Evolution of the Legal Status of the Hungarian National Bank and of the Hungarian Financial

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Evolution of the Legal Status of the Hungarian National Bank…

EVOLUTION OF THE LEGAL STATUS OF THE HUNGARIAN NATIONAL BANK AND OF THE HUNGARIAN FINANCIAL SUPERVISORY AUTHORITY (PSZÁF) IN LIGHT OF EUROPEAN PROGRESS

Gábor Teimer

Ph.D. student, University of Miskolc Deák Ferenc Doctoral School

Budapest University of Technology and Economy Department of Corporate Law

1111 Budapest, Stoczek J. u. 2., Hungary

Field of research: European corporate law – The evolution of the concept of the Societas Europe

For the financial policymakers of the European continent affected by the fever of unification, it became obvious in the nineties of the last century that the EU needs to implement significant changes in the regulatory aspects of its financial administration in order to aspire after a significant role in world politics. However, this was only a political recognition of an opinion well developed in professional circles, according to which monetary union must necessarily be followed by the integration of the financial market. But while the main driving force of the establishment of EMU was rationality in the public finances, the transformation of the financial market was fought for and achieved by the financial sphere itself, offering a spectacular evidence for the feedback between the governing forces and governed. Although on May 1, 2004, Hungary attained full membership in the European Union, but even because of its export-led economy and its close connection to the financial market encompassing the world, our country could not afford to disregard the evolving events. Let us review the fundamental changes affecting the domestic financial sector and the capability of the affected institutions to adapt to such changes.

1. Major changes in the financial market of the Union

The currently existing system (EMU) has emerged as a result of major milestones marking the development of the European Monetary Union (Intra-European Payment Agreements, European Payment Union, Werner plan, Delors report, etc.) and ESCB, the European System of Central Banks embodying its organizational substance, as well as the ECB, the European Central Bank. ESCB, the supranational network consisting of various banks, the European Central Bank (ECB) and the national central banks was established on June 1., 1998. This jointly created system is simultaneously characterized by centralization and decentralization. It is centralized, because the ECB itself determines the European monetary policy, but at the same time, it is decentralized, since the governor/president of each national central bank has a membership in the Board of Governors, which has a central role in the direction of the ECB, thus, all of them participate in decision making. The ECB is a legal person, it is forbidden to request or accept any instructions, consequently, the national central banks – which constitute integral parts of the ESCB – are also independent in this capacity, they are required to implement the instructions received from ECB.

It is obvious that the establishment of the ECB greatly increased the independence of the national central banks in personal, institutional and budgetary aspect, and the maintenance of price stability became their major task. At national level, each country responded differently to the changed situation. In some countries, the references to monetary tasks have been completely eliminated from the laws pertaining to central banks, in some others, only the performance of analyses is possible at national level. In France, the central bank is allowed to create financial provisions within certain limits regulated by the ECB. Some other countries’ national sensitivities do not allow their national banks to form integral parts of the joint monetary policy, for example Finland and Portugal have regulated their own central banks in such a way that the contribution of the central bank to the formation of the joint policy be unambiguously obvious. According to the German rules, nobody can give directions to the president of the central bank, if he/she is acting as a member of the Board of Governors of ECSB. An interesting exception is that in New Zeeland, a contract is concluded between the president of the central bank and the government, which guarantees the extent of inflation, along with all its legal consequences.

Nowadays, the first steps of a much greater progress can be observed. The daily quantity of money circulating on the money markets of the world, the increasing number of market participants, the increasing risk posed by the failure of interconnected national economies and enterprises all support the necessity of change, which can be tackled at the following levels – at an institutional and norm-creative level of the European Union, and in a close connection with the latter, at the level of individual national inspectorates, concerning organizational and management issues as well as their legal statuses, and finally, as an issue concerning the realm of constitutional law, in the area of norm-creating powers provided for the above parties.

The participants of the European Summit held on June 15 and 16 in Cardiff observed the crisis phenomena emerging in the European financial market, and in order to determine the reasons of the problems and ensure recovery, the Council of Europe called upon the European Commission to prepare an action plan for the improvement of the single market of financial services. The Commission determined that the principal norms of financial regulation of the Union are generally satisfactory, but the legislative techniques have to be much more flexible and expedite in order to adapt the rules of supervision to the changing market situation. But in order to ensure this, the common “wholesale” market for the European Union must be established, which requires a fundamental correction of the institutional and legislative system of the European Union. The basis of the reform was the so-called Lámfalussy Report (February 15. 2001) published by the “Committee of the Wise Men”under the direction of the Belgian banker, Sándor Lámfalussy.

According to the report, the most significant obstacle to the common financial market is the inoperability of the regulatory activity, as well as the time-consuming nature of the co-decision procedure, which is an established practice of decision-making in the Union. The rules created seemed inflexible and indecisive, the most fundamental rules required for reliable and predictable operation were missing, just as the mutually unambiguous norms, standards. The European Commission is overloaded and slow and it tends to overcomplicate things, national implementation suffers delays, and the constant supervisory approaches contribute to the growth of problems, as well. In his position, a four-stage approach of the problem can lead to satisfactory results. In the first stage, the Commission submits the draft directive – or regulation – to the Council, after thorough and widespread consultation, which pieces of legislation only specify the basic principles and the implementation powers. At the second stage, it shall propose the establishment of two new organizations – the European Securities Committee and the Committee of European Securities Regulators. The ESC would generally have regulatory tasks – within the implementation powers delegated by the Council to the Commission, it would decide on the regulatory proposals submitted by the Council. The CESR is an independent consulting body, which has the national securities authorities as its members, and it has a consultative role regarding the preparation of rules at the second stage. At the third level, the CESR helps the process by preparing recommendation, guidelines and standards, and measures the supervisory practices. At the fourth stage, the Commission inspects the compliance with the Community law on behalf of the member states and it can apply sanctions in individual cases.

In light of the ideas, the commenced changes went beyond the area of securities the investigation of the extendability of the Lámfalussy procedure to other financial regulatory areas has started. As a result of this, a new committee without any legal predecessor has been created in the banking area, whereas in the field of insurance, and insurance committee has been created based on the so-called Insurance Conference. The committee to be established in the banking field will not only have the supervisory bodies as its members but also the European Central Bank and the central banks of member states, even if the central bank of a given country does not have a supervisory function, with the restriction that only the representatives of supervisory organizations will have the right to vote.

The national supervisory institutions will form an active part of the newly created single financial market. Since the establishments of the inspectorates has remained at a national level, there are significant differences with the appropriate institutions of individual countries. In some countries, the central bank has a supervisory function (Italy, Ireland), but the situation is quite different in Germany and in Belgium where the central bank acts in cooperation with a complementary organization with centralized powers. A particular controlling system supervised by the central bank can be found in Portugal, Greece, the Netherlands, and Spain. And finally, there is a so-called particular system characterizing Finland and France – in these countries, individual, specialized organizations have been established to supervise the various branches of the single market. Thus, in this case, the national legislators have to decide which way to follow and which institutional system to adopt domestically.

As a result of the decision, controlling bodies independent of the central bank have been created in such a way that the legislation has only given the central bank the controlling powers absolutely necessary for completing its tasks. With regard to the inspectorates, it is indubitable, that the future belongs to single inspectorates instead of specialized supervisory bodies. The reason for all this can possibly be found in the prevention of the so-called arbitration, the cross-border presence of the increasing number of market participants, and the presence of sector-neutral inspectorates interested in international cooperation.

Even the Union acts in realization of the latter – the issue of supervision will remain within national powers, respecting individual characteristics, but it expects and promotes harmonization. The major objective of ESCB in this context is the creation of a stable monetary market, within a centralized, Union-based supervisory system. According to the existing agreements, the ECB can be granted special supervisory powers and the supervision-level coordination of the area has been achieved within the framework of the Committee of European Banking Supervisors.

Concerning the legal status of supervisory bodies: due to influences from the Anglo-Saxon legal environment, the financial inspectorates as administrative institutions, such as PSZÁF, aspire after new titles as regulatory bodies. The major task of regulatory bodies is the correction of failures in the operation of the market, guarding the subsistence of the conditions for market operation, similar bodies can be find in the areas of market competition regulation, regulation of general business services, as well as that of the local public services. The most important question to be clarified in connection with the existence of a regulating authority is its own legal status. On one hand, it is a central administrative body, not completely under government control, but the extent and significance of its independence does not reach those of independent branches of power. In reality, we can speak of “autonomous structures” where administrative powers and operative guarantees interrupt the superstructures built on the logic of the regular civil servant system.

Last but not least, we should refer to the problems posed by the norm-creating powers provided for nearly every national financial supervisory body. Reviewing the international situation, two distinct systems can be recognized: the practice signified by the British FSA (Financial Services Authority) and the Danish and Swedish practice implemented following its example, and the German (Bundesanstalt für Finanzdienstleistungsaufsicht) and the Austrian practice. The British-Danish system gives broad legislative powers to the supervisory bodies (e. g.: general rules necessary for consumer protection, protection of good business reputation, in the areas of professional training and operation, price stabilization, financial services, rules against money laundering), together with the corresponding organizational and norm-creating assurances. As opposed to this, on the other side, the norm-creating powers of the supervisory bodies only concern the extent of the supervision fee and the regulation of business.

Nevertheless, it is important to note that in each related British parliament dispute, the constitutionality and in general, the norm-creating powers of the FSA are questioned.

2. Issues concerning the legal status of the MNB and PSZÁF

Future legal status of the central bank

Although even among the most prominent representatives of economics, there are several persons who exhibit doubts regarding the independence of the central bank, on a legal positivist basis (“The central bank is a product of legislation, it is created by laws, consequently it could even be abolished by legislation. Therefore, its independence is questionable. Milton Freedman), nevertheless, upon analyzing the history of development of European institutions, one can declare based on principle that the central banks have achieved an unique level of independence, the significant guarantees of which are elaborated in detail. Their unquestionable autonomies are supported by economics and enforced by the basic principles of the union, and – although not uniformly – expected by the public.

Thus, the first and most important issue is the determination of the nature of its independence. The central bank is independent and in this capacity, it is guaranteed by laws at national and Pan-European level, and as a result of accession, its supranational character is even more emphasized, which will lead to the loss of jus cudandae monetae (state right of coinage) with is a part of state suzerainty. The independent, daily decisions belong to the reality of the central bank, for which the bank is responsible, therefore it has to reject each initiative from the state which would transfer to it any responsibility for tasks not within its powers.

Although the Central Bank Act guarantees the independence of the Hungarian National Bank (MNB) – it is not allowed to request and accept directions from any organization except for the ECB, the President of the MNB has only a reporting obligation to the Parliament – the act has no reference to the relationship with the Union, but it regulates the bank according to its present legal status, as a completely independent institution. It is indubitable that before EMU accession, at a national level, it has achieved such a degree of independence as few other constitutional bodies, nevertheless it cannot be disregarded that at an European level, its maneuvering capabilities will be greatly restricted at an European level. Its domestic autonomy will be unquestionable but as a part of ESCB, it will not have a great deal of opportunities for independent action, since these are greatly determined by the decisions of the ECB both with respect to the goals to be achieved and the means to be selected. Nowadays, its real legal status is primarily determined not by the Constitution and the applicable Central Bank Act but the agreements establishing the organizational framework of the Union. Accordingly, the modification of the text of the Central Bank Act will be necessary in the future, thus several part of the act will be untenable, for example “the MNB shall determine and implement monetary policy, it shall create and manage official foreign exchange and gold reserves, create payment and accounting, as well as securities accounting systems, it shall form its monetary policy and the instruments to enforce this policy independently within the framework of this act.” Of course, in the future, it will do all this as part of the ESCB and its independence will be restricted to federal and not state level. Another severe problem at the practical level, which needs clarification in connection to independence whether any decision connected to the premiums of high ranking officials of the central bank should be within the powers of the Finance Minister. Upon establishment of the ESCB, following the common rules set by the member countries not only the primary legal guarantees are indispensable, but any authority given to the national government in this question is contrary to the principle of the independent central bank, which would be suitable for influencing the decisions of the central bank within its own powers. It is clearly understandable that this is contrary to the requirements, therefore it needs to be amended in the future.

The institutional, personal and financial independence of the central bank is a necessary but not a sufficient condition of describing the conditions determining the institution. In order to create a full picture, the basics of the interrelationship between MNB and PSZÁF have to be clarified. A long debate in Hungary and abroad as well is whether to divide supervision between the MNB and the supervisory body or to create an even higher supervisory body, or several smaller ones. It is indubitable that the MNB, as the “bank of banks” has to perform inspection as well, since this is dictated by its fundamental interests. Various solutions have been found in the world in this regard, but fundamentally, three patters can be distinguished. Bank supervision is either within the powers of the central bank (formerly the United Kingdom, Poland) or a ministry, central administrative body (Japan, Canada), or an administrative body with special powers, which is independent from both the government and the controlling factors of monetary policy (currently the British FSA, Scandinavian countries). Supporting arguments can be found for both the independent supervision and the money market supervision within the powers of the central bank – the synergy of information supports integration, smaller inflation, more effective monetary policy. However, the mutually exclusive presence of monetary and supervisory policy (as a supervisory authority, the MNB is adversely interested in fulfilling its “last refuge” function), the change of bankruptcies passing through more easily, decreased accountability seem to speak against monist ideas. According to some opinions, if the supervisory authority is integrated with the central bank, it could decrease the political pressure on PSZÁF, according to others, the greater the powers of the central bank, the greater the danger of political intervention. According to the practice in the Union, anti-inflationary policy is largely opposed to bank supervisory activities, which would weaken the price stabilizing activity of the ECB, considering this fact, the Union is not planning on establishing a central supervisory body, but leaves the latter within national powers. Not even the Maastricht Treaty refers to union-level controlling policy, and the EU governing bodies support the Europe-wide separation of the two tasks. Accordingly, even in Hungary, controlling financial institutions is basically within the powers of PSZÁF, and the Central Bank Act leaves it within the powers of the MNB to control the compliance with the regulations of the central bank as well as with the conditions of performing supplementary financial services. All of these create favorable conditions, therefore, this status should be maintained in the future.