A choice-based approach to European banking supervision

he financial crisis that has started in August 2007 has unveiled deficiencies in the regulation and supervision of banks, leading to calls for institutional changes and there with providing the opportunity to suggest an alternative approach. The main institutional reforms currently being proposed —including the establishment of a 'global' regulatory body, of 'European' supervisory colleges, or of a European system of financial supervisors — are likely to fail, and it is thus worth considering alternatives. In a recent TILEC DP, TILEC-AFM chairholder Joseph A. McCahery and co-authors Gerard Hertig (ETH Zurich, ECGI] and Ruben Lee (Oxford Finance Group) explore the merits of a choice-oriented approach. Individual Member states have the option to delegate prudential supervision of their largest banks to the European Central Bank, while still retaining the right to re-assume such a role for themselves at a later date. Responsibilities, commitments and costs are allocated by means of a binding agreement with the ECB that can be tailored to Member states' circumstances, to the extent permitted by supervisory coherence and equal treatment. While the authors admit that their approach is not perfect, they believe it to be the best feasible choice in the current circumstances