Supervisory architecture in Europe: What should change?

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Authors Robert Holzmann and Fernando Restoy discuss the debate on how best to organise supervisory tasks


The debate on how to best organise supervisory tasks is relatively recent. Until the last quarter of the 20th century, with bank financing dominant in most jurisdictions, banking and financial supervision were almost synonymous.

As the 20th century drew to a close, a debate emerged over central banks’ role in financial stability. In their pursuit of an explicit, delegated mandate normally focused on price stability, central banks were gaining independence from governments. At the same time, financial institutions became active in different sectors. Consequently, in a number of jurisdictions, the notion of an integrated financial supervisor separated from the price stability-oriented central bank gained traction. At the turn of the century, several jurisdictions introduced a “twin peaks” model which assigned both insurance and banking supervision to the central bank.

In the European Union (EU), the current framework comprises a complex set of sectoral supervisory arrangements with varying degrees of centralisation (high for banks, low for insurance and capital market entities) and heterogeneous institutional setups at the domestic and European levels.

Recent and potential developments, such as pandemics, technological disruptions, major blackouts and the need to address climate-related financial risks have implications for the design of the supervisory structure. In particular, the pandemic shock illustrates the need to put in place robust institutional frameworks that could help deal with different types of unforeseen events in an orderly manner.

Against these considerations, we summarise our conclusions on the evolution of the debate on the organisation of supervision that is recollected in Holzmann and Restoy (2022).[1] It first addresses the global debate and then focuses on European issues.


The debate on supervisory models has traditionally revolved around balancing the synergies and conflicts between price (or economic) stability on the one hand, and financial stability on the other. In principle, the more important the synergies (conflicts) are, the stronger (weaker) is the case for institutional integration of both functions within the same agency.

The evidence suggests that the complementarities are more important than the conflicts, particularly in times of crisis. In the light of their lender of last resort function for solvent banks, centralbanks are well suited to be responsible for the vigilance of credit institutions’ safety and soundness and the stability of the financial system.

At the same time, the terms of the debate have changed on account of the development of macroprudential policy frameworks. Indeed, this new function opens the possibility of using different instruments – which could be managed by different agencies – to achieve either price or financial stability, thereby giving additional support to assigning central banks a narrow price stability mandate. Yet there is so far no compelling evidence that macroprudential instruments on their own deliver the financial stability objective. More importantly, standard monetary policy instruments (like interest rates) and macroprudential tools (such as regulatory capital buffers) affect both macroeconomic and financial developments. It is therefore necessary to coordinate both policy functions to simultaneously achieve both price and financial stability. That need for coordination somewhat limits the scope for the conduct of monetary and macroprudential policies by separate agencies.

Furthermore, supervisory oversight may need to be broadened to cope with new developments in the financial industry. Specific regulatory and supervisory attention may need to be paid to the so-called big tech companies, which are increasingly active in finance. Moreover, some adjustments of the supervisory function may also be implied by the role the financial system is meant to play in facilitating the transition towards a more sustainable economy.

Overall, the above-mentioned debate and recent developments suggest that central banks are set to play a greater role in monitoring the financial system. What is very important in this context is that authorities need to be well equipped to cope with unforeseen developments along the lines of the Covid-19 pandemic. To this end, they should be empowered to act discretionally in emergency situations.

This raises issues about accountability and democratic legitimacy. Institutional arrangements should include governance rules aimed at controlling potential conflicts across objectives. Moreover, legislation should also establish the types of actions that central banks can take in both normal and emergency situations and design appropriate controls by elected officials


Beyond the issues analysed above, any debate in the EU about what the desirable supervisory architecture may look like inevitably touches on the degree to which supervisory powers may or should be centralised.

Since monetary policymaking has already been centralised, much of the debate is about what other powers should be assigned to the European Central Bank. Since the creation of the banking union, the ECB has been given supervisory responsibility for all significant institutions in the monetary union.

The banking union has yet to meet its objectives, however. First, the third pillar of the project, a European deposit guarantee scheme, has not yet been developed, and much uncertainty remains about when that will happen. Second, European banking markets have remained largely fragmented as the provision of cross-border banking services or the pan-Europeanisation of banks’ business models remain stalled. And third, recent experience with banking crises suggests that the doom loop between banks and sovereigns has not been deactivated despite the creation of the banking union.

Another topical issue in the European context is how to organise the macroprudential function. Currently, it is largely decentralised, although the ECB can top up some of the measures taken at the national level. Moreover, the ECB’s macroprudential actions can only refer to a limited subset of (capital-based) instruments which may not be so effective in smoothing out fluctuations in the credit cycle. Given that monetary and macroprudential policy complement each other in promoting both price and financial stability in the euro area, a critical review of the division of labour between the ECB and member countries seems warranted.

Finally, the full development of the capital markets union may also require revising the powers currently assigned to the European agencies (or left with member states such as enterprise bankruptcy rules) in relation to the supervision of the current (largely common) rules that govern financial market activity.


It is no small feat to analyse issues relating to the financial supervisory architecture. It is fair to conclude that there is no single supervisory model that would be universally valid in all circumstances. Adequate coordination of existing supervisory agencies and central banks often proves more relevant for preserving financial and monetary stability than the design of the formal institutional framework. Yet the case for central banks’ involvement in financial stability seems to have strengthened significantly.

Moreover, in the EU there are objective arguments supporting the need for the supervisory architecture to evolve further, not only to cope with new developments, but also to effectively advance economic and financial integration. Cases in point are completing the banking union, making fast progress in the area of the capital markets union and enhancing the macroprudential powers of the ECB. Yet progress in these areas may not come without political progress in the area of fiscal stability.

[1] Robert Holzmann and Fernando Restoy (2022): Supervisory Architecture in Europe: Lessons from crises in the 21st century, Edward Elgar Publishing, Northampton, Mass., October.

Central Banks and Supervisory Architecture in Europe: Lessons from Crises in the 21st Century is out now.

Edited by Robert Holzmann, Governor, Oesterreichische Nationalbank, Austria and Fernando Restoy, Chair, Financial Stability Institute, Bank for International Settlements, Switzerland

Read a sample chapter on Elgaronline


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