Mechanisms for Regulating the Financial Market in the European Union

Abstract

This study presents a comprehensive analysis of the mechanisms of state regulation of financial markets in the European Union, focusing on the role and interaction of macroprudential and microprudential policies. The research emphasizes the importance of maintaining financial system stability and preventing systemic risks, particularly in light of recent global financial crises, the COVID–19 pandemic, and emerging geopolitical challenges. The paper reviews four classical regulatory models: institutional (sectoral), functional, integrated, and Twin Peaks. These models are implemented to varying degrees across EU member states, each with distinct advantages and drawbacks. The sectoral model ensures a clear division of regulatory powers but increases the risk of conflicts of interest between authorities. Conversely, the integrated model allows for a unified approach but may lack flexibility due to its complexity. Special attention is given to the regulation of the non-banking financial sector, including insurance companies, pension funds, and other financial service providers. Regulation of digital financial services, such as crypto-assets and decentralized finance (DeFi) platforms, is still developing within the EU; however, the adoption of the MiCA regulation represents a significant step toward enhancing transparency and investor protection. The integration of sustainability (ESG) factors into prudential frameworks is also emphasized, as climate risks may indirectly threaten financial system stability. Macroprudential regulation focuses on maintaining the stability of the financial system as a whole and mitigating systemic risks, while microprudential supervision ensures the solvency and reliability of individual institutions. Achieving a balance between these two levels is crucial; excessive microprudential strictness may constrain lending, whereas insufficient macroprudential oversight could lead to systemic crises. The study analyzes the pivotal roles of the ESRB and the SSM, along with the functioning of the Banking Union and the Single Rulebook. These frameworks aim to increase transparency, strengthen market confidence, and reduce systemic risks in the EU financial sector. The potential application of innovative technologies such as regtech and suptech to enhance supervisory effectiveness is also discussed. In conclusion, the study asserts that the future development of regulatory systems will depend on the full integration of digital financial innovations, the inclusion of sustainability risks in prudential policies, and closer coordination between macroprudential and microprudential approaches.