Playing the Markets’ Fragmentation? Regulatory Competition and Financial Industry Interests in the missing Supranational Supervision of European Capital Markets

The centralization of financial market supervision at the EU level remains a long-standing yet unresolved issue, persisting from the initial Capital Markets Union (CMU) agenda to the current proposal for a Savings and Investments Union (SIU). A single supranational supervisor for capital markets has been increasingly framed by EU policymakers and international experts as a critical pillar for achieving deeper financial integration in Europe, emerging as a key objective of the SIU. However, unlike the banking sector—where the Single Supervisory Mechanism (SSM) underpins the (still incomplete) Banking Union—progress in capital markets supervision has been incremental and fragmented. Thus far, only limited supervisory powers have been transferred to the European Securities and Markets Authority (ESMA), while coalitions of Member States continue to oppose any substantive centralization. What explains this stalemate? This paper argues that the absence of supranational supervision in EU capital markets stems from two overlapping dynamics: first, the regulatory competition among specialized national financial centers and their governments, which seek to attract specific segments of the financial industry; second, the vested interests of both domestic-oriented and cross-border financial incumbents—such as stock exchanges, asset managers, central counterparties (CCPs), and payment service providers—who stand to benefit from the current polycentric supervisory system. We contend that supervisory fragmentation along national lines remains so far a preferred option for influential financial market players and a strategic imperative for EU-based national financial centers seeking to maintain their competitiveness. Building on this analysis, the paper critically assesses the prospects of centralized supervision under the SIU and highlights how cross-border financial interests may actively hinder further financial integration under a centralized authority.