Need for the Development and Implementation of a Supra-National Prudential Supervisor to Oversee the European Union Financial Sector


A SHIP WITHOUT A CAPTAIN AT THE HELM:

THE NEED FOR THE DEVELOPMENT AND
IMPLEMENTATION OF A SUPRA-NATIONAL

PRUDENTIAL SUPERVISOR TO OVERSEE THE
EUROPEAN UNION FINANCIAL SECTOR

Bryan S. Strawbridge

"The current financial crisis has highlighted the weaknesses
in the EU's supervisory framework, which remains
fragmented along national lines despite the substantial
progress achieved in financial market integration and the
increased importance of cross border entities. Iffinancial
integration is to be efficient in terms ofsafeguarding systemic
stability as well as in delivering lower costs and increased
competition, it is essential to accelerate the ongoing reform of
supervision. "'

I. INTRODUCTION

With the rapid growth of financial institutions in the European Union2

(sometimes the "EU" or the "Union"), the subsequent development of cross-
border transactions, and the establishment of financial subsidiaries spread

* Bryan S. Strawbridge, B.A., Indiana University, 2006; M.B.A., Indiana University
Kelley School of Business, 2009; J.D., Indiana University School of Law - Indianapolis, 2009.
The Author appreciates his parents, Janet A. & Steven J. Strawbridge, Esq., for their unwavering
encouragement and support as well as Stephen M. Sothmann, former Editor-in-Chief of the
Indiana International & Comparative Law Review, for his guidance in the conception and
development of this Note. All errors are the Author's own.

1. Press Release, EUROPA, High Level Expert Group on EU Financial Supervision to
Hold First Meeting on 12 November (Nov. 11, 2008), available at http://europa.eu/rapid/
pressReleasesAction.do?reference=IP/08/1679&format=HTML&aged=0&1anguage=EN&
guiLanguage=en [hereinafter EUROPA Press Release]. EUROPA is the name ofthe website for
the European Union that "provides up-to-date coverage of European Union affairs and essential
information on European integration." EUROPA, About EUROPA, http://europa.eu/
abouteuropa /index en.htm (last visited Oct. 29, 2009).

2. The European Union is an "economic and political partnership between [twenty-seven]
democratic European countries" with over 495 million citizens that has succeeded in creating a
zone of free trade and travel, developed a uniform currency, the Euro, and advocates for a
"fairer, safer world." EUROPA, The EU at a Glance, Panorama of the EU, http://europa.eu/abc/
panorama/indexen.htm (last visited Oct. 29, 2009). Countries that are members of the EU are
referred to as "Member States" in this Note.



IND. INT'L & COMP. L. REv.

throughout various countries within the EU over the past three decades,3 the
need has arisen for the development of an intra-EU supervisory body to oversee
an integrated financial market.4 Similar to the United States' Securities and
Exchange Commission, which, inter alia, regulates and supervises domestic
securities transactions,5 each European Union Member State currently
domestically self-polices their individual financial sector to verify "that their
work will be performed in an objective fashion and that the rules in force will
be applied fairly to all agents operating in the market for financial instruments,
in banking and in insurance."6 This system of Member State national self-
supervision is the final line of review for financial institutions within the EU, as
there does not exist an EU-wide supervisory body.7

With the increasing presence of financial institutions and subsidiaries
located outside the Member States' territorial jurisdictions, individual Member
States are no longer capable of adequately protecting the financial interests of
their citizenry as their supervisory gaze is blinded by jurisdictional limitations.
Due to the "growing amount of cross-border activity and cross-border mergers
of financial institutions," financial supervision at an exclusively national level
is gradually, but increasingly, becoming an untenable condition.9 Therefore,
the need has surfaced for the development of an intra-EU regulatory body to
supervise the financial institutions within the EU as a whole as a means to

3. PIERPAOLO FRATANGELO, BANCA D'ITALIA, INTERNATIONAL AND EUROPEAN CO-
OPERATION FOR PRUDENTIAL SUPERVISION 2 (2003), http://mpra.ub.uni-
muenchen.de/5539/1/MPRA paper_5539.pdf ("The issue is not a new one since the first forms
of cross-border co-operation are almost thirty years old.").

4. ECOFIN, Focus Paper, Informal Meeting Of The Ministers In Charge ofEconomy And
Finance (2008), available at http://www.eu2008.fr/webdav/site/PFUE/shared/import/0912
informelle ecof/FocuspaperEN.pdf. As an arm of the Council of the European Union, the
Economic and Financial Affairs Council, commonly referred to as ECOFIN, is composed of the
Economics and Finance Ministers of the EU Member States, and "covers EU policy in a number
of areas including: economic policy coordination, economic surveillance, monitoring of
Member States' budgetary policy and public finances, the Euro (legal, practical and international
aspects), financial markets and capital movements and economic relations with third countries."
Council of the European Union, ECOFIN Council, http://consilium.europa.eulcms3_fo/
showPage.asp?id=250&lang-en (last visited Oct. 29, 2009).

5. The United States Securities and Exchange Commission (the "SEC") acts as the
"investor's advocate" and seeks "to protect investors, maintain fair, orderly, and efficient
markets, and facilitate capital formation." U.S. Securities and Exchange Commission, What We
Do, http://www.sec.gov/about/whatwedo.shtml (last visited Oct. 29, 2009) [hereinafter SEC].

6. ECOFIN, supra note 4.
7. EUROPA Press Release, supra note 1.
8. Eurofi, For Effective Supervision of Cross-Border Financial Groups (2008),

http://www.eurofl.net/pdf/2008/sept2008/Supervision-Crisis.pdf. "Eurofi, a European think
tank dedicated to the integration and efficiency of EU Financial, Insurance and Banking
Services markets, was created in 2000." Eurofi, Who are we?, http://www.eurofi.net/who.php
(last visited Oct. 29, 2009).

9. Posting of Roel Beetsma & Sylvester Eijffinger to Europe EconoMonitor, Credit Crisis
is a Missed Opportunity to Restructure European Financial Supervision, http://www.rgemonitor
.com/euro-monitor/25272 1/credit crisis is_a_missed opportunityto restructure european
financial_supervision (June 2, 2008).

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supplement the "solo" supervision currently conducted by each Member State.' 0

This proposed entity would act not to wholly supplant national supervision, but
to instead act as an overarching supervisor with the plenary authority to verify
the veracity of financial institutions providing services across the European
Union thereby vitiating the jurisdictional limitations currently inhibiting
national-level supervisors." The national supervisors will continue to supervise
financial entities within their territorial boundaries; however, the supra-national
EU supervisory body will verify the integrity of the financial sector throughout
the EU.12

The Finance Ministers of the EU Member States have begun to recognize
the weaknesses of solo supervision and are at the onset of taking necessary
steps to make corrections.13 Part I of this Note will discuss the meeting in Nice,
France, where representatives of the EU Member States met in 2008 to discuss
the current system of prudential omissions and possible avenues for change.14
Part H will highlight the glaring gaps in the current system of national
prudential supervision, describe past steps taken to shore up such supervisory
holes, as well as discuss some emerging trends on the issue.15 Part III advocates
the creation of an intra-EU regulatory body with broad powers and no
jurisdictional limitations within the EU with the mandate to supervise the
European financial industry.16 Additionally, Part HI will affirm the interaction
and effective cross-border cooperation necessary between national supervisors
and the proposed supra-national entity for successful supervision of the EU
financial sector.' 7 Finally, Part IV will discuss some critiques of the creation of
an intra-EU prudential supervisor and other theories that have been proposed to
address the issue.' 8

II. THE NICE MEETING

In September 2008, all twenty-seven finance ministers of the EU Member
States, the central bank governors, the European Commission, the European
Central Bank, and the European Investment Bank met in Nice, France
(hereinafter, the "Nice meeting"), to confer on the issue of, inter alia,
supervision in an attempt to "fireproof Europe's financial system from the
troubles that have brought U.S. lenders close to collapse" over the past two

10. ECOFIN, supra note 4. See also, Eurofi, supra note 8 ("[T]he financial crisis
highlights the limits of 'solo' supervision."). As discussed in Part II A infra, "solo" supervision
refers to Member States supervising their individual financial sectors domestically without
review by any other entity or other national supervisor.

I1. See infra Part III.
12. See infra Part III.
13. See infra Part I.
14. See infra Part I.
15. See infra Part II.
16. See infra Part III.
17. See infra Part III.
18. See infra Part IV.

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IND. INT'L & COMP. L. REV.

years. 1 The concern of the respective EU Member States was the "potential
collapse of a larger bank or insurer that does business in several EU countries"
and the subsequent "prospect of clashing views between financial supervisors.
. ." as to how to handle the entity's demise. 2 0 The ECOFIN Chair and French
Economy Minister, Christine Lagarde, who organized the Nice meeting, noted
that the discussions would be "devoted to analysing the current economic
situation in Europe and how the Member States should collectively respond to
this situation."

At the conclusion of the Nice meeting the finance ministers "offered few
details about how they will revamp EU's current system of fragmented,
national-based supervision." 22 However, the ministers crafted some general
guidelines to revamp the struggling system and initiated a dialogue regarding
the possible creation of a multinational supervisory body.23 In the financial
sector, the ministers sought to "restore confidence through transparency and
accountability of banks and other sectors." 2 4 Additionally, the "EU ministers
and central bankers said they could agree on 'broad guidelines' on carving up
responsibility for how national financial supervisors should work together to
tackle problems at European financial institutions."2 5

This broad based plan "would see countries shar[ing] more key
information on the risk profile of a company and figure out a crisis plan that
would call on a parent company to ensure that its own funds 'are allocated
equitably among each entity in the group if ever there should be a failure."' 2 6

This supervisory body would essentially be "a pilot in [a] plane" to streamline
supervision of multinational banks and insurers.27

19. Aoife White, EU Discusses Financial Supervision, THE INDUSTRY STANDARD (Sept. 12,
2008), available at http://www.thestandard.com/news/2008/09/12/eu-discusses-financial-
supervision.

20. Id.
21. Press Release, Presidency of the Council of the European Union, Informal Meeting of

the Economy and Finance Ministers in Nice (Sept. 12, 2008), available at
http://www.eu2008.fr/PFUE/lang/en/accueil/PFUE-09_2008/PFUE-12.09.2008/informelle
ministres finances.

22. See generally Adam Cohen, EU Ministers Want Better Regulation, WALL ST. J (Sept.
14,2008), available at http://online.wsj.com/article/SB 122130818990832183.html?mod=hpp
us whats news.

23. See generally EU Finance Ministers Conclude Meeting with Measures to Tackle
Slowdown, CHINA VIEW (Sept. 14, 2008), available at http://news.xinhuanet.com/english/2008-
09/14/ content_9981605.htm; Huw Jones, EU Ministers Outline Bank Supervision Shake-Up,
THOMSON REUTERs (Sept. 13, 2008) available at http://www.reuters.com/article/
rbssFinancialServicesAndRealEstateNews/idUSLD34647820080913 [hereinafter Jones,
Supervision Shake-Up].

24. EU Finance Ministers Conclude Meeting with Measures to Tackle Slowdown, CHINA
VIEw (Sept. 14, 2008), available at http://news.xinhuanet.com/english/2008-09/14/content
9981605.htm.

25. White, supra note 19.
26. Id.
27. Jones, Supervision Shake-Up, supra note 23.

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Although the ministers were unable to develop a final detailed means for
creating a unified supervisory entity at the Nice meeting, the stage was set for
future fashioning of such a system.28 Lagarde stated that the ministers "found
the basis for unified supervision." 2 9 She continued by noting that a singular
financial supervisory body "implies a sounder system, a more effective
solution" and that following the Nice meeting, Europe had "moved towards a
more integrated Europe."0 o Additionally, the meeting brought about greater
transparency among the Finance Ministers and it was agreed that concerted
solutions were necessary to address the growing problem.3' Lagarde similarly
stated that a lead supervisor was necessary for supervision of the EU to be
effective.32

The financial downturn, arguably initiated by the American sub-prime
mortgage debacle, exemplifies the current inability of Member States to
regulate the cross-border financial institutions and their myriad of intra-Member
State securities' transactions. Eurofi, a European think tank that monitors
financial integration, comments,

Since cross-border financial players are characterized by
highly integrated and centralized operations from a strategic
and commercial perspective, as well as for their risk and cash
management, it is at the group's head office that growth
strategies are mapped out, future sources ofprofit are planned,
choices are decided on in terms of innovations, and the various
corresponding risks are identified.34

It is because of these cross-border interactions that Member States' self-
policing, or "solo supervision," is untenable.35 Member States' supervisory
bodies can no longer guarantee quality supervision or effectively protect their
depositors because subsidiaries can be located outside their territorial
boundaries and, thus, outside their reviewable jurisdiction. In order to
provide for the future security and stability of the European Union, Member
States should continue the dialogue begun at Nice so as to create a unified intra-
EU supervisory body, which will oversee the integrity of the continent's

28. HIGHLIGHTS-EU Finance Ministers'Meeting in Nice, THoMsoN REUTERS (Sept. 13,
2008), available at http://www.reuters.com/article/companyNews/idUKLC
66164120080913?symbol= LEH.N.

29. Id.
30. Jones, Supervision Shake-Up, supra note 23.
31. Christine Lagarde, ECOFIN Chair and French Economy Minister, Remarks following

the Nice Meeting (Sept. 13, 2008) (transcript available at http://uk.reuters.com/article/UK_
SMALLCAPSRPT/idUKLC66164120080913).

32. Id.
33. Eurofi, supra note 8.
34. Id.
35. Id.
36. Id.

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financial system.

M. CURRENT SYSTEM OF EUROPEAN FINANCIAL SUPERVISION

Debates regarding the cooperation of European nations in the financial
sector typically focus on crisis management.37 This is a natural reaction as it is
these crises that bring the spotlight on inadequacies in a financial system.
However, in order to properly address the way in which a system manages a
crisis, it is necessary to analyze the manner in which it operates under ordinary
conditions so as to ascertain the existing deficiencies.38 This Note focuses not
on the present financial crises, but instead on the deficiencies in supervision
that have not yet been rectified. The financial damage could have been
mitigated had these failures been previously addressed. Accordingly, attention
should shift from the immediate emergency to future prevention and adaptation
by focusing on cooperation of all EU Member States toward the end of creating
an intra-EU supervisor.

At present, prudential supervision in the EU exists exclusively at a
national level,40 meaning that there is no EU financial supervisor with the
authority to verify that financial institutions are in accord with the standardS41
set forth by EU regulations or domestic laws.42 EUROPA has noted that "[t]he
current national-based organisation of EU supervisions lacks a framework for
delivering supervisory convergence and limits the scope for effective macro-
prudential oversight based on a comprehensive view of developments in
financial markets and institutions."43 If protecting against systematic instability
and further negative developments in the EU financial sector is going to occur,
integration of an EU supervisor must be accelerated."

A. Supervision Versus Regulation

The difference between the creation of regulation-a legislative
function-and supervision, traditionally under the purview of an executive, has
been blurred. 45  Although the terms regulation and supervision are often

37. Tommaso Padoa-Schioppa, Better Supervision is Key to Stability, THE BANKER (Apr. 7,
2008), available at http://www.thebanker.com/news/fullstory.php/aid/5666/Better supervision
iskeytostability.html. Mr. Padoa-Schioppa was the Minister of Economy and Finance of

Italy from 2006-2008 and is a former board member of the European Central Bank (the "ECB").
Id.

38. Id.
39. Id.
40. EUROPA Press Release, supra note 1.
41. See infra Part 1I D for a discussion of supervisory standards that have been proposed to

further effective cross-border communication and information sharing by national supervisors.
42. See EUROPA Press Release, supra note 1.
43. Id.
44. Id.
45. Padoa-Schioppa, supra note 37.

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mistakenly used interchangeably, "[s]upervision refers to the oversight of
financial firms' behaviour (in particular, risk monitoring).'" In contrast,
"[r]egulation refers to rule-making. 4

7 The goal of economic regulation is to
"correct market imperfections and unfair distribution of resources, while
simultaneously pursuing three general objectives: stability, equitable resource
distribution, and efficiency.'4 8

A supervisor is a regulatory body that seeks to competently and
objectively guarantee that rules pertaining to the market for financial
institutions in banking and insurance are applied fairly to all agents in such
fields. 4 9 "Solo" supervision refers to the overseeing of a financial market by a
singular Member States' supervisor without external review.50 For example, in
France the supervisory bodies are the Autoritd des March6s Financiers, which is
in charge of the financial instrument market, the Banking Commission, which
oversees credit institutions and investment banks, and the Autoritd de Contr6le
des Assurances et des Mutuelles, which covers the insurance industry.5 These

agencies review their respective markets sans outside interference.52
As discussed below, national supervisors have voluntarily adopted quasi-

uniform standards whereby each national supervisor attempts to coordinate with
other national supervisors. However, there currently is no EU body acting on
a supra-national level to coordinate supervision. Prudential supervision is "[a]
term sometimes used to describe the supervision/regulation of institutions such
as banks . .. where the supervising authority seeks to ensure that the depositors
are protected by the institution in question being financially sound." By
leaving supervision of international banks under the purview of national
supervisors exclusively, supervisory review is inadequate, and exposes the
financial sector to systemic failure.

B. Overview ofNational Supervision and Its Inherent Flaws

The traditional notion, or "institutional" model, of national supervision is
predicated on specialization of each single segment of the financial industry by
separate supervisors.55 Under this model, all supervisory responsibilities of

46. Rosa M. Lastra, The Governance Structure for Financial Regulation and Supervision
in Europe, 10 COLUM. J. EUR. L. 49,49 (2003).

47. Id.
48. 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, 469 (2003).
49. ECOFIN, supra note 4.
50. Id.
51. See id.
52. Id.
53. See infra Part II D for a discussion of the Basel Committee's series of standards

proposed to nations around the world in an attempt to encourage cross-border communication
and uniformity in applying supervisory norms.

54. prudential%20supervision/1 188/ (last visited Oct. 29, 2009).
55. Di Giorgio, supra note 48, at 466.

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each segment are assigned to a distinct agency.56  The three traditional
supervisory authorities are guardians over banks, financial mutual funds, and
insurance companies. 57 These supervisory agencies control "entry selection
processes (e.g., authorizations and enrolling procedures in special registers),
constant monitoring of business activities (controls, inspections, sanctions) and
decisions about exit from the market (suspensions or removal)." 8

The institutional model has been effective in the past as financial entities
were able to efficiently interact with a single specialized supervisor (i.e., a
distinct national agency tasked with a particularized and individual financial
sector) thereby reducing supervision costs. 59 However, with the development
and growth of massive financial institutions servicing multiple arms of the
financial industry, duplication and redundancy have become the norms of the
traditional model of national supervision.60 For example, financial entities
performing multiple sector activities are being burdened by conflicting rules
imposed by various distinct supervisory agencies due to differing classifications
and overlap in their legal statuses.6' Additionally, global banks "which operate
in [ten] or more countries find it impossible to organize compliance with rules
from their group headquarters in a structured way because rules and
requirements are completely different across countries."62 In a global financial
economy "where the boundaries separating the various institutions are
progressively being erased, it is no longer possible to definitively determine
whether particular entities are banks, non-banking intermediaries, or insurance
companies."

The growth of conglomerates with international offices and subsidiaries
makes national level regulation and supervision unable to adequately protect
the public.64 The current "financial architecture" of the supervision of Europe
is defined by three principles: (1) decentralization, (2) cooperation, and (3)
segmentation "by specialist financial institutions conducting distinct financial
activities: banking, securities and insurance.,65 However, the current
institutional design is being altered by 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." 66 The blurring of
services provided by international financial entities has created the trend toward

56. Id. See supra Part II A for an analogous discussion of the French model of supervisory
segmentation by particularized financial sectors.

57. Di Giorgio, supra note 48, at 466.
58. Id.
59. Id.
60. Id.
61. Id. at 466-67.
62. Padoa-Schioppa, supra note 37.
63. Di Giorgio, supra note 48, at 467.
64. See id. at 463.
65. Lastra, supra note 46, at 50.
66. Id.

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the consolidation of national supervision into a single domestic supervisory
entity (i.e., moving away from the institutional model of supervision for each
specialized financial sector).

C. The Trend for Consolidation of Member State Supervision into a
Singular National Supervisor

Member States with a multitude of specialized agencies are trending
towards consolidation into a singular national supervisor to streamline

supervision. The drive for consolidation of national supervisory authorities
within Member States via legislative reform "is a regulatory response to the rise
in financial conglomerates and complex financial groups."69 The impetus for
these legislative reforms within certain Member States (e.g., the United
Kingdom70 and Germany") is that "the structure of the regulatory system needs
to reflect the structure of the markets that are regulated." 72 Other Member
States, such as Ireland, Sweden and Britain "have [also] moved to a single
supervisor who oversees not just banks but other segments of the financial
services industry, like insurance and securities." This trend for individual
Member States to consolidate supervisory responsibilities has significant
broader implications, "as it could pave the way for the creation of a single
[European Union supervisor], in particular if all or most Member States were to
adopt such a model in their respective jurisdictions."74

Although analogous to the United States' system of supervision, the
European trend to consolidate to a single national supervisor is not wholly
equivalent. As noted in the introduction of this Note, the SEC is a regulator
and supervisor of the United States' financial sector.75 But, it is not the sole
supervisor. The United States "model of financial regulation and supervision

67. Di Giorgio, supra note 48, at 466-67.
68. Lastra, supra note 46, at 50.
69. Id.
70. Id. at 51. The Bank of England Act of 1998, which came into effect on June 1, 1998,

transferred responsibility for banking supervision from the Bank of England to the Financial
Services Authority (commonly referred to as the "FSA"). Id.

71. Id. at 50. The Federal Financial Supervisory Authority of Germany, the Bundesanstalt
fir Finanzdienstleistungsaufsicht or "BaFin," was established on May 1, 2002, and "consists of
three supervisory directorates for banking supervision, insurance supervision and securities
supervision/asset management, and three cross-sectoral departments dealing with cross-sectoral
issues." Id.

72. Id. (quoting Richard K. Abrams & Michael W. Taylor, Issues in the Unification of
Financial Sector Supervision 3 (International Monetary Fund, Working Paper No. 00/213,
2000)).

73. Matthew Saltmarsh, Jumble ofRules Would Hobble Any EUBailout Warnings, Anger
and Doubts, INTERNATIONAL HERALD TRuUNE, Sept. 24,2008, at 1, available at 2008 WLNR
18121608.

74. Lastra, supra note 46, at 52.
75. See generally SEC, supra note 5.
76. Lastra, supra note 46, at 53.

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is characterized by its complexity, the multiplicity of regulators, and the
demands of federalism."77 Additionally,

Banking in the U.S. is subject both to federal law and to state
law. There are several supervisory authorities at the federal
level: the Federal Reserve System, the Office of the
Comptroller of the Currency, and the Federal Deposit
Insurance Corporation (in addition to the federal regulators for
thrifts, such as the OTS, Office of Thrift Supervision). There
are also supervisory authorities at the state level.78

Although a comparison of the United States' system of supervision seems
rational, due to the breadth of complexity in the United States' tiered
supervision, comparing the United States' system to the progression of
European development towards singular Member State supervision is not
wholly analogous. Accordingly, the subsequent analysis and recommendation
in this Note will omit further comparison to the United States' system of
prudential supervision. The emerging trend in EU Member States to
consolidate their individual supervisory system within the domestic financial
sector displays an openness for change as well as greater regulatory uniformity,
which would make the potential for the creation of an intra-EU supervisory
body more plausible as it simplifies coordination from a multitude of national
agencies to a singular entity for each nation.

D. EU Framework of Minimum Standards

While supervision has been effectuated on an exclusively national level in
the EU, this is not to say that there does not exist communication and
cooperation among Member States' domestic supervisors. Steps have been
taken to encourage cross-border operations so as to maintain, as best as feasible,
supervision of international banks and institutions by national supervisors.so As
discussed below, the intrinsic failure of attempting to coordinate national
supervisors is that abiding by agreements and supervisory standards are
optional, and lack any legally binding force.

Contrary to other industries, such as steel production or automotive
manufacturing, "finance is called a system - a set of connected things." 82 That
is to say, the financial sector is a global assortment of giant international
financial institutions, such as "JPMorgan [Chase], Deutsche Bank, UniCredit,
and perhaps two dozen other global financial institutions [that] form a system

77. Id.
78. Id.
79. Id. at 51.
80. See generally Padoa-Schioppa, supra note 37.
81. Id.
82. Id.

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among themselves, with the plethora of minor institutions operating in their
respective home countries."83 Although advancements have been taken in the
past to make regulation of these institutions international, whether it be in the
creation of capital requirements, bank licensing criteria, or deposit insurance,
there has been very limited steps taken to mandate financial supervision on an
international scale or at even a European level.M

In the European Union, the responsibility for Euro monetary policy has
been centralized in the European Central Bank (the "ECB")." However,
banking and financial supervision has remained at the national level with the
respective domestic agencies. This divergence is unique to the European
Union.87 National supervisors within the EU are tasked with the obligation to
create both regulations, including harmonization with EU directives, and
effectuate such regulation through financial supervision of domestic
institutions. 8

At the EU level, common standards have been proposed to financial
intermediaries, banks, securities regulations, and accounting rules to ensure
universal banking and to maintain an open market throughout the Union. An
example of internationally proposed supervisory standards is the Minimum
Standards for the Supervision of International Banking Groups and Their
Standards (the "Minimum Standards"), which were enacted in 1992.90 Under
internationally proposed standards such as these, each Member State may
voluntarily adopt the Minimum Standards, but they are not mandatory.91

The Minimum Standards were a product of the Basel Committee, which
was created in 1975 as a response to various bank failures in Europe.92 The
Basel Committee, which is still in existence, is composed of banking regulators
from France, Germany, the Netherlands, Belgium, Luxembourg, Sweden,
Switzerland, Italy, Spain, Japan, the United Kingdom, Canada, and the United

83. Id.
84. Id.
85. Di Giorgio, supra note 4848, at 463.
86. Id.
87. Id. at 463-64.
88. Id. at 463.
89. Rolf H. Weber & Douglas W. Arner, Towarda New Designfor International Financial

Regulation, 29 U. PA. J. INT'L L. 391, 440 (2007).
90. Duncan E. Alford, Core Principles for Effective Banking Supervision: An Enforceable

International Financial Standard?, 28 B.C. INT'L & COMP. L. REv. 237, 243 (2005).
9 1. Id.
92. Id. at 242. "The Basel Committee was established as the Committee on Banking

Regulations and Supervisory Practices by the central-bank Governors of the Group of Ten
countries at the end of 1974 in the aftermath of serious disturbances in international currency
and banking markets (notably the failure of Bankhaus Herstatt in West Germany). The first
meeting took place in February 1975 and meetings have been held regularly three or four times a
year since." BASEL COMMrITEE ON BANKING SUPERVIsION, HISTORY OF THE BASEL COMMITrEE
AND rrs MEMBERSHIP 1 (2004), available at http://www.aon.com/nl/nl/risicomanagement/
arc/credit risk management/Historyof BaselcommitteeOktober_2004.pdf.

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States.93

The purpose of the Basel Committee is to "provide[ ] a forum for regular
cooperation on banking supervisory matters ... to enhance understanding of
key supervisory issues and improve the quality of banking supervision
worldwide."" It is worth noting, however, that the Basel Committee "has no
legal enforcement power itself, but encourages member nations to abide by
these regulatory guidelines and to use whatever authority they possess to enact
and enforce them."95 In order to promulgate its determinations as effectively as
possible, the Basel Committee typically presents its determinations at a biennial
meeting of the International Conference of Banking Supervisors. These
principles are subsequently endorsed by the Conference.9 7 In addition to the
Minimum Standards from 1992, the Basel Committee has issued other
guidelines on international banking supervision: the Concordat of 1975; the
Revised Concordat; the Capital Adequacy Standards, commonly referred to as
"Basel I"; the Core Principles; and in 2004, the International Convergence of
Capital Measurement and Capital Standards: A Revised Framework, commonly
referred to as "Basel II." Some of these guidelines will be discussed below.98

Improved cross-border communication, a principle espoused by the Basel
Committee, assists national supervisors in effectively conducting their jobs by
increasing information, and evidences the point that a supra-national EU
supervisor can work among multiple nationalities. Such cooperation was seen
as desperately needed following bank failures in the mid-1970s "and the
subsequent confusion over the settlement of the bank's liabilities."99 The Basel
Committee sought to address these deficiencies by delineating the proper roles
of home country supervisory agencies over their domestically located
international financial institutions. 1' To these ends, the Basel Committee
issued the Concordat of 1975.101 The proclamation was entitled a Concordat
because it was not a binding legal treaty, but an enumeration of supervision
guidelines that EU Member States were encouraged to adopt.102 Duncan Alford

93. Alford, supra note 90, at 242. See generally Bank for International Settlements, About
the Basel Committee, http://www.bis.org/bcbs/ (last visited Oct. 29, 2009); Peter Cooke, The
Basel "Concordat" on Supervision ofBanks' Foreign Establishments, 39 AUSSENWIRTSCHAFr
151 (1984).

94. Bank for International Settlements, About the Basel Committee,
http://www.bis.org/bcbs/ (last visited Oct. 29, 2009).

95. Alford, supra note 90, at 243.
96. Id.
97. Id.
98. Id.
99. Id. at 244.

100. Id.
101. Id. See Committee on Banking Regulations and Supervisory Practices, Report to the

Governors on the Supervision of Banks' Foreign Establishment (1975), http://www.bis.org/
publ/bcbs00a.pdf?noframes=1 (last visited Oct. 29,2009), for the original text of the Concordat
of 1975. The original name of the Basel Committee was Committee on Banking Regulations
and Supervisory Practices. Id.

102. Alford, supra note 90, at 244.

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comments on the Concordat:

The objectives of the Concordat were to ensure the adequate
regulation of foreign banks and the prevention of foreign
banks from escaping supervision. A central tenet of the
Concordat was joint responsibility between home and host
countries in regulating international banks.

The Concordat dealt primarily with the liquidity, solvency,
and foreign exchange operations of foreign banks. The host
supervisory authority was responsible for regulating liquidity,
regardless of the type of banking entity established in the host
nation. 103

The Concordat sought to clarify confusion between supervisors as to
which supervisor, domestic or host country, was responsible for overseeing
international corporations based on what type of foreign banking entity was
involved.'0 It was proclaimed by the Concordat that "subsidiaries and joint
ventures were the responsibility of the host regulator, while branches were the
responsibility of the home regulator." 05

Although the Concordat was effective in shoring up some of the
confusion regarding which supervisor was tasked with overseeing a particular
entity, it did have some weaknesses.106 For example, the Concordat left open
the question of which supervisor should act to oversee a major bank failure. 07

Additionally,

designation of the host supervisor as the primary regulator of
foreign bank subsidiaries ran contrary to the system of
consolidated supervision used in most industrialized nations.
The allocations of responsibility in the Concordat presented a
risk that host regulators, following consolidated supervision,
would look to parent supervisors to regulate a bank
subsidiary's solvency, while parent regulator, relying upon
language in the Concordat, would look to the host supervisor
to perform this task. 0 8

There was also a mistaken belief that lender of last resort responsibilities
came along with supervisory obligations; this was never intended, nor stated in

103. Id. at 244-45 (internal citations omitted).
104. Id.
105. Id.
106. Id.
107. Id.
108. Id. at 245-46 (internal citations omitted).

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IND. INT'L & COMP. L. REv.

the Concordat.'" Member State supervisors were interpreting the Concordat
inconsistently, leading to incongruous determinations." 0 In the end, it was the
lack of specificity that relegated the Concordat to failure and necessitated
amendment."'

The 1982 implosion of the Luxembourg subsidiary of Banco
Ambrosiano, which at one point was the largest Italian bank, evidenced the
insufficiencies of the original Concordat.1 2 The Luxembourg subsidiary had
made $1.4 billion worth of loans to Latin American countries, which proved to
be ill-considered."' The subsidiary also owed $450 million to a myriad of
creditors, which the bank was unable to pay leading to a total financial
collapse.1 4 Both the Italian and the Luxembourg supervisors claimed not to
have supervisory or lender of last resort obligations.' 15 Italian regulators opined
that since local regulators had rebuffed their attempts to examine Banco
Ambrosiano's South American offices, they accordingly had no legal authority
to regulate the bank's foreign subsidiaries."' 6  The Italian government's
argument was that Italian regulators could not take responsibility for a bank
failure that they were not permitted to supervise.' 7 Contrastingly, Luxembourg
regulators believed that the responsibility rested solely with Italian regulators
because the subsidiary was operating under the same name as the parent."
Banco Ambrosiano's collapse in Luxembourg and the subsequent tangle over
responsibility accentuated the failures in the Concordat and led to the creation
and implementation of the Revised Concordat of 1983."9

The Revised Concordat of 1983 was not a new agreement, but rather an
amendment to the original Concordat.120 Similar to the original, the Revised
Concordat is a non-binding agreement that was promulgated by the Basel
Committee as a proclamation of "recommended guidelines of best practices."'21
The revisions sought to close the gaps in European financial supervision that

had been present under the original Concordat and directly addressed foreign
bank regulation and supervision.122  As with the original, the Revised
Concordat instituted the principle of consolidated supervision whereby, "firstly,
no foreign banking establishment should escape supervision; and secondly, that

109. Id. at 246.
110. Id.
111. Id.
112. Id.
113. Id.
114. Id.
115. Id. at 247.
116. Id.
117. Id.
118. Id.
119. Id.
120. Id.
121. Id.
122. Id.

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the supervision should be adequate."l23 Although these principles may seem
clear in modem finance, "[T]hey express an 'essential truth' that constitutes the
basis of international co-operation: without them current structures wouldn't
exist."1 24

A pivotal amendment included in the Revised Concordat was the
principle of "Dual Key" supervision.12 5 Under such a system, both home and
host supervisory entities assess the quality of the other's supervision for
international banks.12 6 This gives both supervisors-home and host-the
authority to make sure that the manner in which the other is supervising meets
their minimum degree of quality.127 Duncan Alford comments that under the
Revised Concordat:

The host jurisdiction had to be satisfied with the supervision
over the parent bank within its home jurisdiction; likewise, the
parent bank's home jurisdiction had to be satisfied that the
foreign operations of its domestic banks were supervised
adequately by the host regulators.

If the host regulator considered the parent regulator's
supervision insufficient, the host regulator had the right to
discourage or prohibit the foreign bank from operating within
its jurisdiction or to set stringent conditions for the bank's
continued operation therein. Likewise, the parent regulator
could attempt to extend its jurisdictional reach if it did not
believe that the host regulator was providing adequate
supervision.128

The goal of the revisions was to prevent a "race to the bottom" mentality
where jurisdictions would relax their regulations and supervision with the
hopes of attracting foreign investment.129

In the context of the Banco Ambrosiano failure, if the Revised Concordat
had been in effect at that time instead of the Concordat, Luxembourg would
have had the responsibility for supervising the Italian bank's subsidiary in
Luxembourg.130 However, if Italian supervisory authorities had not been
satisfied with the quality of supervision by Luxembourg, Italian supervisors

123. Fratangelo, supra note 3, at 3. See also Weber & Arner, supra note 89, at 391.
124. Fratangelo, supra note 3, at 3.
125. Alford, supra note 90, at 248.
126. Id.
127. Id.
128. Id. at 248-49.
129. Id. at 249.
130. Id.

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IND. INT'L & COMP. L. REv.

would have been able to step in and provide supervision.' 3 ' This is a prime
example of the benefits of Dual Key supervision. As it stood, no regulator
interceded and took responsibility for supervisory duties.13 2

In addition to Dual Key supervision, the Revised Concordat also
implemented the theory of Consolidated Supervision whereby "the parent
supervisor monitored a parent bank's risk exposure and capital adequacy based
on all operations of the bank, wherever conducted."l 3 3 It was noted by the
Basel Committee that this principle might extend the commonly understood
jurisdictional bounds of supervisory responsibilities.134 Although the Revised
Concordat took great steps in filling the gaps in supervision, there still remained
flaws.'"a Most glaringly, the Revised Concordat still lacked provisions
pertaining to lender of last resort responsibilities.' 36 Additionally, "[t]he
Revised Concordat purposely blurred host and parent regulatory responsibilities
in order to avoid the type of finger-pointing that occurred among regulators
after the Banco Ambrosiano failure." 37 By doing this, the Basel Committee
created new issues of overlapping supervisory authority between home and host
agencies where one regulator might have responsibility as the primary
supervisor, but another regulator has an interest in maintaining supervision over
a foreign institution.'3

Addressing critiques of the Revised Concordat, the Basel Committee put
forth the Minimum Standards in 1992.139 The Minimum Standards were
intended by the Basel Committee to tighten international bank supervision and
strengthen the principles espoused in the Concordat and the Revised
Concordat.'" The Minimum Standards required that:

(1) all international banks and banking groups should be
supervised by home country regulators; (2) international banks
should obtain permission from both the host and home country
regulators before opening branches or other banking
establishments in foreign nations; (3) banking regulators
should have the right to gather information form international
banks; (4) host regulators can impose restrictive measures
against the international banks if the Minimum Standards are
not met; and (5) encouragement of information exchanges

131. Id.
132. Id.
133. Id. at 250.
134. Id.
135. Id. at 251.
136. Id.
137. Id. at 252.
138. Id.
139. Id. at 255.
140. Id.

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between regulators in different nations should continue.141

The Minimum Standards affirmed to the world that no internationally
operating European bank can function outside the eye of a supervisor and that
"consolidated supervision is a fundamental regulatory principle adopted by the
international bank supervisory community." 42

The Minimum Standards, like the Revised Concordat, accentuated the
notion of consolidated supervision whereby all international banks would be, at
a minimum, supervised by their home country supervisors and obligated to
conduct business in accordance with their domestic regulations. 14 3 Under this
theory of supervision, home country supervisors would have verifiable
information on the international operations of banks within their home
jurisdiction that are operating on a supra-national scale.'" Home country
supervisors would then assess the financial practices based on the information
gathered for "safety and soundness of international banks."4 s Additionally,
home country supervisors could block the creation of corporate subsidiaries that
they deemed to be in discord with the theory of consolidated supervision or
prevented adequate supervision.1

The responsibility for ensuring that home country supervisors were able
to meet the Minimum Standards rested solely with the home country
supervisors themselves.14 7 The Minimum Standards also required banks
desiring to operate on an international scale to obtain permission from both the
home country and host country supervisors before commencing such
operations.14 8 This was not always readily obtained as such approval was
conditioned on a multilateral accord between supervisors with often-divergent
opinions.14 9 In the absence of such agreement, the "Minimum Standards
allocated supervisory responsibilities between home and host country regulators
in a similar manner as the Revised Concordat."' 50 The Minimum Standards,
like other Basel Committee plans, are not without flaws necessitating redress.' 5'

Unlike the Minimum Standards and other Basel Committee standards that
are adopted solely on an optional basis, principles relating to financial
institutions that each Member State was obligated to interpose into its national
laws were delineated with the 1986 Single European Act. 5 2  This act

141. 1d. at 255-56.
142. Id. at 257.
143. Id. at 256.
144. Id.
145. Id.
146. Id.
147. Id.
148. Id.
149. Id.
150. Id.
151. Id.
152. See Europa, The Single European Act, http://europa.eu/scadplus/treaties/

singleact-en.htin (last visited Oct. 29, 2009), for the text of the statute, which "revises the

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IND. INT'L & COMP. L. REv.

"implemented the common internal market on the basis of mutual recognition
that is based on common minimum standards applicable in all Member States
through European Directives and implemented through domestic legislation."'s 3

Weber and Amer note that under the Single European Act

all Member States agree to recognize the validity of one
another's laws, regulations, and standards, thereby facilitating
free trade in goods and services without the need for prior
harmonization, while limiting the scope for competition
among rules by mandating Member State conformity with a
"floor" of essential, minimum European requirements. As
such, financial services regulation in the European Union
seeks to avoid the problem of competitive deregulation and
regulatory arbitrage that may undermine the legitimacy and
efficiency of financial marketS.15 4

Through the combination of promoting the Minimum Standards for
financial regulation and respecting the free flow of capital throughout the EU
via the Single European Act, businesses have been encouraged to conduct
commerce outside their "home state" and enter the "host states" throughout the
EU.155 The notion of a "single" passport permits an EU firm to conduct
business throughout the Union as if there were no territorial boundary
restrictions. 56

Free movement of capital and commerce within the EU is possible, in
part, due to the Minimum Standards directed to all national regulators and
supervisors. By creating a system of common Minimum Standards, financial
institutions are on notice as to at least the "floor" of essential requirements.' 57

A drawback of this legal framework is that despite making institutions aware of
the minimum burdens prescribed, the EU is still lacking a supra-national
supervisor with the authority to oversee compliance by financial entities.
Instead, national supervisors are the sole watchdogs to ensure the veracity of the
financial entities. Relying exclusively on national supervisory entities exposes
consumers both inside and outside the EU to fiscal harm.

Like the Revised Concordat, the Minimum Standards had gaps that banks
attempted to utilize to gain advantages and avoid regulations.' 58 Host country

Treaties of Rome in order to add new momentum to European integration and to complete the
internal market. It amends the rules governing the operation of the European institutions and
expands Community powers, notably in the field of research and development, the environment
and common foreign policy." Id. See generally Single European Act, Feb. 17, 1986, 1987 O.J.
(L 169) 1.

153. Weber & Arner, supra note 89, at 440-41.
154. Id. at 441.
155. Id.
156. Id.
157. Id.
158. Alford, supra note 90, at 258.

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supervisors were able to choose to allow foreign banks to operate within their
jurisdiction even if the banks' domestic supervisors did not act in accordance
with the Minimum Standards.' 59 To do this, host country supervisors needed
only to issue restrictions upon the foreign bank that it held to be "necessary and
appropriate."'6 Furthermore, questions of retroactivity were left untouched by
the Minimum Standards.' 6' Although new branches were covered by the
conditions of the Minimum Standards, pre-existing branches were not explicitly
addressed, leaving lingering questions ofwhether the new provisions were to be
retroactively applied to the older financial establishments.1 62

The premise behind the Minimum Standards was to "promote
cooperation between home and host countries and encourage the flow of
information among bank regulators." 63 To achieve this end, the drafters of the
Minimum Standards intentionally left the provisions therein vague.'66 By doing
this, it was believed that ambiguity would facilitate flexibility to analyze each
issue for what it was on a case-by-case basis.165 Similar to the Concordat and
the Revised Concordat, the Minimum Standards are not legally binding. 66

Therefore, enforcement of the mandates in the Minimum Standards rested
solely on the shoulders of national supervisors.' 67 Furthering confusion,
domestic supervisors interpreted the Minimum Standards as they saw fit,
creating murky standards at best and illogical discrepancies at worst. 68

Conceived in 1992, the Minimum Standards were supplemented, due to many
of these failing, by the Core Principles for Banking Supervision, commonly
referred to as the "Core Principles," in 1997.169

In order to move past mere coordination of national supervisors, the Basel
Committee proffered the Core Principles to develop a more substantive notion
of banking regulation and supervision.17 0 This move was seen to be a reaction
to many prominent bank failures after 1992 and the insufficiencies of the

159. Id.
160. Id.
161. Id.
162. Id.
163. Id. at 258-59.
164. Id. at 259.
165. Id.
166. Id.
167. Id.
168. Id.
169. Id. at 260. The Core Principles were created by the Basel Committee "slightly over one

year after the G-7's request." Id. at 261. The G-7 had asked for "more comprehensive and
detailed financial standards." Id. In their communiqud, the G-7 "encourag[ed] the adoption of
strong prudential standards in emerging economies and increase[ed] cooperation with their
supervisory authorities; international financial institutions and bodies should increase their
efforts to promote effective supervisory structures in these economies." Id. (quoting
Strengthening Economic and Monetary Cooperation, Making a Success of Globalization for the
Benefit of All: Economic Communiqud, G-7 Lyon Summit (June 28, 1996), available at
http://www.g8.utoronto.ca/ summit/19961yon/communique.html).

170. Id. at 260.

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IND. INT'L & COMP. L. REv.

Minimum Standards to meet those challenges.17' These bank failures occurred
not only in the EU, but also in the United States.172 The Core Principles are
expansive and addressed the best practices for supervision in the banking
industry. 73 Spread across twenty-five guidelines, the Core Principles cover
"supervising entire national banking systems from the licensing of banks to
their closure due to insolvency." 74 Merely three of the principles discuss
"cross-border banking, which previously had been the focus of the Basel
Committee's standard- setting work." 75  Supervision of banks conducting
operations across borders as well as exclusively domestic services is
enumerated in the remainder of the Core Principles.'7 6 The Core Principles
were seen by the financial industry as "a major expansion of the Basel
Committee's work on bank supervision." 77

The Core Principles are far more detailed than previous Basel Committee
standards and are enumerated in seven categories: (1) preconditions for
effective banking supervision; (2) licensing and structure; (3) prudential
regulations and requirements; (4) methods of ongoing banking supervision; (5)
information requirements; (6) formal powers of supervision; and (7) cross-
border banking.178 Although a detailed explanation of these guidelines is not
essential to this analysis, the preconditions set forth in Principle 1 are worth
noting. The Core Principles' preconditions mandate

that there are certain economic conditions necessary for an
effective bank supervisory system. A nation must have sound
macroeconomic policies, effective market discipline, a well-
developed legal system, sound accounting principles, an
orderly method for closing insolvent banks, and policies that
promote financial system stability such as lender of last resort
responsibility and depositor protection. Although bank
supervisors generally do not create or implement these
policies, sound macroeconomic conditions are vital to their

171. Id. The Bearings Bank of London "failed after a trader in the Singapore operation...
had lost over 927 million British pounds ... in the futures market." Id. The Bank of England
refused to rescue the bank, and it was sold to ING. Id. Many attributed the failure of the bank
to botched supervision because the individual trader in question hid the losses for some years.
Id.

172. Id. In 1995, "the Federal Reserve Board revoked the charter of the New York branch
of the Daiwa Bank . .. because of its concealment of over US $ 1 billion in unrecorded trading
losses incurred in the bond market." Id. This failure to disclose did not rest solely with the
Daiwa Bank because the Japanese Ministry of Finance was knowledgeable of the loss, but had
failed to notify the Federal Reserve in a timely manner. Id.

173. Id. at 261.
174. Id. at 261-62.
175. Id. at 262.
176. Id.
177. Id.
178. Id.

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ability to regulate banks effectively.'7 9

The theme most espoused by the Core Principles is the need for
supervisory independence.'8 0 To maintain such independence, supervisors
must be provided adequate resources with respect to funding as well as
staffing.' 8 ' Effective supervisors will have delineated parameters and
objectives for their respective agency.' 82 Additionally, the Core Principles posit
best practices in fairly broad terms. 8 3 For example, the Core Principles
recommend that supervisors should attempt to "limit[] or restrict bank
exposures to single borrowers" or "groups of related borrowers."'" Such broad
language was most likely the effect of compromise among the drafters of the
Core Principles who varied in their desired language for the guidelines.18 5

Although the Basel Committee was the original drafter of the Core Principles,
supervisory entities from non-G-l 0186 nations endorsed the Core Principles as
well.' 87 For example, "[r]epresentatives from Chile, the People's Republic of
China, the Czech Republic, Hong Kong, Mexico, Russia, and Thailand
participated in the drafting process, while officials from Argentina, Brazil,
Hungary, India, Indonesia, the Republic of Korea, Malaysia, Poland, and
Singapore participated closely in the Core Principles' development." 88

Additionally, at the International Monetary Fund's annual meeting in 1997 and
the World Bank's annual meeting, representatives of the attending nations
endorsed the Core Principles.18 9

Despite the drastic steps taken by the Basel Committee to express as
much guidance as possible, the Core Principles nonetheless lacked in some
areas.190 The Core Principles failed to satisfactorily address "whether a country
should have a deposit insurance scheme."' 9 ' Although they mention a
"systemic safety net as a precondition to effective supervision," the Core
Principles do not delineate specific requirements such as amounts or
percentages as to deposit insurance.19 2 Additionally, the Basel Committee did

179. Id.
180. Id.
181. Id.
182. Id.
183. Id. at 263.
184. Id.
185. Id.
186. At the time of the Core Principles' promulgation, the "informal forum that promotes

open and constructive discussion between industrial and emerging-market countries on key
issues related to global economic stability" was known as the "G- 10." Currently there are
twenty members of the group now known as the "G-20." G-20, About G-20,
http://www.g20.org/about-what_ isg20.aspx (last visited Oct. 4, 2009).

187. Alford, supra note 90, at 263.
188. Id. at 263-64.
189. Id. at 264.
190. Id. at 265.
191. Id.
192. Id.

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IND. INT'L & COMP. L. REV.

not specify the most appropriate structure for supervisory agencies. However,
this flaw is de minimis as many commentators have provided guidance on this
topic ad nauseam.193 Furthermore, the Core Principles failed to agree on a
common bank accounting system.194 Principle 21 asserted that accounting
systems should be fair and consistent; however, more is needed than a vague
suggestion such as this.195 It is essential and should have been recommended
by the Basel Committee that a common system of accounting standards be
developed across the continent for commonality to effectuate consolidated
supervision.19 6 Duncan Alford notes that "[i]t appears that more substantive
harmonization of bank accounting standards will be left for a future revision of
the Core Principles."l 97 Although the enumeration of the Core Principles is the
most profound step taken by the Basel Committee to clarify the best practices to
supervise financial institutions, 198 proposals by a non-government entity
without the force of law can only go so far in advancing effective supervision of
the European Union financial sector.

The ambiguities of Basel Committee proposals are often criticized, as
they are in this Note; however, there are some advantages to non-treaty
agreements. 199 "Soft law" is beneficial in that it is fairly easy to gain wide
acceptance of the agreement without having to deal with the haggling and
compromise of "hard law." 200 Additionally, "[t]his type of law is flexible and
allows the parties to consider specific national conditions or attributes in
implementing the standards. For instance, the Core Principles are sensitive to
the fact that bank regulatory structures differ greatly among nations."201 By not
being bound to the explicit provisions of non-binding agreements, nations tend
to be easily persuaded to accept the substantive principles expressed in the
document without fear of facing repercussions in failing to abide by the

202entirety. This is particularly true in industries where standards are rapidly
evolving, such as finance.203 In the scope of this Note, "soft law" has been an
effective means for the Basel Committee to gain acceptance of uniform
supervisory standards with which individual nations are familiar. By building
comprehension among national supervisors of these standards, the creation of
an intra-EU supervisor will be eased, as there will be little substantive change
in the supervisory standards.

The advancements taken over the past forty years to shore up deficiencies

193. Id.
194. Id. at 266.
195. Id.
196. Id.
197. Id.
198. Id. at 269.
199. Id. at 284-85.
200. Id. at 285. "Soft law" is defined as being a non-enforceable agreement. Id. at 284.
201. Id. at 285.
202. Id.
203. Id.

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in European financial supervision and prudential cooperation have been
profound; however, the goal of effective supervision has not been satisfied.
Further developments are needed to address the supervisory flaws currently still
in existence. The financial emissaries that met in Nice in 2008 sought to solve
such problems, but by the beginning of 2009, their objectives still remained
unattained. Angel Gurria, the Secretary General for the Organisation for
Economic Cooperation and Development, proclaimed in January 2009 that a
single centralized EU-wide supervisor is absolutely necessary to work in
conjunction with national supervisors.20 With no end in sight to the current
economic turmoil, European Union leaders now see that a drastic shift in the
supervision of financial entities is no longer a debate, but instead a necessity.2 0 5

National supervision coordination alone is an insufficient means to quell fears
of instability and authenticate the veracity of the financial sector. The creation
of an intra-EU supervisory entity alone is adequate to effectively supervise the
Union's financial industry.

IV. CREATION OF AN INTRA-EU PRUDENTIAL SUPERVISOR

A. Overview

Whether phrased as the "lead supervisor," 206 the proposed European
Financial Services Authority, commonly referred to as the "EFSA",2 07 a pan
European supervisor,208 or, as it is in this Note, an intra-EU supervisor or supra-
national supervisor, the notion remains the same: the creation of a prudential
supervisory entity tasked with the mandate to oversee the financial industry
within the entire EU. This entity would directly supervise all "internationally
operating companies or companies that operate only at the national level but
that are so big that they pose a potential systemic risk."209 The supra-national

204. Press Release, Organisation for Economic Co-operation and Development, Euro Area
Needs More Integrated Financial Market Supervision, says OECD's Gurria (Oct. 29, 2009),
available at
http://www.oecd.org/document/49/0,3343,en_2649_3456941985521__1I1_1 ,00.html.

205. Huw Jones, EU Executive, Watchdogs Spar in Supervision Debate, THOMSON
FINANCIALNEWS, Oct. 29,2009, http://www.forbes.com/feeds/afx/2009/01/27/afx5969284.html
[hereinafter Jones, Watchdogs Spar]. EU Economic and Monetary Affairs Commissioner,
Joaquin Almunia, posited that "[there is now a real necessity to have a single supervisory
agency at EU level." Id

206. See generally European Financial Services Round Table, On the Lead Supervisor
Model and the Future of Financial Supervision in the EU (2005), available at http://www.efr.bet
members/upload/news/22676EFRlsvfinal-June2005.pdf [hereinafter European Financial
Services Round Table].

207. Beetsma & Eijfflinger, supra note 9.
208. See generally Duncan Alford, The Lamfalussy Process and EU Bank Regulation:

Another Step on the Road to Pan-European Regulation?, 25 Ann. Rev. Banking & Fin. L. 389
(2006) [hereinafter Alford, The Lamfalussy Process].

209. Beetsma & Eijffinger, supra note 9.

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IND. INT'L & COMP. L. REV.

prudential supervisor would be a lead contact for all issues of prudential
supervision, create a system of reporting, and to the extent necessary,
harmonize conflicting national regulations.210

This European supervisory body will have the ability to dictate
standardized rules on supervision at the national level. Moreover, the national
supervisors will exist under the umbrella of the European supervisor.211 A
system of uniform rules will create equality across borders and prevent national
supervisors from initiating advantages for local companies through loose

212supervision. However, "[s]upervision of smaller, national financial
enterprises can be delegated to national supervisory agencies." 213 Thus, "these
agencies will not disappear, because they are in close contact with national
financial firms and as such they have the necessary information for adequate
supervision."2 14

B. Factors Encouraging Integration of a Supra-National Supervisor

The European Union has the ability to move ahead on the path to an
intra-EU financial market and a single prudential supervisor.215 In addition to
individual Member States moving to consolidate their domestic supervisors into
a sole entity,216 "[financial operators enjoy complete freedom of movement
across Member States while the introduction of the single currency offered new
opportunity of business all over the Continent." 2 17 However, there still remains
a great many barriers to the integration of an intra-EU prudential supervisor.218

The legal, cultural, and tax code differences amongst twenty-seven
different Member States has a very real impact on the ability for cross-border
collaboration and coordination. 21 9 Additionally, "with the accession of new
Member States from Eastern Europe, these differences will be even more
evident considering the specific history of these countries." 2 20 Accordingly,
further development of cross-national relations will continue to be a
prerequisite for the viability of an intra-EU prudential supervisor.2 2'

The manner in which individual Member States self-regulate their
respective financial industries is affected by their historical development of
regulation as well as the character of their financial institutions.222 The public

210. European Financial Services Round Table, supra note 206, at 23.
211. See generally id.
212. See generally id.
213. Beetsma & Eijffinger, supra note 9.
214. Id.
215. Fratangelo, supra note 3, at 2.
216. See supra Part I C.
217. Fratangelo, supra note 3, at 2.
218. Id.
219. Id.
220. Id.
221. Id.
222. lain Begg & David Green, Should the European Tier Play a Role in Prudential

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predominantly owns some Member States' financial institutions; whereas, other
"countries have centralised financial systems in which major financial groups
play a leading role, while in others, the system is fragmented either regionally
or by type of service."223 The differences in each country's "legal, political and
institutional arrangements are compounded by contrasting market structures in
financial services." 224 These varying prudential supervision lineages are as
much of the result of historical context as they are rationalized choices
premised in sound economic principles.225

Laws regarding insolvent financial institutions differ markedly from one
Member State to another within the EU with some leaning towards creditor's
favor and others to debtors.226 European finance ministers noted in April 2008
that speed is of the essence following a financial implosion of a mega-
institution.2 27 The ministers signed a "memorandum of understanding binding
national authorities to favor private-sector rescues where possible, and urging
them to decide in advance who would foot the bill for banks that operate in
more than one country if state bailouts are required." 2 28 Unlike a unified
federal nation where the citizenry shares a common understanding, Europeans
will likely not have an affinity for sending their tax dollars out of the country to
foot the bill on a failed bank in a neighboring country.229 Although Member
States recognize the importance of cross-border interaction in sidestepping
complete collapse of financial institutions, in the absence of an intra-EU
authority with broad powers to coordinate a potential bailout, the likelihood of
success for such a bailout is minimal.

C. The ECB Willing to Assume Supervisory Responsibilities

One of the initial questions pertaining to any conversation regarding the
creation of an EU-wide supervisor is: who will assume supervisory
responsibilities yet maintain independence? The most capable entity to perform
supervisory duties is the ECB. The President of the ECB, Jean-Claude Triche,
has made clear that the Bank is willing to take control of the new intra-EU

supervisor.230 The ECB's willingness to accept such responsibility is
significant as the ECB is widely recognized as being an independent agency.231

This is due, in part, to the fact that the ECB's independence is enshrined in the

Supervision ofBanks? (2001) (unpublished manuscript, on file with the Archive of European
Integration, available at http://aei.pitt.edul6899/01/beggiain.pdf).

223. Id.
224. Id.
225. Id.
226. Saltmarsh, supra note 73, at 2.
227. Id.
228. Id.
229. Id. at 3.
230. Calls for Single EU Financial Supervisor Resurface, EURAcTrv, Oct. 29, 2009,

http://www.euractiv.com/en/financial-services/calls-single-eu-financial-supervisor-resurface/
article-178514 [hereinafter EURAcTIv].

231. Jones, Watchdogs Spar, supra note 205.

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IND. INT'L & CoMP. L. REV.

European Union's founding treaty.232 Some members of the ECB have
commented that the Bank "could play a central role in [E]uro zone banking
supervision without needing to change the treaty, which would be a difficult
task."233

However, an assumption of supervisory duties by the ECB would not be
without some hindrances. A major

obstacle lies in wait regarding a possible extension of the
ECB's powers. The bank only has a mandate to act on behalf
of the [sixteen E]urozone countries, thus excluding the
[United Kingdom], Sweden, Denmark, Poland and the
majority of the Eastern EU member states, which have not
adopted the single currency.234

Thus, creating an entire new agency seems more likely than expanding
235the ECB scope to non-Eurozone countries.

The European Financial Services Round Table236 has articulated the
creation of a "lead supervisor" since June 2004.237 It notes "the lead supervisor
should be responsible for the prudential supervision not only of branches in
other EU [M]ember [S]tates, but also of fully owned (fully controlled)
subsidiaries in other EU [M]ember [S]tates." 2 38 Additionally, "[i]n order to be
considered optimal and conducive towards reaching its goals, any supervisory
structure must meet-and must be assessed against-objective criteria." 239

Such criteria include: (1) the creation of financial stability while implementing
a framework for a competitive financial industry; (2) a cost efficient supervisory
system; (3) transparency; (4) an effective crisis management system; (5)
adaptable to market evolvement; and (6) political accountability.240

Proponents of creating a supra-national supervisory body in Europe point
to the increased cooperation amongst Member States as evidence that the
proposed entity is becoming more feasible.241 With EU regulators meeting
regularly, such as the Nice meeting, the European Union leaders, specifically
the European Commission, are duly advised as to how to amend or draft new
rules to most effectively combat issues hindering the financial markets.242 To

232. Id.
233. Id
234. EURAcrv, supra note 230.
235. Id.
236. "The purpose of the [European Financial Services Round Table] is to provide a strong

industry voice on European policy issues relating to financial services." European Financial
Services Round Table, www.efr.be (last visited Nov. 27, 2009).

237. EUROPEAN FNANcAL SERVICEs RouND TABLE, supra note 206, at 7.
238. Id.
239. Id. at 10.
240. Id.
241. Saltmarsh, supra note 73.
242. Id.

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accentuate their point, critics point to the $700 billion plus financial "bailout"243

in the United States in 2008244 as the type of assistance which would be
difficult to formulate under a system without an intra-EU prudential
supervisor.245 The blurred rules in Europe "concerning the insolvency of a
financial institution that operates in different countries in particular is causing
unease." 246 These differences amongst Member States would make any multi-
State coordinated assistance package difficult unless there was a captain at the
helm, such as a supra-national supervisor. In order to address these and other
noted concerns, EU leaders must act to implement a single intra-EU supervisor
with relative haste.

V. CRITICS OF INTRA-EU SUPERVISION & OTHER OPTIONS

With the escalation of financial institutions' struggles throughout 2008,
2009, and foreseeably into 2010, some nations and groups have called for
greater (or lesser) steps than what this Note has recommended.247 Below are
some alternative proposals that have been advocated for during the financial
struggle.

A. A Pseudo Supra-National Supervisor: An Early Warning System

In early 2009, a combination of a multitude of plans emerged as the
leading blueprint for creating a pseudo supra-national supervisor.248 This
proposed entity is a watered-downed version of the supervisor advocated for in
this Note.2 49 At an emergency summit in Brussels on the financial crises, EU
leaders backed a proposal that "recommended setting up two new broad
supervisory bodies in the EU--one chaired by the ECB to monitor system-wide
risks, the other to combine the efforts of national supervisors." 25 0 This plan

243. The Author acknowledges that the purported "bailout" is not technically a bailout, but
is merely referring to its colloquially used designation.

244. See Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343, 122 Stat.
3765 (2008).

245. Saltmarsh, supra note 73.
246. Id.
247. See generally David Rothnie, EU Calledfor Worldwide Banking Watchdog, EVENING

STANDARD, Oct. 16, 2008, at 26. See also Charlie McCreevy, European Comm'r for Internal
Markets and Services, Address at the Lead Conference-Euro Finance Week: Prudential
Supervision in an Integrated Market (Nov. 17, 2008) (transcript available at
http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/08/623&format=DOC&aged
=0&language=EN&guiLanguage=en).

248. Huw Jones, UPDATE 1-EULeaders Back Financial Supervision Blueprint, THOMSON
REUTERS, Mar. 1, 2009, http://uk.reuters.com/article/idUKL165744420090301 [hereinafter
Jones, Blueprint].

249. EU Considers New, Stronger Financial Supervision, ASSOCIATED PREss (Feb. 25,
2009), available at http://www.iht.com/articles/ap/2009/02/25/business/EU-EU-Banking-
Oversight. php.

250. Jones, Blueprint, supra note 248.

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IND. INT'L & COMP. L. REV.

calls for the creation of "a new EU-wide supervisor to oversee risks and give
early warnings, but that individual banks should continue to be looked after by
strengthened national regulators." 251 With this, national supervisors would
maintain their status as the effective supervisor of their domestic institutions
while the two EU-wide supervisors would serve as gatherers of information to
facilitate cross-nation supervisor communications and to serve as an early
warning system for pending failures of financial entities. 252

Previously viewed as a potential hindrance to any step towards a supra-
national supervisory entity, German Chancellor Angela Merkel noted that she
"encourage[d] the European Commission to rapidly implement the
[proposal]."253 Additionally, French President Nicolas Sarkozy and Britain's
Prime Minister, Gordon Brown, advocated on behalf of the adoption of this
blueprint.2 54 The inclusion of these leaders amongst those supporting any
measure advocating the creation of a supra-national supervisor is not
insignificant.

Although this proposal is leading down the road towards an intra-EU
supervisor, it falls "short of advocating a single European superregulator,
opting instead for a more pragmatic and incremental approach toward
strengthening supervision." 255 As this Note recommends, the creation of a
supra-national supervisor would "run the risk of a veto from Britain, which is
worried about transferring responsibility for the management of the City of
London, the British financial center, to a European level." 25 6 Stephen Castle
notes that this proposal's "authors said they thought the scale of the financial
crisis might persuade national governments to cede some supervisory authority,
and, under their plans, the City of London would, to some extent, be supervised
by a pan-European watchdog." 25 7 However, this plan is but an intermediate
step that falls short of the recommendation made in this Note.

The proposal's author, Jacques de Larosiere, explained the rationale as to
why the drafters did not push for the creation of an EU-wide supervisor with
broad powers. 2 58 He noted "it would have been 'unrealistic' for one EU-wide
supervisor to police banks, saying it 'would not necessarily prove effective' and
would not be accountable to taxpayers."259 Additionally, Larosiere mentioned
that recommending the creation of the supra-national supervisor had "little

251. EU Considers New, Stronger Financial Supervision, supra note 249.
252. Id.
253. Jones, Blueprint, supra note 248.
254. Id.
255. Stephen Castle, European Panel Seeks Closer Supervision ofBanks, THE NEW YORK

TIMEs, Feb. 25, 2009, http://www.nytines.com/2009/02/26/business/worldbusiness/
26euro.btmil?_P= 1 &ref=europe.

256. Id.
257. Id.
258. EU Considers New, Stronger Financial Supervision, supra note 249.
259. Id.

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prospect of being accepted" due to Britain's purported veto on the issue.260

Notwithstanding many EU Member States' leaders' support, this
261proposed plan is not without its dissenters. Peter Praet, who chairs the

Banking Supervision Committee of EU Central Banks, noted that although the
proposal is "a very good step in the right direction and some of the problems we
have seen could have been mitigated under such a system," it is "certainly not
sufficient in the absence of a strong crisis management and resolution
framework for the European Union as a whole."262 Praet noted the conceptual
and practical insufficiencies of the plan in relation to the exchanges of
"monetary policy, financial stability, and micro supervision." 263 Although this
proposal takes an affirmative step towards the creation of a supra-national
supervisor, it is too little, too late. Greater steps are necessary at this pivotal
juncture. The creation of a supra-national entity is mandated by this economic
climate. Any step short of that action is insufficient.

B. Proposed International Supervisor

Some leaders from around the globe have now recognized that there is
indeed an international market warranting increased steps to streamline
regulations across the globe, instead of merely the EU. 26 The meeting of the
leaders from twenty heads of state, commonly known as the "G20," in
November 2008 culminated in a shared understanding "towards a more
appropriate financial architecture at the global level." 265 Additionally, the
leaders put forth their notion of the cause of the financial turmoil:

Not least among these was the fact that regulators and
supervisors did not fully understand the risks building up in
the financial markets. They did not keep pace with financial
innovation or give due attention to cross-sectoral propagation
of risk. There was a lack of transparency and inadequate
oversight of market players, particularly with respect to
complex financial instruments. The G20 leaders also noted
that the segmented nature of regulation contributed to
inconsistencies, both domestically and internationally. These
regulatory deficiencies contributed to the excesses in the
market and ultimately resulted in severe market disruption.26 6

260. Id.
261. Top EU Supervisor Says Reform Plan Good but Insufficient, THomsoN FINANcIAL

NEWs, Feb. 25, 2009, http://www.forbes.com/feeds/afx/2009/02/25/afx6094879.html.
262. Id.
263. Id.
264. McCreevy, supra note 247.
265. Id.
266. Id.

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IND. INT'L & CoMP. L. REV.

The G20 meeting came on the heels of an announcement by EU leaders
in October 2008 calling for the creation of an international board to oversee, at
a minimum, the world's thirty largest financial institutions. 267  This
proclamation was at the behest of United Kingdom Prime Minister Gordon
Brown.268 In order for such a plan to come to fruition, the significant hurdles of
gaining Chinese and American approval remain.2 69 Furthermore, there appears
to be disagreement amongst some Member States regarding the exact details of
the supervisory body. 2 70 Specifically, the United Kingdom is unlikely to sign
off on French requests to extend financial supervision to hedge funds or to
remove financial offshore offices in the Channel Islands or the Isle of Man. 271
Whether the relevant parties will be able to reach a compromise as to the exact
specifics of an international supervisory body is yet to be seen and is, in fact,
unlikely. In the interim, the EU should proceed on the road to create its own
intra-EU supervisory body to fully and efficiently protect the citizenry of the
EU Member States.

C. Common Regulation Without a Common Supervisor

Other financial theorists have opined that although a common system of
rules would be advantageous to the EU, the creation of a single supervisor is
unnecessary and could be in fact counterproductive to the stated goals.272 Rosa
Lastra notes that a system of common regulation could be adopted through a
treaty or a directive that would require harmonization of national regulations
similar to that of other EU directives without the need of a supra-national
supervisor.273 The advantage of such a proposal is that supervision would be
left in the hands of national supervisors and that international financial
institutions would not be burdened with conflicting and confusing regulations
differing from nation to nation. Such a system of common regulations would
be an increase over the current framework of minimum standards previously
discussed as this system would be mandatory throughout the EU.274 Lastra
additionally points out that some Member States have begun to consolidate
their individual supervisory agencies into a single national supervisor.27 5 This

267. Rothnie, supra note 247.
268. Id.
269. Id.
270. Id.
271. Id.
272. Lastra, supra note 46, at 59.
273. Id. See, e.g., Council Directive 85/374, On the Approximation of the Laws,

Regulations and Administrative Provisions of the Member States Concerning Liability for
Defective Products, 1985 O.J. (L 210) 20 (commonly referred to as "The EU Products Liability
Directive," mandating harmonization of national statutes with the directive).

274. See supra Part II D for a discussion on the minimum obligations encouraged for all
financial institutions within the EU.

275. See supra Part II C for a discussion of the trend towards having a singular national
supervisor exclusively.

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trend would make communication, coordination, and harmonization more
streamlined should the EU decide to adopt a model system of regulations
instead of following the recommendation of this Note and create a single supra-
national supervisor.276

Member States who are hesitant to relinquish autonomy of their national
supervisory agencies could potentially be the greatest inhibitor of creating a
uniform and mandatory system of EU-wide standards (even without an intra-
EU supervisor). This debate is not unknown to scholars of the creation of the
United States' system of government. The proposed system of common
regulations throughout the EU mandating increased and uniform supervision by
national supervisory entities is analogous to the United States' notion of
Federalism in that nations are apprehensive of subjecting themselves to the
regulations of a higher authority.27 With the advent of the American theory of
government evolved the duopoly of the power of the federal system compared
to that of the independence of states.278 Advocates for the rights of individual
states were threatened by the supremacy2 79 of federal laws and sought to ensure
that the recent Revolution would not be for naught with the creation of a new
monarchy in federal form imposing potentially restrictive laws upon the states.
This debate is analogous to the present Note in that individual EU Member
States and their respective supervisory agencies, whether singular or specialized
by sector, wish to ensure the veracity of financial institutions throughout the EU
without subjecting the businesses within their territories to overly burdensome
regulations or restrictive provisions imposed by an EU-wide directive
mandating common supervisory standards.

By creating a common system of regulations for national supervisors to
follow uniformly throughout the EU, transaction costs for financial entities to
act in compliance with a multitude of, at times, conflicting rules would be
minimized. Although the creation of a system of uniform standards, whether
implemented through a directive or otherwise, would be advantageous for
uniformity throughout the EU, without an intra-EU supervisor to mandate
compliance, national supervisors alone would be ineffective in verifying
conformity therewith.

D. EU Member Opposition to the Creation of an Intra-EU Supervisor

As previously noted, some Member States vehemently oppose the

276. Lastra, supra note 46, at 66. See supra Part II C for a discussion of the trend towards
the merging of specialized national supervisory agencies into a single national supervisor.

277. See STATES' RIGHTS AND AMERICAN FEDERAuSM: ADOCUMENTARY HISTORY (Frederick
D. Drake & Lynn R. Nelson eds., 1999), for a general commentary on the debate between
Federalism and states' rights advocates during the inception and ratification of the United States
of America and its Constitution from 1787-1789.

278. Id.
279. See U.S. CoNsT. art. VI cl. 2.

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creation of a singular intra-EU supervisor for a multitude of reasons.280 EU
heavyweights Germany and the United Kingdom have previously opposed any
sort of new supervisory body or extending the reach of the ECB because both
nations prefer domestic control of the financial institutions. 28' Additionally,
"both countries prefer the concept of collegial supervision, which would
effectively allow them to control branches located in other EU countries." 2 8 2

Even some smaller Member States, especially in Eastern Europe, oppose
enlarging supervision "as they want to retain control of their own banking
sectors." 28 3 Finally, as discussed above, "France and Italy, which are keen to
promote more centralised European supervision . .. would prefer to address the
issue at global level. Italy was among the first to push for the idea, while French
President Nicolas Sarkozy backed the concept at a hearing in the European
Parliament " in September 2008.28

The opposition of even a single Member State could derail the entire
process.285 At the 1998 European Council meeting in Vienna, the integration of
the financial services sector was advocated.286 Following that conference,

the European Commission proposed a Financial Services
Action that outlined the steps (including forty-two legislative
measures) to complete the creation of an internal market for
financial services. As of June 2004, nearly all the required
legislation at the EU level had been enacted. Nevertheless,
[Member States] have yet to enact legislation at the national
level to implement the various EU directives.2 8 7

Furthermore, advocates for the transfer of supervisory responsibilities to
the ECB should note that pursuant to the Treaty on European Union, "the ECB
can only aid in the smooth operation of prudential supervision of banks"
because the ECB does not "have direct responsibility for the supervision of
banks within the EU."288 The Treaty on European Union does have a provision
whereby supervisory duties can be transferred to the ECB; however, the
passage of such responsibilities requires a unanimous approval from Member
States that would be exceptionally difficult to achieve.28 9 Nonetheless, the
current economic climate has shifted notions of traditional expectations making
an unanimous approval, something normally outside the realm of possibility,

280. EuRACTIv, supra note 230.
281. See generally id.
282. Id.
283. Id.
284. Id.
285. Alford, supra note 90, at 269-71.
286. Id. at 269.
287. Id. at 269-70.
288. Id. at 270.
289. Id.

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into a real prospect.
The aforementioned alternative proposals certainly have merit and are

well thought out approaches to previous financial supervision deficiencies;
however, incremental steps are insufficient at present. The implementation of
an intra-EU supervisor with broad supervisory reach alone is satisfactory to
provide adequate supervision of cross-border entities within the European
Union.

VI. CONCLUSION

Dissenters to the creation of a supra-national EU-wide supervisor with
plenary supervisory authority point to the numerous difficulties in such creation

290as the grounds for implementing some watered-down supervisory scheme.
Concededly, there are indeed substantial hindrances to achieving this end.
However, merely because the implementation of the entity is fraught with
political challenges does not warrant the implementation of a lesser plan that is
incremental in nature. The past half-century of European financial supervision
development has seen the increasing growth of cross-border communication
and a merging of the standards of best supervisory practices. 29' Whether
promulgated by the Basel Committee or other advisory bodies,292 the theories
encompassing effective supervision have evolved to the degree where the next
logical and proper step is the creation of an intra-EU supervisor without
jurisdictional limitations.

The leaders of the EU Member States have delineated a blueprint for
supervision that would leave supervision to their own national supervisors and
have EU supervisors serve as conduits of information and as an early warning
system.293 This proposal is insignificant when viewed under the eye of the
current economic climate. Such a blueprint is insufficient. The citizenry and
investors of the EU financial system deserve greater protection that what this
plan offers. Accordingly, leaders of the EU should move with relative haste to
develop and implement the supra-national EU supervisor with broad power to
adequately protect the European financial sector.

290. See supra Part IV A for a discussion of the proposal to create two new supervisory
bodies at the EU-level while leaving effective supervision to national supervisors. The EU-wide
supervisors would "oversee risks and give early warnings, but that individual banks should to be
looked after by strengthened regulators." EU Considers New, Stronger Financial Supervision,
supra note 249.

291. See supra Part II D for a discussion of the developments of cross-border
communication of national supervisors and the Basel Committee's non-binding "soft laws" to
encourage greater supervision standards.

292. See supra Part II D.
293. See supra Part IV A.

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