The Banking Supervision Committee (BSC) of the European System of Central Banks (ESCB) was established in 1998 to assist in the fulfilment of the ESCB's statutory tasks in the fields of prudential supervision of credit institutions and the stability of the financial system.1) The BSC is composed of high-level representatives from the EU banking supervisory authorities, national central banks and the ECB, the latter providing also the Secretariat to the Committee. The European Commission and the Committee of European Banking Supervisors (CEBS) have observer status in the BSC. Since its establishment as an ESCB Committee, the BSC has been chaired by Edgar Meister who has greatly contributed to its work and has steered the Committee's deliberations in a very effective, smooth and congenial manner.
This contribution provides an overview of the activities of the BSC since its inception. It starts by recalling the historical background that led to the establishment of the BSC and influenced its further evolution. The article then reviews the accomplishments of the BSC in the fulfilment of its mandate and concludes with some reflections on the Committee's future activities.
Enhancing interaction
The BSC can look back on a long tradition as a forum for the multilateral informa-tion-sharing and cooperation between EU central banks and banking supervisors. Its roots can be found in the Banking Supervisory Sub-Committee of the Committee of Governors of the Central Banks of the European Community, which was set up in 1989. At that time, the committee was an informal group of banking supervisors from the centrals banks of the Community (and, in cases where the central bank did not have legal responsibility for banking supervision, of senior representatives of the respective supervisory authorities) under the chairmanship of Brian Quinn, taking the first steps towards defining its own role in enhancing the interaction between central banking and banking supervision functions, particularly in the context of Stage One of Economic and Monetary Union (EMU), which began on 1 July 1990 with the lifting of all restrictions on the movement of capital between Member States.
Stage Two of EMU started on 1 January 1994 with the establishment of the European Monetary Institute (EMI) and the EMI Council then assumed the tasks and activities of the Committee of Governors. The Banking Supervisory Sub-Committee was duly incorporated into the structure of the EMI, so that it could play its role in the pursuit of the EMI's objectives, namely to strengthen central bank cooperation and monetary policy coordination, and to make the preparations required for the establishment of the ESCB, for the conduct of the single monetary policy and for the creation of a single currency.
Under the stewardship of Tom de Swaan, the EMI Banking Supervisory Sub-Committee devoted itself to three main preparatory tasks for Stage Three. First, it provided advice on the policy content of the ESCB tasks relating to the prudential supervision of credit institutions and the stability of the financial system. Second, it contributed - from a banking supervision perspective to the regulatory and organisational framework necessary for the performance of some of the Eurosystem's central banking tasks in Stage Three. Third, it also provided a forum for the multilateral exchange of views on banking supervisory issues in the European Union that were not directly related to the future activities of the ESCB.
Cooperation between the Eurosystem and national authorities
The BSC was formally set up after the establishment of the ECB on 1 June 1998. In addition to its role of assisting in the fulfilment of the ESCB tasks, the creation of the BSC was instrumental in fostering the smooth cooperation between the Eurosystem and the national banking supervisory authorities. This was particularly important given that the introduction of the euro on 1 January 1999 led to an unprecedented situation where the jurisdiction for the single monetary policy, encompassing eleven Member States at the time, and the jurisdiction for banking supervision, which remained national, did not coincide any longer. The BSC thus provided a platform to bridge this institutional asymmetry between the performance of central banking functions at the euro area level and the conduct of the national supervisory tasks.2)
In responding to this institutional challenge, an understanding emerged among the authorities represented in the BSC that it was essential to establish a framework of cooperation between central banks and banking supervisors which would ensure that this asymmetry would not play a significant role in practice. This did not imply a move in the direction of establishing a single supervisory authority, but rather it aimed at establishing the conditions that would allow the national supervisors to operate as effectively as a single authority, when needed.
Evolving role of the Banking Supervision Committee
In recent years, the role and contribution of the BSC has further evolved in line with two main developments. First, the deepening in EU financial integration after the introduction of the euro led, inter alia, to a growing number of credit institutions with extensive/substantial cross-border activities. This requires enhanced monitoring on the part of central banks and banking supervisors for the purpose of safeguarding financial stability. Second, the extension of the Lamfalussy framework3) for financial regulation and supervision to all financial sectors at the end of 2003 led to a new architecture of financial services committees aimed at strengthening the cooperation between supervisors and at fostering the convergence of supervisory practices.
In the field of banking, the relevant newly established body was the CEBS. As a result, the mandate of the BSC was revised by the Governing Council of the ECB in 2004 to reflect these developments. The new mandate provided for an enhanced focus on financial stability analysis and on the mac-ro-prudential perspective in its work of contributing to the design of financial regulation and supervisory tools.
Over the past few years, the work and output of the BSC - notably its published reports - have gained a higher public profile, also thanks to the efforts and activities of Edgar Meister, and have helped to demonstrate to the markets and the public at large that the ESCB is at the "cutting edge" with regard to financial stability analysis, tools and methodology, and keeps abreast of developments in a rapidly changing and increasingly complex financial system.
Financial stability as the primary objective
The BSC consists of representatives from both central banks and banking supervisory authorities. The Committee's composition helps to link the macro-prudential and the micro-prudential perspectives in its work. The BSC membership extends to the entire European Union and is not restricted to euro area countries only, since financial institutions' activities are not necessarily confined to the euro area but may encompass the EU's single financial market as a whole. The BSC can, however, meet and deal with specific issues also in a euro area composition. While this is not the prevalent modus operandi of the Committee, BSC members representing the national financial stability and supervisory authorities in the euro area could be required to support the Eurosystem on specific issues of relevance to the area.
According to its mandate, the first and primary task of the BSC is the contribution to monitoring and assessing developments in the euro area and EU banking and financial sectors from a financial stability perspective. This includes the analysis of both conjunctural and structural developments mainly in the banking sector but also in other segments of the financial system, for instance in the insurance and hedge fund industries. Therefore, the macro-prudential perspective and the financial stability mission of the BSC are very clearly highlighted in its mandate. In this context, the BSC also contributes to the preparation of the ECB's Financial Stability Review, the ECB's flagship publication in the field of financial stability.
A second task of the BSC is the contribution to the design of financial regulation and supervisory tools from a macro-prudential perspective. Financial regulation is understood in a broad sense that includes all relevant areas relating to financial services (for instance accounting, corporate governance, safety net). This task entails analysing the possible effects of regulatory or supervisory requirements on the functioning of the financial institutions and markets, on banking and financial structures and on financial stability. In this context, the BSC assists in the preparation of the ECB's advice on draft Community and national legislation.4)
The third task of the BSC is the promotion of cooperation between central banks and banking supervisors on issues of common interest. This mainly relates to the development of cooperation arrangements between central bank and supervisory functions, namely in the fields of central bank operations, payment systems and crisis management. The work of the BSC on these three fundamental tasks has been substantive and extensive as I will outline in the sections below.
New developments in the EU financial sector
The BSC contributes to the production of several publications on financial stability issues relevant to the euro area and the EU. These include the regular annual BSC reports on banking stability and structural developments in the EU banking sector, as well as the ECB's Financial Stability Review referred to earlier. In addition to these regular reports, the BSC also analyses specific topics on an ad hoc basis, whenever they are relevant from a financial stability perspective.
With regard to the monitoring of conjunctural developments, the Committee identifies each year two or three main topics and examines pertinent market developments which may affect the risk profile of the banking sector. Recent examples include the analysis of exposures of EU banks to the hedge fund industry and to the private equity sector. The monitoring of structural developments involves the selection of topics of longer-term relevance. For example, the Committee recently analysed the impact of population ageing on the banking sector and the changing structure of the funding of EU banks.