The creation of the European system for financial supervision and the review of mark-to-market principle – European Union's main directions towards financial stability

The Larosiere commission, who was given by the European Commission president the task to research the causes of the present global financial crisis and come up with recommendations on how to reform the regulation of financial markets, has published its report on 25th of February 2009. The report lays out a framework to take the European Union forward. Ambitious reforms are proposed, projected on two main dimensions: a macro prudential dimension and a micro prudential dimension. The creation of a new European System for Financial Supervision covers the micro prudential dimension and it refers to the transformation of the existing level 3 committees into 3 new European Authorities less than one central institution. Regarding the creation of these three new institutions two suggestions are presented: one about the cross sector cooperation between these institutions, and the second about the need to have a fiscal back-up, a fiscal power alongside the supervisory one in this newly created European System for Financial Supervision. With respect to accounting rules, the report underlines the importance of a wider review of the mark-to-market accounting. An in-depth analysis of the mark-to-market accounting leads to an alarming conclusion: mark-to-market accounting was one of the main causes that triggered and fuelled the current global financial crisis. From the point of view of regulators, and of systemic financial risk, mark-to-market has serious disadvantages because it can fuel systemic pro-cyclicality with disastrous consequences. A suggestion is presented: the differentiated application of the mark-to-market accounting rule depending on the class of assets and liabilities.