The Architecture of Macroprudential Supervision in the EU Regional Model

In the aftermath of the global financial crisis that erupted in 2008, an expert group under the chairmanship of Jacques de Larosière, a former Banque de France Governor and IMF Managing Director, was mandated by the European Commission to advise on the future of financial regulation and supervision. In its report, the “de Larosière report” (2009), this group identified a range of weaknesses in the EU regulatory and supervisory structure that were laid bare by the crisis. A key finding was that financial supervisors were generally charged with the single objective of safeguarding the specific elements of the financial system within their remit. In short, their focus was on specific institutions or markets that were within their scope of responsibility. This microprudential supervisory approach did not focus on the health or stability of the system as a whole. There was to some extent a fallacy of composition whereby regulators and supervisors believed that by focusing on the health of individual firms, systemic stability would be ensured. This approach of course ignored not only the externalities associated with some activities and but also the fact that apparently rational behaviour on the part of an individual firm may create collectively unsustainable conditions in the market as a whole. In short, the system did not pay due attention to macroprudential supervision and the maintenance of systemic stability.