Olivia Johanna Erdélyi Twin Peaks for Europe: State-ofthe-Art Financial Supervisory Consolidation Rethinking the Group Support Regime Under Solvency II Twin Peaks for Europe: State-of-the-Art Financial Supervisory Consolidation Olivia Johanna Erdélyi Twin Peaks for Europe: State-of-the-Art Financial Supervisory Consolidation Rethinking the Group Support Regime Under Solvency II 123 Olivia J Erdélyi Heinrich Heine University of Düsseldorf Frankfurt am Main, Germany Inauguraldissertation zur Erlangung der Doktorwürde der Juristischen Fakultät der Heinrich-Heine-Universität Düsseldorf Erstgutachter: Prof Dr Dirk Looschelders Zweitgutachter: Prof Dr Christoph J Börner Jahr der mündlichen Prüfung: 2015 ”D61” ISBN 978-3-319-30706-0 DOI 10.1007/978-3-319-30707-7 ISBN 978-3-319-30707-7 (eBook) Library of Congress Control Number: 2016938800 © Springer International Publishing Switzerland 2016 This work is subject to copyright All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed The use of general descriptive names, registered names, trademarks, service marks, etc in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made Printed on acid-free paper This Springer imprint is published by Springer Nature The registered company is Springer International Publishing AG Switzerland Acknowledgments First of all, I am most grateful to my thesis supervisors, Prof Dr Dirk Looschelders from the Faculty of Law and Prof Dr Christoph J Börner from the Faculty of Business Administration and Economics of Heinrich Heine University Düsseldorf, for accompanying me on this somewhat unusual interdisciplinary venture at the interface of law and international finance I also wish to express my gratitude to Prof Dr Karel Van Hulle (International Center for Insurance Regulation, KULeuven, formerly European Commission), Dominique Thienpont (European Commission), Prof Dr Elemér Terták (European Commission), Ricardo González García (European Commission), Dr Konrad Szelag (European Commission), Hannes Huhtaniemi (European Commission), Pierre Darbre (European Commission), and Motohiro Hatanaka (Bank for International Settlements) for their extremely helpful expert comments on several topics addressed in this work Furthermore, I would like to thank my friends Shane Foster, Stephanie ViebeFoster, and Andreas Krause for proofreading my thesis Thank you guys for being a great help! And above all, I am deeply grateful to my family, in particular, my husband, Gábor, and my son, Alex, for their love, endless support, patience, and encouragement throughout this project v Contents Introduction References Milestones of European Insurance Regulation 2.1 Three Generations of Insurance Directives 2.1.1 First Generation Insurance Directives 2.1.2 Second Generation Insurance Directives 2.1.3 Third Generation Insurance Directives 2.2 Solvency I 2.2.1 The Main Features of Solvency I 2.2.2 Shortcomings of Solvency I 2.2.3 Need for Modernization 2.3 Solvency II 2.3.1 Principal Stakeholders in the Solvency II Process 2.3.2 The Phases of the Solvency II Process 2.4 Legal Basis and Structure of the Solvency II Directive 2.4.1 Pillar 2.4.2 Pillar 2.4.3 Pillar 2.4.4 Roof References 10 10 11 11 12 13 14 16 17 17 21 27 27 29 30 31 31 European Financial Services Legislation 3.1 Background 3.2 The Pre-Lisbon Lamfalussy Framework 3.2.1 Level 1: Framework Principles 3.2.2 Level 2: Implementing Measures 3.2.3 Level 3: Uniform Implementation 3.2.4 Level 4: Enforcement 3.2.5 Review of the Lamfalussy Process 39 40 43 44 45 50 50 52 vii viii Contents 3.3 Changes Brought by the Lisbon Treaty 3.3.1 Co-Decision Procedure Becomes Ordinary Legislative Procedure 3.3.2 Comitology Reform 3.4 The de Larosière Reform 3.4.1 Flaws in the European Financial Supervisory Framework 3.4.2 The European System of Financial Supervision 3.5 The Post-Lisbon Lamfalussy Framework 3.5.1 Level 1: Framework Legislative Acts 3.5.2 Level 2: Non-Legislative Acts 3.5.3 Level 3: Uniform Implementation 3.5.4 Level 4: Enforcement References 52 53 53 58 61 62 65 67 67 70 71 71 Insurance Groups and Their Supervision 77 4.1 Characteristics of Insurance Groups 79 4.1.1 Definition 79 4.1.2 Organizational Forms 83 4.2 Group Supervision Under the Insurance Groups Directive 92 4.3 Group Supervision Under Solvency II 96 4.3.1 Pillar Requirements 98 4.3.2 Pillar Requirements 112 4.3.3 Pillar Requirements 120 References 120 The Group Support Regime 5.1 Background 5.2 Introduction of the Rules 5.3 The Group Support Regime’s Operation in Practice 5.3.1 Scenario 1: Breach of One Solo SCR 5.3.2 Scenario 2: Breach of One Solo MCR 5.3.3 Scenario 3: Breach of Consolidated Group SCR 5.3.4 Scenario 4: Breach of Minimum Consolidated Group SCR 5.4 Compromise Instead of Group Support Regime 5.5 The Way Forward References 125 126 129 145 146 149 153 Towards a Genuine Economic and Monetary Union 6.1 The Case for a Full Economic and Monetary Union 6.1.1 About Successful Monetary Unions 6.1.2 The Flaws of the Maastricht Architecture 6.2 Genuine Economic and Monetary Union 6.2.1 Integrated Financial Framework: Banking Union 6.2.2 Integrated Budgetary Framework: Fiscal Union 169 170 171 176 184 185 192 157 160 164 167 Contents ix 6.2.3 Integrated Economic Policy Framework: Economic Union 194 6.2.4 Democratic Legitimacy and Accountability: Political Union 195 References 196 Reform of the EU Financial Stability Framework 7.1 Financial Stability Frameworks Across the Globe 7.1.1 The Rationale for Financial Regulation 7.1.2 The Four Financial Supervisory Approaches 7.1.3 The Role of Central Banks in Financial Stability Frameworks 7.1.4 How Much Does Supervisory Structure Really Matter? 7.1.5 Integral Features of Successful Financial Stability Frameworks 7.2 The Current European Financial Stability Framework 7.3 Twin Peaks for Europe? 7.3.1 Reform Objectives, Policy Options, and Methodology 7.3.2 Analysis and Comparison of Policy Options 7.3.3 Concluding Remarks on the Overall Design of the New Financial Stability Framework References 201 203 204 205 210 218 220 222 226 227 233 254 255 Conclusion 259 248 • • • • • • Reform of the EU Financial Stability Framework competences over the entire financial industry would promote regulatory synergies Score: Separation of Micro- and Macro-Prudential Supervision: With macroprudential oversight responsibilities in the ESRB and the ECB, one ore more EU-level bodies in charge of prudential and conduct-of-business supervision (depending on the option chosen), and the SRB as a cross-sectoral European resolution authority, micro- and macro-prudential supervision would continue to be duly separated Score: Increased Central Bank Involvement: As noted earlier, several jurisdictions extended their central bank’s role in the resolution of failing financial entities in recent years Option would entrust the SRB with this responsibility leaving the ECB’s competences unaltered and therefore follow the direction determined by European policy choices rather than that international trend Score: Coordination, Cooperation & Conflict Resolution: In the absence of institutional changes and the creation of competence conflicts within the ESAs, the current arrangements could with minor amendments guarantee efficient supervisory coordination, cooperation, and conflict resolution Score: Regulatory Consolidation: Even if Option would not reduce the number of EU-level bodies involved in financial supervision, it would further regulatory consolidation by providing for a single, integrated, cross-sectoral resolution authority, which could effectively handle resolution tasks Score: Legal Feasibility: Provided that the formal role of the Council and Commission is preserved, the extension of the SRB’s mandates could with all likelihood be justified by Article 114 TFEU A Treaty change would nevertheless be a more optimal solution, being the only way to transform the SRB into an independent European institution with full discretionary powers Abolishing the Council’s and Commission’s involvement would considerably simplify the SRB’s decision-making processes, which have garnered notable criticism in view of their complexity Score: Practical feasibility: Reiterating the observations made under Options and 2, Option is not expected to face any significant problems with regard to its practical feasibility beyond reaching political consensus on moving resolution competences over the remaining two financial sectors to the EU-level Score: Results Regarding Objectives and As measured by the selected comparison criteria, Option is the preferred solution to realize Objective 1, while Objective can be best achieved by Option The new European financial stability architecture proposed based on this conclusion could 7.3 Twin Peaks for Europe? 249 be squarely characterized as a hybrid twin peaks system The ECB would continue to perform its central banking tasks conferred upon it by the Treaty Systemic risk regulatory functions would be divided between the ESRB and the ECB, whereas the regulatory purview of both institutions would encompass the entire Union In view of the heightened interconnectedness of eurozone Member States, the ECB—supported by a network of national supervisors—would carry compulsory responsibility for the prudential supervision of all financial industry sectors within the eurozone, while non-euro area Member States would be welcome to participate on a voluntary basis thereby promoting the unity and integrity of the broader internal market Non-euro area Member States not wishing to join the new system could alternatively remain supervised by their respective NCAs The financial supervisory landscape would be enriched with a new EU-level conduct-of-business regulator, the ECBR, which would have jurisdiction over all financial sectors within the eurozone and also rely on a supportive network of national authorities responsible for business conduct regulation In line with Europe’s variable geometry, non-euro area Member States would likewise have the option to join in the new regime or retain their domestic conduct-of-business regulatory arrangements The SRB— aided by a network of national resolution authorities—would assume the role of European resolution authority with respect to the banking, insurance, and securities sectors within the euro area Here again, the choice between participating in the system or conducting resolution at national level would be left entirely to the discretion of Member States outside of the eurozone And finally, the EFSC would emerge as a further new actor of the European financial stability framework with the twofold objective to ensure efficient coordination and cooperation between all EU-level bodies involved in the oversight of the European financial system on the one hand, and perform supervisory conflict resolution functions where necessary on the other hand Objective 3: Establishment of a European Safety Net in the Insurance and Securities Sectors Option 1: Harmonized Network of National IGSs and ICSs • Promoting Financial Stability: Among the principal goals of the reform measures adopted in response to the European financial and sovereign debt crisis were to counter the financial market fragmentation and break the vicious circle between the financial—especially banking—system and sovereigns, which disrupted financial stability to the point to question the very existence of the EU Rejecting the ambitious original intention to set up a genuinely pan-European DGS to shore up the reforms introduced under the Banking Union, European policymakers settled for a harmonized network of national DGSs to protect depositors and buttress financial stability on the European financial markets As mentioned earlier, there are widespread concerns that by leaving Member States ultimately responsible for the financing of bank failures, these new guarantee 250 • • • • 81 Reform of the EU Financial Stability Framework arrangements would be found wanting to realize the objectives they were set out to achieve.81 This suggests that, although undeniably superior to the pre-crisis arrangements, nationally organized guarantee schemes—whether DGSs, IGSs, or ICSs—generally have a lesser potential to foster financial stability in the Union and in particular the eurozone than pan-European schemes Score: Ensuring Adequate Consumer Protection: As pointed out on previous occasion, a harmonized network of national IGSs and ICSs would put Member States in the role of ultimate guarantors, implying that the degree of consumer protection would continue to be linked to the apparently very much diverging financial strength of those national sovereigns Such differences between the levels of provided consumer protection are not in line with the highly integrated nature of European financial markets Option would thus not sufficiently further consumer protection Score: Potential to Invoke Moral Hazard: It is a well-known fact that any ill-designed safety net is likely to create moral hazard incentives by giving an unintended sense of complacency to those it intends to protect However, proper design of guarantee arrangements is generally thought to be sufficient to eliminate this danger.82 In view of this observation, as long as they are carefully designed, it probably does not make a difference whether the European insurance and securities safety nets are organized nationally or at a pan-EU level Score: Effects on Competition: It is not hard to see how the incidence or absence of guarantee arrangements in today’s integrated financial marketplace yields an unlevel playing field and influences competition both between and within industry sectors However, while providing a compelling argument for consistency between various guarantee arrangements, this does not say anything about the superiority of Options and with respect to each other.83 Score: Consistency of the Safety Net: The comments made under the previous point highlighted the importance of internal consistency between different existing safety nets For their efficient functioning, it is equally paramount that guarantee arrangements are also aligned with the wider financial regulatory environment, in particular that they are supported by robust financial regulatory and burden sharing arrangements.84 Under the here suggested modified twin peaks approach, financial regulation, supervision, and the resolution of failing financial institutions would be predominantly performed at EU-level Nationally organized IGSs See HL Paper 134 (2014) [50], p 45 et seq See Schich and Kim (2011) [17], p 16 et seq 83 See Schich and Kim (2011) [17], p 18 et seq 84 See Schich and Kim (2011) [17], p 21 et seq 82 7.3 Twin Peaks for Europe? 251 and ICSs would be consistent with the current European DGS system but not with the otherwise centralized European financial stability framework Score: • Guarantor’s Capacity to Finance the Safety Net: Option would imply that European Member States would have to provide a fiscal backstop for their domestic safety nets.85 Thus, because in principle single Member States by themselves are financially weaker than all of them combined, Option is inferior to Option Although similar arrangements as currently employed in the European DGS system—most notably the mutual borrowing facility between different national schemes—may attenuate the pressure weighing on single countries, fiscally weaker Member States might still face difficulties to fulfill their commitments made towards their safety nets Score: • Legal Feasibility: Similarly to the currently applicable European DGS system, the harmonized network of national IGSs and ICSs could be set up without requiring Treaty change on the basis of Article 53(1) TFEU, which—in conjunction with Article 54(1) TFEU—empowers Parliament and Council to issue directives that have as their objective to facilitate the taking up and pursuit of business activities by companies ‘formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Union.’ That definition includes financial institutions pertaining to all three industry sectors.86 Score: • Political Feasibility: In light of the fact that sufficient political support was gathered for the European DGS system introduced within the Banking Union, there is hope that once they become political priority, similar arrangements in the insurance and securities sectors would not face major political obstacles, although the recent withdrawal87 of the Commission’s proposal to modify the ICSD is surely not a very promising development in this respect Score: Option 2: Pan-European Safety Net • Promoting Financial Stability: The corollary of the remarks on the restricted ability of Option to facilitate financial stability in Europe is that a pan-European safety net would be a clearly superior solution in this respect Score: • Ensuring Adequate Consumer Protection: Option would not face the problems mentioned in the context of Option and would therefore be able to ensure appropriate consumer protection throughout the EU Score: 85 See Schich and Kim (2011) [17], p 22 et seq See Articles 53 and 54 TFEU and COM(2010) 368 final [41], p 87 COM(2014) 910 final [38] 86 252 Reform of the EU Financial Stability Framework • Potential to Invoke Moral Hazard: Based on the arguments presented under Option 1, Option is likewise neutral as regards the issue of moral hazard Score: • Effects on Competition: As explained in connection with Option 1, it is rather the inconsistency between different financial system guarantees than their nationally organized or pan-European nature that affects intra- or cross-sectoral competition Score: • Consistency with Financial Regulatory Framework: If established, a panEuropean safety net would most likely encompass all financial sectors, ensuring both internal consistency between the specific sectoral guarantee arrangements and their consistency with the wider hybrid twin peaks European financial stability framework Score: • Guarantor’s Capacity to Finance the Safety Net: In comparison to the national backstop arrangements envisaged under Option 1, the joint and several guarantee of all participating Member States behind a truly pan-European safety net would provide much stronger assurance that losses covered by various schemes are compensated Nevertheless, because of the significant debt mutualization involved in this solution, Option probably only constitutes a viable alternative if the EU or at least the eurozone moves much closer to a genuine fiscal union In this case, a robust fiscal governance framework including features, such as a federal budget, common bond market, and various other transfer mechanisms for sharing economic risks, would presumably considerably enhance its economic resilience.88 Score: • Legal Feasibility: Based on the considerations typically made in the context of the legal form of financial system guarantees, Option would either require the allocation of scheme management functions to the prudential supervisor—which would be the ECB pursuant to the here advocated hybrid twin peaks approach— or the creation of another statutory authority or privately constituted entity to operate the pan-European scheme.89 Conversely to Option 1, neither of the above alternatives are possible invoking Article 53(1) TFEU as legal base The earlier observations in relation to Article 127(6) TFEU—the currently sole imaginable legal base for attributing these functions to the ECB—suggest that while this provision may allow for extending the ECB’s mandates with responsibilities regarding an EU-wide DGS and ICS, it surely prohibits entrusting this institution with any such competences in respect to an IGS Therefore, this scenario requires Treaty change As explained in the context of other policy options, setting up a new EU-level body to run the European safety net would be only conceivable in recourse to Article 114 or perhaps 352 TFEU, but the numerous concomitant 88 89 The elements of such a fiscal governance framework are outlined in more detail in Sect 6.1.1 See the Davis Report (2004) [35], p 143 et seq 7.3 Twin Peaks for Europe? 253 caveats of this approach make a strong case for a Treaty change And finally, as reasonable as it may be in theory, engaging a private entity as scheme manager does not seem to be in line with the Union’s institutional culture, which is why the legal conditions for such a solution shall not be further explored here Score: • Political Feasibility: Because Option would put our big toe firmly into fiscal union, it is definitely politically unrealistic as things stand, although the recent recommendation formulated in the Presidents’ Report to launch a European Deposit Insurance Scheme (EDIS) is certainly a promising development in this respect.90 Score: Results Regarding Objective As anticipated, the results of the analysis of the available policy options to create a European safety net in the insurance and securities sectors indicate that even though Option is superior in achieving the policy objectives pursued by the here examined types of financial system guarantees and also scores better with regard to almost every aspect usually considered when introducing new guarantee arrangements, the impediments in terms of its legal and practical feasibility will ban it from the European policymaking agenda for the foreseeable future Option 1, on the other hand, brings reasonable improvements to the currently employed insurance guarantee and investor compensation arrangements, without raising any significant legal or political concerns Therefore, at least initially—and refraining from going into further details—the author advocates the introduction of harmonized networks of national IGSs and ICSs, which broadly mirror the recently established European DGS system under the Banking Union For reasons of practicality—especially given the greatly differing levels of advancement of guarantee arrangements in the banking, insurance, and securities sectors—the new European safety net should probably maintain the currently prevalent sectoral separation of financial system guarantees At a later stage and provided that the EU or at least the euro area comes close to a genuine fiscal federation, these harmonized national networks of DGSs, IGSs, and ICSs could usefully be replaced by a truly pan-European safety net—possibly in the form of a single scheme providing maximum organizational efficiency and a single point of access for consumers, while at the same time comprising three sub-schemes for the banking, insurance, and securities sectors to duly recognize their differences The so far well-functioning Financial Services Compensation Scheme (FSCS) in the UK could serve as a useful example in this respect.91 90 91 Presidents’ Report (2015)[51], p 11 et seq For a detailed overview of the considerations underlying the FSCS’ design see FSA (1997) [46] 254 Reform of the EU Financial Stability Framework 7.3.3 Concluding Remarks on the Overall Design of the New Financial Stability Framework The suggested reform measures would consolidate the European financial stability framework into a hybrid twin peaks model illustrated by Fig 7.2 Apart from the slight discrepancy between the envisaged centralized supervisory, resolution, and central banking arrangements on one side, and the at least initially nationally organized and sectorally separated safety net on the other side, the new system would be coherent and a great deal simpler than the current architecture Due to its integrated nature, clear division of responsibilities, and efficient coordination mechanisms, the new framework would better reflect today’s interconnected financial landscape and more easily cope with the thereby posed challenges Having said that, mindful of the previously highlighted limited possibility to devise ideal supervisory structure and governance arrangements due to the incompleteness of the contract between supervisors and society, it has to be underscored Central Banking Functions ESCB ECB EFSC European financial system's primary coordinating body responsible for supervisory cooperation and conflict resolution NCBs objectives: maintaining price stability and supporting EU´s economic policies tasks: defining monetary policy, oversight of payment systems, conduct of foreign-exchange operations, management of MSs´ foreign exhange reserves, and supporting banking prudential supervisory and financial stability policies Macro-Prudential Supervision ECB specific macro-prudential tasks and tools conferred by Reg (EU) No 1024/2013 ESRB macro-prudential oversight over the entire EU financial system Micro-Prudential Supervision & Resolution Prudential Supervisison Conduct-Of-Business Regulation Resolution ECB ECBR SRB European prudential supervisor for all financial sectors in the eurozone and participating Member States European Conduct-Of-Business Regulator for all financial sectors in the eurozone and participating Member States European Resolution Authority for all financial sectors in the eurozone and participating Member States Banking, Insurance & Securities PR NCAs Banking, Insurance & Securities CBR NCAs Banking, Insurance & Securities Resolution NCAs supporting the ECB and responsible for prudential supervision in non-participating Member States supporting the ECBR and responsible for conduct-of-business regulation in non-participating Member States supporting the SRB and responsible for the resolution of failing financial institutions in non-participating Member States Harmonized Network of National DGSs, IGSs, and ICSs separated along sectoral lines objectives: promote financial stability and ensure adequate consumer protection Fig 7.2 Hybrid twin peaks EU financial stability framework References 255 that the proposed hybrid twin peaks structure—however optimal it is internationally deemed to be—is merely a necessary foundation of a well-functioning European financial stability framework but does by far not guarantee its success The efficacy of the built-in, in principle efficient coordination mechanisms ultimately hinges upon the existence of a real will and sincere efforts on the part of the regulators involved to share all relevant information and assist each other’s work as best they can Moreover, to ensure such a favorable attitude, it is crucial that care is taken to acquire superior human capital as well as to create and maintain a supportive regulatory culture that attaches central importance to high-quality regulation and supervision An auxiliary and for present purposes key benefit of the proposed architecture would be the creation of nearly all elements of a previously missing supportive regulatory framework that could guarantee the safe functioning of the GSR.92 This could warrant a revision of opposing Member States’ view on this otherwise beyond doubt very useful capital management tool To provide an additional safeguard and assuming that the calculation of contributions to the proposed European IGS system will follow a comparable logic to that employed in respect of the existing DGS system,93 it is argued here that if the GSR is adopted, its use should be included in the calculation of the 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Employment Protection and Foreign Direct Investment August 2013 56 TAYLOR , M W ’Twin Peaks’: A Regulatory Structure for the New Century London, Centre for the Study of Financial Innovation, 1995 57 THE HIGH -LEVEL GROUP ON FINANCIAL SUPERVISION IN THE EU Report de Larosière, J (Chairman), 25.02.2009 Chapter Conclusion European economic and political integration is a fascinating, multifaceted, and dynamic process, which has been crucially shaping European citizens’ lives for over half a century now and will likely continue to so for many more years to come It has had its ups and downs, at times severely testing Europeans’ will to unite and surely, the future holds further obstacles to overcome Financial market integration, regulation, and supervision are similarly consequential subjects that have been dominating worldwide academic, policy, and public attention particularly since the outbreak of the 2007 global economic and financial crisis This work has connected these two topics of immense practical relevance by studying European financial market integration and its implications on both the financial industry and financial supervision, with a primary focus on the supervisory challenges associated with the evolution of cross-border insurance groups Starting from the 1970s, European policymakers’ efforts to create a single market in financial services have remarkably stimulated financial innovation, resulting in a rapidly growing presence of complex insurance and other financial groups offering sophisticated financial products on the European financial markets This trend required a commensurate adjustment of oversight methodologies and sadly, for various reasons, insurance group supervisory approaches adopted in Europe over time have tended to lag behind business realities The innovative, holistic group supervisory arrangements employed under the new Solvency II regime—becoming fully applicable on January 2016—constitute a major breakthrough, tackling most previously unresolved problems arising in the context of insurance group supervision Yet, Solvency II could have been more However, as has been the case with countless pieces of EU legislation before, economic necessities have once again proved to be irreconcilable with political priorities, creating missed opportunities along the way One focal point of the research presented in this study has been the GSR, a subject that elicited much controversy in the course of the Solvency II negotiations but—to the disappointment of many—never found its way into the Solvency II © Springer International Publishing Switzerland 2016 O.J Erdélyi, Twin Peaks for Europe: State-of-the-Art Financial Supervisory Consolidation, DOI 10.1007/978-3-319-30707-7_8 259 260 Conclusion Directive adopted in 2009 The author has been arguing that current developments in European and international financial regulation and supervision coupled with the reform proposals introduced in the previous chapter warrant a revision of the ultimately prevailing negative stance taken toward the GSR She also believes that this post-crisis era in which the world’s policymakers and supervisors carefully scrutinize their financial supervisory approaches and wider financial stability frameworks, and international work on insurance resolution intensifies, gives a perfect opportunity for such a reassessment The GSR is an ingenious capital management tool proposed by the Commission to complement the new group supervisory framework designed to grant insurance groups operating in a decentralized subsidiary model the same freedom and efficacy in capital management as their competitors opting for the legally integrated branch structure enjoy The subsidiary structure’s inherent legal and practical barriers impeding optimal capital allocation have prompted numerous groups to (re)organize their affiliates as branches even if this choice has conflicted with their business model The resulting inefficient and overly complex group structures are not only posing unnecessary supervisory problems but also provide perverse incentives for supervisors to favor one organizational model over another rather than generating a supervisory framework that encourages firms to take the form that best fits their business needs If adopted, the GSR could establish a level playing field between these two most commonly used organizational forms, putting an end to this both for supervisors and supervised entities suboptimal situation Despite its undisputed merits, the GSR did not survive the political scrutiny of Member States, which feared that absent of an appropriate supportive regulatory framework, this in principle useful capital management instrument would more harm than good Among the criticized shortcomings of the European insurance supervisory framework were the lack of adequately funded insurance guarantee schemes as well as the absence of legally binding and harmonized crisis management, early intervention, resolution, fiscal burden-sharing, and supervisory dispute resolution arrangements Indeed, only a year later in 2010, similar shortcomings of the entire European financial system—especially in the banking industry—compounded by other flaws of EMU’s wider economic governance framework have come to aggravate the 2007 global economic and financial crisis into a deep and prolonged European sovereign debt crisis, which triggered a never expected reversal of European financial market integration ultimately threatening the integrity of the EU as a whole Among myriads of other reform measures, this protracted depression has propelled a significant reinforcement of the European financial supervisory architecture by the creation of the ESFS—fully operational since January 2011—and has also given rise to the Commission’s and Council’s GEMU agenda, a comprehensive legislative initiative put forward in 2012 envisaging a fundamental overhaul of EMU’s economic and political governance system with a view to gradually move the EU closer to a genuine fiscal federation Together with the ESFS, the recently adopted Banking Union—the first and most pressing of GEMU’s four building Conclusion 261 blocks—address some of the issues raised by the GSR’s opponents and remedy a number of comparable deficiencies in the banking sector Furthermore, over the past roughly three decades, the global financial marketplace has experienced an enormous transformation along with recurring regional financial turmoils of differing severity, drawing heightened policy attention to the vices and virtues of the different financial supervisory approaches and broader financial stability frameworks employed around the world A relatively common pattern observable is a progressive consolidation towards integrated financial supervisory models, such as the integrated approach and the—of late apparently even more attractive—twin peaks approach, to better reflect financial market realities Based on the current academic and policy debates surrounding the optimality of financial stability frameworks in general and the European financial regulatory landscape in particular, this survey has concluded with a proposal to revamp the European financial regulatory architecture into what can be best described as a hybrid twin peaks model with the twofold aim to create the preconditions for the safe functioning of the GSR in the insurance sector as well as to strengthen and consolidate the existing structure of financial system oversight to enhance its resilience in the face of future financial crises The author is highly aware of the immensely controversial nature of the chosen subject-matter and of the fact that some of the proposed reform measures may not be politically realistic at the time of writing Nevertheless, it is hoped that the ideas presented in this work would stimulate further academic reflections and perhaps also influence future policy debates in the areas addressed Given its inevitably restricted scope, this study has only furnished answers to a small subset of complex questions emerging in contemporary insurance supervision, wider financial supervision, and European integration, leaving plenty of open research directions in each of these areas In the European context, these include developing an adequate resolution framework in the insurance sector, devising a truly pan-European safety net, improving the democratic accountability and legitimacy of the European institutional apparatus and decision-making processes, and advance the broader GEMU agenda to facilitate EMU’s further economic integration towards a genuine fiscal federation, to mention just a few Beyond that, there are many open questions related to the general design of financial stability frameworks, which could be subject to further economic, political, and legal analysis The most recent economic and financial crisis has ruthlessly revealed the vulnerabilities of both the global financial system and EMU’s economic and political governance framework, eliciting stronger cooperation between the world’s supervisors and policymakers to develop universally applicable common standards, and encouraging European leaders to sort out their problems, their best to reconcile any opposing views, and devote their undivided attention to promote further European integration The lessons are clear, yet the issues to resolve remain contentious But finally, there seems to be sufficient will to what needs to be done Let us hope that this crisis-induced momentum fueling international cooperation lasts long enough to adopt all the necessary reforms to restore sustainable financial 262 Conclusion stability both in Europe and worldwide It is time to set aside political differences both within Europe and internationally and make sure that the aspirations born as a result of this enhanced cooperation become political reality rather than—as so often in the past—carefully ignored and eventually forgotten dreams of technical experts .. .Twin Peaks for Europe: State-of-the-Art Financial Supervisory Consolidation Olivia Johanna Erdélyi Twin Peaks for Europe: State-of-the-Art Financial Supervisory... Center for Insurance Regulation, KULeuven, formerly European Commission), Dominique Thienpont (European Commission), Prof Dr Elemér Terták (European Commission), Ricardo González García (European... 7.2 The Current European Financial Stability Framework 7.3 Twin Peaks for Europe? 7.3.1 Reform Objectives, Policy Options,