Financial supervision focuses on the aggregate (macroprudential) in addition to the individual (microprudential). But an agreed framework for measuring and addressing financial imbalances is lacking. We propose a holistic approach for the financial system as a whole, beyond banking. Building on our model of financial amplification, the financial cycle is the key variable for measuring financial imbalances. The cycle can be curbed by leverage restrictions that might vary across countries. We make concrete policy proposals for the design of macroprudential instruments to simplify the current framework and make it more consistent.

We offer three basic mechanisms to improve the governance of ‘normal times’ financial supervisors (as opposed to resolution agencies and systemic risk boards). To enhance supervisory effectiveness, we propose first to institutionalise strong CEOs, with boards or commissions being limited to basic policy decision-making and to monitoring. Second, lower-level staff would get increased line responsibilities. Finally, subjecting supervisors to reinforced disclosure requirements would improve market responsiveness.

The four Framework Directives of the Lamfalussy Process constituted a further step towards guaranteeing an efficient and dynamic functioning of the EU's securities market. Since then, a number of implementing directives and regulations have been passed and further changes have already been suggested.

Regarding the existing system from a German point of view, this article focuses on the role of the Committee of European Securities Regulators (CESR) and the legal nature of its guidelines and recommendations. It establishes the claim that the CESR's statements have a binding effect despite their character set out in the Framework Directives and argues that the traditional dichotomy of legal sources needs to be substituted by a trichotomy of hard law, soft law and a third kind of secondary law. This so-called third kind of secondary law has three consequences: first of all, it needs to be recognised; secondly, it needs to be complied with; and thirdly, in case of non-compliance, extensive reasons must be given. This puts the third kind of secondary law in a position similar to that of persuasive authorities. Regulation (EC) No. 1060/2009, which was adopted following the financial crisis, confirms this notion by requiring that the national financial supervisors consider the CESR's advice but that they can deviate if they give full reasons for their decision.

Lastly, the creation of a European Securities and Markets Authority (ESMA), which has already been proposed, is discussed and compared with the existing system. The ESMA's expanded supervisory powers over national authorities are a step in the right direction. It remains to be seen, however, whether the Proposal for a Regulation creating the ESMA will achieve the goal of establishing a common supervisory culture for European financial markets.

In Europe, several models for financial supervision have developed over time: from the traditional three-pillar or institutional model (banking insurance and securities), via the intermediate ‘twin peaks’ model, which is closer to a functional approach, to the single or integrated model. Many elements, including market structure, historical and political factors, have determined each State's choice in favour of one of the models. Several States have recently tried to find more efficient and less costly supervisory schemes. A comparative analysis of the features of these models gives indications about the drivers for choosing one of them and the pros and cons that have been advanced. The actual situation in each of the EU States is described. Some conclusions are drawn as to the regulatory structure at EU level.

In the aftermath of the economic crisis of 1997–1998, South Korea undertook a number of reforms in financial supervision. Questions have been raised, however, as to whether Korea has in fact succeeded in creating a system of financial supervision capable of dealing with certain risks and responding to new challenges. This article examines Korea's recent experience in financial instability resulting from misconduct by credit card companies as a case in point and argues that the postcrisis reform in financial supervision was limited to changing formal institutions for financial supervision and that further reforms will have to be undertaken in other related institutions if Korea is to improve its financial supervision.

This article reexamines the period of the Japanese bubble (1985–1990) and emphasizes ill-supervised and ill-sequenced financial deregulation as a key proximate factor. Given the subsequent costs of this political choice, what explains such a path of domestic financial deregulation without the establishment of corresponding supervisory institutions? I argue that the suboptimal Japanese outcome represents the equilibrium point for political leaders who had to balance global pressures to deregulate the economy, corporate pressures to liberalize finance, and domestic resistance by an array of politically connected interest groups. The government chose ill-supervised financial deregulation as the path of least political resistance and the golden bullet that could both defuse trade tensions with the United States and readjust the Japanese political economy in a harmless way. Instead, as they interacted with other factors, the choices made in the early 1980s destabilized the Japanese system and carried the seeds of the ensuing financial crisis.