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Building a financial stability architecture

VIEWS: 8 PAGES: 4

The turmoil that has buffeted European financial markets in recent months has underscored the need for fundamental reforms of the European Union (EU)'s economic policy frameworks. Prominent among these reform needs is a better financial stability architecture that renders the financial system less prone to crises, more robust during crises, less dependent on taxpayer support, and better able to support economic growth throughout the business cycle. In this article, the authors will assess the progress against what they think is needed for a sound and efficient single financial market, focusing on the banking system. The EU financial reform progress to date are: 1. With the banking system largely stabilized, the most urgent reform need is the restructuring of weak institutions. 2. A second core reform track concerns regulatory repair. 3. A third major track deals with supervisory arrangements. 4. The most difficult, least advanced, but perhaps most important reform track is crisis management and resolution.

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									    i n T e r n aT i o n a l p e r s p e c T i v e




         Building a financial
         stability architecture
         for the European single financial market
         Recent and current                                             ThE TurmoIl that has buffeted European financial
                                                                        markets in recent months has underscored the need
         developments in Europe                                         for fundamental reforms of the European Union (EU)’s
                                                                        economic policy frameworks. Prominent among these
         highlight the urgent need                                      reform needs is a better financial stability architecture
                                                                        that renders the financial system less prone to crises,
         for financial reforms to enable                                more robust during crises, less dependent on
         EU-level solutions that resolve                                taxpayer support, and better able to support
                                                                        economic growth throughout the business cycle.
         the misalignments between                                           While the EU is not unique in needing financial
                                                                        reform, its single financial market project presents
         powers, responsibility and                                     unique challenges. It has allowed financial institutions
                                                                        to operate across the EU’s internal borders, causing
         accountability for financial                                   an increasing disconnect with the existing national
                                                                        financial stability arrangements. The crisis has
         stability without fragmenting                                  demonstrated the costliness of the resulting
         the single financial market.                                   inefficiencies and coordination problems. It has also
                                                                        shown how interdependent member states have
                                                                        become, reaping major benefits or suffering large
                                                                        costs from each other’s decisions. For EU member




                                                mArEk BElkA (pictured) is Director of the IMF’s European Department. He was
                                                previously Under-Secretary General at the United Nations and Executive Secretary
                                                of the UN Economic Commission for Europe, and served as the Prime Minister of
                                                Poland from 2004 to 2005.
                                                WIm FoNTEyNE is a senior economist in the IMF’s EU Policies team and
                                                co-author of the IMF book Integrating Europe’s Financial Markets.
                                               wfonteyne@imf.org




        I N F I N A N C E j u n e 2010                                                    The magazine for Finsia members
                                                                             i n T e r n aT i o n a l p e r s p e c T i v e



states to feel at ease in the single financial market       Securities and Markets Authority (ESMA), and the
after the trauma of the global financial crisis and         European Insurance and Occupational Pensions
the ensuing sovereign debt crisis in Europe, their          Authority (EIOPA) will have a sectoral division of
interdependency has to be matched by joint                  labor. They will be based on the already existing
decision-making mechanisms and accountability               committees of European supervisors, but will have
towards each other. Hence, EU level solutions are           legal personality, a fully developed and independent
needed to resolve the misalignments between powers,         governance structure, much greater responsibilities
responsibility
								
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