply in decision-making practice (e.g. in licensing and enforcement proceedings). In the event of conflicts with national law, this could lead to a series of legal actions against the home supervisor. However, the legal impacts on supervised entities in this regard are not addressed at all in the proposals.

Position of the Czech National Bank

on the Impact assessment to the Communication from the Commission, European financial supervision

1. Position on macro-prudential issues in the IA:

The IA underestimates the risks of forcing addressees to act on ESRC/ESRB recommendations through excessive pressure, in particular through the public disclosure of factors endangering the stability of the financial system of the Member State concerned. Maintaining financial stability, especially at a time of crisis, is a very difficult and sensitive issue. Knowledge of the specific conditions in a Member State is of key importance, as is sensitive treatment of information that could lead to misinterpretation of the situation. The IA also fails to emphasise sufficiently that financial stability is primarily the responsibility of the competent national authority. Insensitive treatment of information and the taking of decisions without a detailed knowledge of the environment and the specific situation may result in irreparable mistakes and trigger irreversible developments. Restricting instruments and responsibilities for financial stability management at the national level could cause significant problems for the Member States in future times of crisis. Such problems could even result in crisis situations far worse than the current ones.

Summary: Extending the mandate of the ESRC/ESRB beyond data analysis and issuing recommendations for reducing systemic risk and preventing/minimising the impact of financial crises is unacceptable, since:

(1) national institutions responsible for maintaining financial stability must not be limited in their activities or in the use of appropriate tools; and (2) given what is mentioned in (1), decisions on whether or not to implement ESRC/ESRB recommendations must be left solely to national institutions, and the creation of further coercive means (such as public disclosure) to force addressees to adopt non-binding recommendations not only is unacceptable, but under certain circumstances may become counterproductive to efforts to maintain financial stability.

5 2. Position on micro-prudential issues in the IA:

On the one hand, the IA states that the present model based on the Lamfalussy level 3 (3L3) Committees was a step forward in enhancing coordination of supervision in the EU and was strengthened last year by, among other things, changes in the Charters of the individual committees and the approval of the creation of colleges of supervisors for all major cross-border bank groups. On the other hand, however, it claims in the same breath that the process was slower than expected. The fact that the system referred to as the “Dynamic status quo: home country model and the Lamfalussy framework” has been in operation for less than a year in its new form and thus has not had a chance prove its viability or non-viability, is totally ignored. By contrast, it states intentionally, without any documentation or evidence, that during the last seven years of supervisory cooperation in the securities area and four years in the banking and insurance sectors this model has turned out to be much slower and more limited than expected. Once again we must emphasise that this and other Commission documents state explicitly that supervision (meaning the present system of regulation and supervision in the EU) was not one of the main causes of the financial crisis.

As regards the assessment of this and other models, the cross-border financial group is generally viewed as a single legal entity, and the fact that its subsidiaries can and do operate in individual countries as independent legal entities with their own legal personality and with related rights and obligations is not sufficiently respected. By contrast, in such a set-up, the cross-border group as a whole does not have legal personality. This is of crucial importance in terms of the absence of legal responsibility.

The fact that one of the models not favoured by the authors of the IA is called “Step back” suggests that the document is biased. The criteria chosen to assess the models are not directed at negative evaluation, but, by contrast, lead to a clearly positive assessment or “fully persuasive victory” of Option 4 “de Larosière proposal” and Option 5 “Full supervisory centralisation: a single EU Supervisor” preferred by the Commission. The assessment is even organised in such a way that these options have not a single neutral or negative mark, but only a double plus compared to the present model (see Table 5, section 6.1). However, as regards the main criterion (level playing field) it is obvious at first glance that ensuring uniform transposition and implementation of European law through the regulations of the Commission or the newly established ESAs to the national supervisors is more than doubtful, since it may conflict with the due legislative process.

The study omits some significant criteria, such as the legislative possibilities of establishing the ESAs and their accountability, the separation of the fiscal and moral/political competences of national institutions from the powers transferred to the ESAs without direct responsibility for the relevant decisions, the impacts on regulatory and supervisory costs (only the costs of individual cross-border groups are considered), and other legislative and legal impacts on the position of supervised national entities. If these criteria were taken into account, it is reasonable to assume that the proposed ESFS model would not be assessed as the best or the most efficient.

The document should have discussed a model primarily taking account of the following supervisory issues as well: sectoral fragmentation, the low convergence of transposition and implementation of European law, fiscal responsibility, failures by only a few individual

6 supervisors and not the entire system, and the fact that financial instability was triggered as usual by the failure of one or several significant local financial institutions.

The new model should:

- eliminate the fragmentation of national sectoral supervisors and integrate them into a single national supervisor responsible for the entire financial market; - remove the diverse responsibilities for maintaining financial stability and integrate this function, together with supervision, into a single authority at the national level; - eliminate the possibility of national discretions forming a basis for possible divergence in the implementation of legislation; - simplify and strengthen the exchange of information between supervisors by standardising the reporting framework; - use the existing anti-cyclical instruments in European regulations (Basel II) and accounting regulations (IFRS) and, following a comprehensive analysis, add further instruments as required; - based on sufficient experience from the activity of the strengthened 3L3 Committees, recommend other potential tools to improve the effectiveness and efficiency of their activity.

The aforementioned fundamental omissions, or purely subjective approaches, render the conclusions regarding the strengths and weaknesses of the proposed European supervision models completely worthless. The conclusions would be very different if the aforementioned criteria were applied.

Summary: The assessment of the advantages and disadvantages of the systems under discussion and the preference for the European supervision model referred to as the “de Larosière proposal: European System of Financial Supervisors (ESFS)” based on this assessment are totally unsustainable for at least the following reasons: (i) the assessment of the proposed models fails to take into account crucial issues relating to their implementation and applicability, (ii) the assessment only considers selected criteria suiting the recommended, newly proposed models, (iii) the assessment ignores obvious and already proposed models for the European regulatory and supervisory framework that clearly have great potential in terms of applicability and effectiveness.

3. Other shortcomings of the IA a) Delegation of responsibilities

The IA mentions many times and in various places the transfer of powers from national regulators to the ESAs and the need for indirect yet highly effective enforcement instruments.

– The transfer of some powers to the European level or to newly established ESAs is justified in the document for example by the need to settle disputes between national supervisors, ensure a level playing field for cross-border companies, reduce the costs of cross-border companies, remove the home-host problem and improve crisis management. Little attention is given to the fact that decision-making at the European level will have fiscal and moral impacts on the national environment and the accountability of national

7 supervisory authorities. The problems arising in these cases are of key importance to the new model of regulation and supervision in the EU and are totally ignored in the assessment of its possibilities and effectiveness. – The issue of the legal support for the establishment and powers of the ESAs lying only within the possibilities provided for in the existing EU Treaty is also highly debatable. The assertion that some of the possibilities provided for in the European legislation regarding the transfer of individual, precisely defined functions or decisions issued on the basis of European directives is insufficient for the transfer of such wide-ranging and general powers as proposed. The same applies to the creation of the ESAs on the basis of the European Commission’s authorisation to establish European agencies, given their general and wide-ranging orientation as mentioned above. This gives rise to justified discussions about whether the approval of the model proposed by the Commission requires further amendments to the EU Treaty. – The transfer of powers from national supervisors accountable to national parliaments to an ESA – with the decisions of this European authority having fiscal impacts at the national level – could mean such a large degree of power transfer that its approval, albeit only in principle, may require approval by national parliaments (at least in the case of the Czech Republic). – The experience to date, and not only in the financial market area, shows the danger of having a system where decision-making powers are separated from direct (or indirect) accountability for such decisions. If this is accompanied by decisions on specific cases in specific conditions, the mistakes of the system will multiply further. – The creation of a level playing field for supervised entities within the single European market is based primarily on the possibilities provided for in European directives. Improvements can be achieved by minimising or eliminating national discretions and eliminating the current long-known but persisting differences in the legislation of individual Member States in areas which either directly concern the financial market (e.g. holding certainty, securities transfers and securities settlement) or partly affect the financial market (e.g. company law). The efforts to address some of these problems by transferring powers to the ESAs would in fact be a way of substituting for shortcomings or inactivity in the present legislative process and in the work at European level (the Commission, the European Parliament and the Council), as the changes imposed would be made by national supervisory authorities without legislative initiatives. – Experience shows that the mediation process set by all the 3L3 Committees is virtually unused.

None of these aspects/problems, which can be summarised as “Responsibility of the ESFS for enforced implementation of inappropriate non-binding recommendations versus the position and restriction of the activities of national supervisors fully responsible for maintaining financial stability”, are discussed in the document at all. Given that such an important element is missing, the Impact Assessment fulfils its objective only minimally.

Summary: The proposed model of European supervision (micro-prudential supervision) is unacceptable in the proposed form, since:

(1) a justifiable legal framework for establishing ESAs has not been clearly defined; (2) the simultaneous transfer of decision-making powers and transfer of accountability for the effects (including fiscal effects) of decision-making at the European level is not resolved;

8 (3) the extent of the transfer of powers could generate pressure for amendments to the EU Treaty; (4) the extent of the transfer of powers from national to European level may first require parliamentary approval, since it could have implications for constitutional law; (5) national supervisory authorities cannot be used to ensure convergence of the transposition and implementation of European regulations if they have not been vested with legal initiatives. b) Overlooking the real causes of the crisis

According to the IA, the current set-up for micro-prudential supervision of the EU financial market suffers from many shortcomings, caused above all by the following five factors (problem drivers, see p. 11):

. a limited ability to challenge the decisions of a national supervisory authority in the event of cross-border impacts or aspects, . insufficient harmonisation of powers (and sanctions) of national supervisory authorities and supervisory rules, . differences in supervisory practices applied by national authorities, . fragmented responsibilities or lack of legal certainty regarding the responsibilities of national supervisors, . absence of legal arrangements allowing for EU-wide supervision of some institutions operating all across Europe, e.g. credit rating agencies.1

None of these factors caused the current crisis. The IA thus takes into account only marginally, or not at all, the real causes of the insolvency of major international banks in some Member States, which ultimately necessitated massive and costly intervention by the governments of those Member States and in some cases even coordinated action by several Member States. Case studies of the insolvency of these banks (why are none appended to the IA?) would probably show that a unique set of factors caused the insolvency of each of these banks. However, they would also reveal that the common and fundamental cause of all the insolvencies and other serious adverse shocks that hit the banking sectors of several Member States and necessitated ECB as well as government intervention is the failure of risk management systems, which manifested itself in three forms:

 poor risk management, especially management of risks associated with exposures to “toxic assets”, typically asset backed securities and credit default swaps,  wrong business strategies, which led some banks to make very costly acquisitions that exhausted their capital. Such strategies were based on poor risk analysis and flawed estimates of stock market developments, i.e. failure in the management of equity risk and trading risk due to market competition,  excessive leverage of banks, reflected in gross underestimation of liquidity risk; this factor was exacerbated by the dilution of regulatory capital with various hybrid capital items.

1 IA, p. 11–12.

9 We regard the failure of risk management systems as a much more important issue than the problem drivers the IA deliberately uses to select the objectives of the planned reform and the option selection criteria. It can be concluded that the IA fails to take into account the real and empirically proven problems that caused the current financial crisis at the micro- level. Consequently, the IA sets neither the right objective nor the right criteria for assessing the micro-prudential supervision options/models. c) Manipulation of the criteria

Even this wrong assessment of the micro-prudential supervision models is not performed consistently in the IA. Improving the effectiveness and cost efficiency of supervision is mentioned as objective number 4 on page 16, but on page 24 this objective is reduced to improving cost efficiency for supervised companies (regulatory burden). Only in step two, where just two models – namely the ESFS and the single European supervisor – remain in play, is the effectiveness of supervision reintroduced as a criterion and is even declared to be a very important one.

Using this reduced selection, it is not difficult to prove that the ESFS is the best option. Such inconsistent application of the assessment criteria can hardly be regarded as fair. If the effectiveness criterion was applied in step one, the IA would face the difficulty of explaining how the proposed ESAs and the proposed transfer of some powers from national supervisors to the ESAs would increase the effectiveness of supervision. This leads us to conclude that the IA manipulates the effectiveness criterion by applying it in a selective manner. d) Incompleteness

The IA ignores several important criteria that are crucial for micro-prudential supervision in practice. This concerns at least the following criteria:

 Fiscal responsibility – Fiscal responsibility is associated with the authorisation to issue legally binding decisions affecting the freedom of operation of supervised entities. The IA concludes that it is right to create ESAs that will issue binding standards for the performance of supervision and will be entitled to issue decisions binding on national supervisors (e.g. in the case of a dispute within a college of supervisors). However, the IA fails to address whether and how the ESAs will share responsibility with the national authority for any fiscal costs incurred by such supervisory decisions. Neither does it deal with the problem of how to proceed where an ESA and a national authority of a Member State have different opinions regarding the potential fiscal impacts of the decision or the proposed action. The IA should explain this issue and include it in the assessment criteria instead of circumventing it.

 Legal and reputational risks for the supervisor – All supervisory authorities are concerned about the legal and reputational risks they bear in exercising their powers. In this respect the IA is remarkably carefree with regard to the ESAs, proposing that they should be empowered to issue legally binding decisions without taking into account that the exercise of powers is always accompanied by legal and reputational risks. It should be noted that the establishment of the ESAs will probably increase the overall level of legal risk in supervision, as their very existence implies a higher number of parties to potential legal disputes. The same is true of

10 reputational risk, as the ESAs would be potentially more attractive as targets of media campaigns than national supervisors. e) Further controversial issues in the IA

The IA regards insufficient centralisation of European supervision as a shortcoming in supervision in the EU. However, the chart on page 6 of the IA confirms that the biggest financial sector problems have arisen in countries where assets are predominantly owned by domestic entities. This proves that the problems are at the level of some home supervisors rather than at the European level.

The economies in the first positions in this chart, which is intended to illustrate the high degree of territorial integration in the EU, are negligible in terms of size relative to the European market and could hardly trigger a pan-European or global crisis.

The IA mentions fragmented supervision at the national level as a persisting problem in the EU.2 This problem is confirmed in the fourth paragraph on page 7, which states that responsibility for financial stability in individual EU Member States is fragmented and that this had an impact on the spread of the financial crisis. Nevertheless, neither the IA nor the Commission proposal addresses this issue, choosing instead to focus solely on the centralisation of supervision on the micro and macro level.

The differences in opinion regarding supervision in the cases of ABN AMRO and Unicredit, which the IA mentions as problem situations on page 7, should be viewed as a natural discussion in a situation where each institution operates in a different financial market. The same applies to the fact that a national supervisor decides in accordance with its responsibility for financial stability within its jurisdiction, which can affect other countries as well. The supervisor thus always decides on the basis of its own accountability. According to the proposal, however, a centralised European supervisor can decide in a manner that damages the interests of one or more countries, but it is not held accountable in such case. We must emphasise that while a fatal mistake made by a national supervisor will have a direct impact on the national financial sector and a potential impact on others, a fatal mistake made by a centralised European supervisor will affect the entire EU financial sector.

The last paragraph on page 7 of the IA states that the crisis exposed that the mismatch between the level of integration of European financial markets and the national organisation of supervisory responsibilities can create risks to stability.3 However, one should bear in mind that integration is going on not only within the EU, but worldwide, and goes beyond the territorial integration stressed by the IA. EU markets have significant links with markets in the US and Asia. The Commission and IA proposals completely ignore this fact. Yet such links can cause much greater damage than those with the countries in the first positions in the chart on page 6.

The assertions on pages 7 and 8 (reduced competitiveness of the European financial industry compared with what would have been the case with better supervisory practices; negative impact on the Single Market of uncoordinated policies driven by national interest) are not

2 Section 3.1. of the IA, page 7, first paragraph. 3 Section 3.1. of the IA, page 7, fifth paragraph.

11 supported by any evidence or analysis. The same is true of the assertion on page 11 (excessive costs and administrative burden to cross-border companies).

The Commission’s Impact Assessment is also based on the claim that supervisory authorities were unable to adopt joint solutions quickly, and it regards this lack of unity as one of the weaknesses of the current Lamfalussy framework, a weakness that could undermine confidence in the financial markets and further destabilise them. The incoherent approach of regulators to the bans on short-selling is cited as an example in various parts of the document.

According to the CNB, this incoherency can be explained easily, for example by the fact that the bans were imposed on the basis of various circumstances and various degrees of seriousness of the problem and under various degrees of lobbying pressures from issuers, especially banks, on politicians and indirectly also on supervisory authorities, to impose such bans. It is ironic, however, that these pressures came from banks whose toxic assets, often linked to real estate in off-balance sheet items, were the main cause of the decline in their share prices.

Independent analyses have shown that the bans on short-selling had a negative impact on the proper functioning of the financial market. For example, EDHEC analysts came to the following conclusions4:

- Market volatility rose sharply because there was no clarity on the reasons behind the measure. - The impact of the ban on market volatility was greater than the impact of the financial crisis. - Share prices deviated yet more from their fundamental value. - The risk/return possibilities of investors worsened. - The desired effect on market trends has not been achieved (no reduction of the negative skewness of returns is being observed) and there is no evidence of the possible impact of this measure on extreme market movements.

Meanwhile, deliberations in CESR showed that the bans on short-selling reduced market efficiency for the shares of those issuers who were subject to the bans or other limitations.

As the CNB is convinced, on the basis of quite a large number of independent analyses, that the bans caused distortions in the financial markets, we believe that the heterogeneous approach of regulators criticised by the Commission in the Impact Assessment was logical and that any top-down solution involving the transfer of powers from national supervisory authorities to a European authority could damage the market.

We assume, of course, that the future decisions of the European authority would not be restricted to short positions.

The IA criticises excessive intervention by host supervisors and calls for a European framework. In practice, however, we can find an opposite example: Iceland’s Landsbanki HF operated on the British market based on the European passport. In accordance with European regulations, the British supervisor could not supervise this entity directly, yet it had to

4 http://www.theseus-mba.com/jsp/fiche_article.jsp?CODE=1239890986926&LANGUE=1&RH=theseus07

12 participate in the payout of deposits when the bank collapsed.5 Therefore, experience indicates the need for greater involvement of host states in the supervision of groups. Policies aimed at constantly reducing financial institutions’ costs can lead to excessive supervisory costs and excessive market risk appetite among entities enjoying the benefits of deposit insurance.

Last but not least, the problem with the IA is that it views the issue of European supervision above all from the perspective of cross-border banking groups. The CNB regards dialogue with these groups as important. However, we believe that the standpoints of cross-border banking groups are not always consistent with the interests of taxpayers in the countries where these groups operate.

4. Conclusions

Our analysis of the IA shows that its objective of assembling credible arguments for the proposed reform of supervision of the EU financial market in the area of macro-prudential supervision has been fulfilled only partially. As regards micro-prudential supervision, especially the question of how far ESAs with the proposed powers would contribute to increasing the efficiency of micro-prudential supervision, we arrive at the conclusion that this objective has hardly been fulfilled at all.

In general, the IA does not display the usual characteristics of an impact assessment. It fails to analyse the impacts of various options substantiated by supporting documents. Instead, the document appears to be a one-sided and biased defence of the proposed solution. The assessment of the strengths and weaknesses of the frameworks discussed in the IA is unacceptable, as it fails to take into account crucial issues relating to the implementation and applicability of the new models, it only considers selected criteria suiting the recommended and proposed models, and it ignores obvious and already proposed models for the European regulatory and supervisory framework that clearly have great potential in terms of applicability and effectiveness.

5 The Turner Review, page 38.