Abstract
The aim of this paper is to analyze main weaknesses of the pre-crisis supervisory and regulatory architecture of the fnancial market in the EU, a system which has become a catalyst of the subprime crisis in Europe. A review of the literature and an analysis of legal documents were used to research the subject. The major conclusion of the paper is that these imperfections have resulted mainly from an insufficient supervisory mandate of the European Central Bank (ECB), as well as from the principle of home-country supervision. Before the crisis, activities of the ECB were focused mainly on its basic monetary policy mandate while in the case of macro prudential supervision, the ECB could only form recommendations that were not effectively translated into specific actions of national micro prudential supervisors. Empowering the ECB with microprudential competences was proposed in the so-called choice-based approach, which was not implemented due to the fact that the member states perceived it as a limitation on their sovereignty. Another weakness of fnancial supervision in the EU originated from the principle of home-country supervision, according to which a home-country supervisor had a dominant position over the host-country supervisor. The principle has led to considerable information asymmetry, as well as to a conflict of interests between national supervisors, which impeded proper crisis management. The post-crisis reform has eliminated none of these problems.