A distinctive feature of the last decade has been the drastic change wrought by globalisation and financial innovation on the world's financial systems. With the worldwide shift toward financial systems based on global markets, attention is focusing on the need to redesign existing financial institutions and markets, corporate governance schemes and regulatory frameworks in order to achieve long-term stability of said financial systems. Interest in restructuring the region's financial systems has intensified as a result of last century's financial stress and the consequent need for architecture for the changing economy.



Fries and Lane (as cited in Berndt 2002) asserted that building a sound financial system is a prerequisite for economic development and ensuring long-term financial stability. The development of bond and equity markets has also been found as one important way of reducing financial fragility.

Gale (2001), in the similar line of argument as Fries and Lane, claimed that financial systems are crucial for the allocation of resources in a modern economy. They channel household savings to the corporate sector and allocate investment funds among firms. They allow intertemporal smoothing of consumption by households and expenditures by firms. They allow both firms and households to share risks.

Such vital importance of the maintenance of stable regional and global financial systems has spurred debate on who is best fit to oversee it. In the European Union (EU), the question of whether supervision should remain national or should it be shifted to the European level in order to maintain the efficiency and stability of European financial systems has been a moot issue(Neave 2005).

A modern financial supervision regime geared solely to fulfilling the criterion of economic efficiency would fall short of what is required. Financial system supervision must also fulfil a regulatory mandate. It also needs political legitimation, which includes control. The question of whether the existing system of decentralised financial supervision should be replaced by centralised EU financial supervision has been a controversial subject. One issue raised in this regard was whether cross border transactions by EU institutions have gained such a great significance in terms of European market stability that there a centralised EU supervision can be justified. Padoa-Schioppa (2004) observed that reactions to episodes of fragility in the European Financial system used to be a call for more stringent controls and new rules; now many observers question the very need for supervision.

The European financial systems have traditionally been under the supervision of respective member countries described as a decentralised system. This setup has worked in the past but has been increasingly proving to be problematic and unpractical in the face of the ever-changing international financial landscape. However, to a large extent, the principle of the home country being in charge of its own financial system continues to prevail to this day. This meant that banks, insurance companies and securities markets had their own set of regulators, different from those of the same institutions on other countries in Europe.

There are arguments for and against the case of supervision remaining on a national level. On the one hand of the debate are the benefits of maintaining the traditional system of handling financial activities in a decentralised setup. Advocates of the old system claim that since ?financial supervision is about protecting consumers and ensuring the stability of the financial system, an integrated or specialist supervisory authority would not make much difference? (Lannoo 2000:3). Further, observers have been found to argue that shifting to the European level for the supervision of the financial systems would take precious amount of time away from focusing on attending to the more immediate needs of the financial sector of the economy. This time-consumption would be mainly spent on the orientation of supervisors to take on duties and responsibilities quite like their previous posts but on a wider and more complicated scope of financial system. Moreover, supporters of this stand assert that a clearer focus and more country-specific decisions can be made regarding the improvement of financial systems if they were to stay on the national level. Difficulties in harmonization of the legal and financial framework and its attendant costs were also stressed.