A Supervisory Efficiency Test for EU Financial Markets: Taking an Operational Approach to Integration and Oversight

ABSTRACT The EU’s supervision of financial markets remains fragmented and misaligned with the depth of market integration achieved through initiatives such as the Capital Markets Union (CMU) and the Savings and Investment Union (SIU). Political resistance to centralizing supervision, particularly under the European Securities and Markets Authority (ESMA), has stalled reform, leaving a hybrid system of national oversight, mutual recognition, and limited supranational authority. This patchwork hampers consistency, weakens enforcement, and exposes the EU to inefficiencies and regulatory arbitrage—especially in fast-evolving cross-border segments like fintech, environmental, social and governance (ESG), and crypto-assets. This article proposes a supervisory efficiency test as a practical tool to assess whether supervisory arrangements correspond to the level of market integration for specific financial products, services, or actors. Rather than relying on political agreement over institutional reform, the test offers an evidence-based, task-specific approach to evaluate whether supervision is best handled nationally, through coordination, or centrally. If embedded systematically into the EU’s regulatory process, the test could support a more coherent, proportionate, and adaptive supervisory architecture that evolves in step with Europe’s financial markets.