Cross-Border Groups: Supervision after the Crisis

The financial crisis which began in 2007 has dramatically laid bare the limits and shortcomings of the current financial regulatory system and supervisory controls both at the national level (although there are often considerable differences between the various contexts) and internationally. The situation is, if possible, even more critical with regard to cross-border and cross-sector operators. There had been warnings for some time (Vella, 2002) of the risk that the financial system that had emerged from the consolidation and internationalisation process of the last decade would not be capable of dealing adequately with any faults which might occur within it. But as the history of financial crises demonstrates, and the current situation confirms, unfortunately regulators tend to respond to rather than prevent market failures. The European Union is a special case, where the problem is more complex due to two main structural factors. Firstly, the EU may have common financial regulation based on its directives, but there are still wide variations with regard to implementation of this legislation within the individual member states. Moreover, there are no EU regulations for dealing with crises affecting individual companies or groups. Secondly, supervision is still performed on the principle of home country control, with systems which differ from state to state, where agencies operate with different powers, procedures and styles.The asymmetries outlined above are even more noticeable in the case of cross-border and cross-sector financial groups, the development of which has been one of the most significant phenomena in the European financial industry of the last decade. For these groups, the multiplicity of regulators and supervisors implies high compliance costs, operating difficulties with regard to group risk management, and an increase in forum shopping in search of more relaxed legal and regulatory frameworks. The limitations of the current regulatory and control structure were dramatically revealed in the autumn of 2008, when two of the EU’s largest cross-border and cross-sector groups, Fortis and Dexia, found themselves in financial difficulties. The rescue measures taken led to a reversal of the process of financial integration, as the groups were broken up and renationalised in a trend towards retrenchment within national borders. The scale and depth of the current crisis have provided a powerful stimulus for the debate on controls: there are now a large number of proposals for modifying the supervisory framework, including both suggestions for the establishment of global supervision, and less ambitious models focusing on supervision for Europe only. This survey aims to identify the asymmetries between the development of banking and financial groups at the pan-European level and that of the regulation of and controls over these groups, and highlight the main failures. A critical analysis will then be made of the proposals for an EU-wide control and supervisory framework now being considered, in particular the de Larosière Report. The analysis will centre on the three means available for safeguarding stability and protecting the financial markets: the provision of rules, the performance of controls on operations and players, and crisis prevention and management.