The crisis-based European Union financial regulatory intervention: are we on the top of the prudential wave?

Abstract

The new European Union framework pertaining to financial regulation, supervision and oversight is a ‘child of the crisis’—indeed, to be more precise, that of two crises: the recent (2007–2009) international financial crisis, and the current fiscal crisis in the euro area, which erupted in 2010. The new framework addresses most of the causes of these crises by introducing a set of extensive rules aimed at three primary goals: enhancement of financial stability, enhancement of market efficiency, transparency and integrity, and enhancement of consumer protection. It has also established two pan-European mechanisms for micro-prudential supervision and resolution of (at least) systemically important credit institutions and investment firms, within the framework of the European Banking Union.

Within this context, the present article focuses mainly on the new aspects of European Union banking regulation and supervision.

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Notes

  1. 1.

    OJ L 55, 28.2.2011, pp. 13–20.

  2. 2.

    These Articles are analysed in Craig [8], pp. 57–66 and 252–255.

  3. 3.

    OJ L 331, 15.12.2010, pp. 12–47.

  4. 4.

    OJ L 331, 15.12.2010, pp. 48–83.

  5. 5.

    OJ L 331, 15.12.2010, pp. 84–119.

  6. 6.

    The High-Level Group on Financial Supervision in the EU, Chaired by Jacques de Larosière, Report, Brussels, 25 February 2009. This Report is available at: http://ec.europa.eu/commission_barroso/president/pdf/statement_20090225_en.pdf. For an overview of this Report, see Gortsos [23].

  7. 7.

    See on this Gortsos [22], pp. 15–16.

  8. 8.

    This Report is available at http://ec.europa.eu/internal_market/securities/lamfalussy/index_en.htm. On the Lamfalussy Report and these Committees, see indicatively Ferran [14], pp. 58–126, Lastra [29], pp. 334–341, and Hadjiemmanuil [24], pp. 804–818.

  9. 9.

    As regards the reasons that led to the adoption of this approach (although there were proposals for the unification of Authorities), see Louis [35], p. 154 (point 7.10).

  10. 10.

    Padoa-Schioppa [40], p. 121.

  11. 11.

    Lastra [29], p. 298.

  12. 12.

    OJ L 331, 15.12.2010, pp. 1–11.

  13. 13.

    OJ L 331, 15.12.2010, pp. 162–164.

  14. 14.

    On the ESFS, see Louis [35], Gortsos [22], with particular emphasis on the role of the European Banking Authority, Ferran [13], Moloney [38], Wymeersch [53], and Papathanassiou and Zagouras [41] (on the ESRB).

  15. 15.

    On the causes of this crisis see, by means of mere indication (out of a vast existing literature), Borio [4], pp. 1–13, Goodhart [17], pp. 2–29, Swoboda [49], Norberg [39], Rajan [43], Posner [42], pp. 13–245, Lastra and Wood [31], pp. 537–545, Tirole [50], pp. 11–47, and Gortsos [21], pp. 127–129. For a comparison of the recent crisis with the international financial crisis of 1931 (both in terms of causes and in terms of regulatory reaction), see Moessner and Allen [37].

  16. 16.

    The so-called ‘Basel III regulatory framework’ consists of two Reports of the Basel Committee on Banking Supervision:

    For a detailed overview of the rules included in this framework, see indicatively Gortsos [21], pp. 264–281.

    These Reports have already been revised in June 2011 and January 2013, respectively (available at: http://www.bis.org/bcbs/basel3.htm, with further links), and the revision process is ongoing.

  17. 17.

    On the FSB and these other international fora, see indicatively Gortsos [21], pp. 143–159 and 160–195, respectively.

  18. 18.

    See indicatively Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 “on credit agreements for consumers relating to residential immovable property (…)” (OJ L 60, 28.2.2014, pp. 34–85).

  19. 19.

    Directive 2014/49/EU of the European Parliament and of the Council of 16 April 2014 “on deposit guarantee schemes (recast)” (OJ L 173, 12.6.2014, pp. 149–178). This Directive is analysed in Gortsos [18].

  20. 20.

    The FSB defines the shadow banking system as “the system of credit intermediation that involves entities and activities outside the regular banking system” (FSB (2011): “Shadow Banking: Strengthening Oversight and Regulation, Recommendations”, 27 October, Sect. 1 (available at: http://www.financialstabilityboard.org/2011/10/r_111027a)). In practice, shadow banking entities and activities raise funding with deposit-like characteristics, perform maturity or liquidity transformation, allow credit risk transfer, or use direct or indirect leverage.

    According to these FSB Recommendations, the regulatory measures to be examined by authorities refer to five (5) main aspects:

    • the indirect regulation of banks’ interaction with and shadow banking entities,

    • the regulatory reform of money market funds (MMFs),

    • the regulation of other shadow banking entities, such as hedge funds,

    • the regulation of securitisation, and

    • the regulation of securities financing transactions (SFTs), such as securities lending and repurchase agreements (repos) (ibid., Sect. 3.2).

  21. 21.

    COM/2013/0614 final.

  22. 22.

    COM/2013/0615 final—2013/0306 (COD).

  23. 23.

    According to Article 15, paragraph 3 of Council Directive 93/22/EEC “on investment services in the securities field” (OJ L 141, 11.6.93, pp. 27–46), Member States were prohibited, since 1996, to impose on European Union credit institutions limitations with regard to the provision of investment services. This rule still applies.

  24. 24.

    On this model, see Saunders and Walter [44], pp. 3–9 and 84–126.

  25. 25.

    In extremis, under US federal financial law, banks were, since 1933, not allowed either to provide investment services or to have subsidiaries that offer investment services pursuant to the provisions of the “Glass-Steagall Act”. This law was partly repealed in 1999 with the “Financial Services Modernisation Act” (widely known as ‘Gramm-Leach-Bliley Act’, Public Law 106–102, 113 Stat. 1338).

  26. 26.

    Public Law 111–203, 124 Stat. 1376–2223.

  27. 27.

    The Report is available at: http://bankingcommission.independent.gov.uk.

  28. 28.

    On all these structural banking reforms, see Binder [2], pp. 16–22 and 27–32.

  29. 29.

    For the mandate and list of members, see http://ec.europa.eu/internal_market/bank/docs/high-level_expert_group/mandate_en.pdf.

  30. 30.

    High-Level Expet Group on Reforming the Structure of the EU Banking Sector, Final Report (2012), available at: http://ec.europa.eu/internal_market/bank/docs/high-level_expert_group/report_en.pdf.

  31. 31.

    COM/2014/040 final—2014/0017 (COD). On this aspect, see also Binder [2], pp. 23–27.

  32. 32.

    For an evaluation of this crisis, see indicatively Eichengreen, Feldmann, Liebman, von Hagen and Wyplosz [10], pp. 47–64.

  33. 33.

    It is evident that several institutional developments were related to the enhancement of the European Union Economic Union. By way of mere indication, see on this the Van Rompuy Report [51], and Stephanou [48].

  34. 34.

    The SSM is based on Council Regulation (EU) No 1024/2013 of 15 October 2013 “conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions” (OJ L 287, 29.10.2013, pp. 63–89).

    The institutional framework pertaining to the SSM is further specified in several legal acts of the ECB, containing provisions on the detailed operational arrangements for the implementation of the tasks conferred upon it by Regulation 1024/2013 (for an overview of these acts, see below Table 2). Among them, the most important is Regulation (EU) No 468/2014 of the European Central Bank of 16 April 2014 “establishing the framework for cooperation within the SSM between the European Central Bank and national competent authorities and with national designated authorities (‘SSM Framework Regulation’)” (ECB/2014/17) (OJ L 141, 14.5.2014, pp. 1–50).

    In addition, an Interinstitutional Agreement between the European Parliament and the ECB was also signed in October 2013 “on the practical modalities of the exercise of democratic accountability and oversight over the exercise of the tasks conferred on the ECB within the framework of the Single Supervisory Mechanism” (OJ L 320, 30.11.2013, pp. 1–6).

  35. 35.

    Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014 “establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No 1093/2010” (OJ L 225, 30.7.2014, pp. 1–90). See on this Louis [33].

  36. 36.

    Intergovernmental Agreement of 14 May 2014 “on the transfer and mutualisation of contributions to a single resolution fund” (available at: http://register.consilium.europa.eu/content/out?lang=EN&typ=ENTRY&i=SMPL&DOC_ID=ST%208457%202014%20COR%201).

  37. 37.

    Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 “on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms (…)” (OJ L 176, 27.6.2013, pp. 338–436).

  38. 38.

    Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 “on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012” (OJ L 176, 27.6.2013, pp. 1–337).

  39. 39.

    Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 “establishing a framework for the recovery and resolution of credit institutions and investment firms (…)” (OJ L 173, 12.6.2014, pp. 190–348). On this Directive, see indicatively Binder [1] and [2].

  40. 40.

    For a general overview and a first assessment of the legal sources of the EBU, see Louis [34]), Binder [3], Breuss [7], Ferran and Babis [15], Ferrarini and Chiarella [16], Lastra [28], Wymeersch [52], and Gortsos [19], and Brescia Morra [6].

  41. 41.

    Euro Area Summit Statement, 29 June 2012, first paragraph, first sentence) available at: http://consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131359.pdf).

  42. 42.

    The EFSF was established in June 2010 by a Framework Agreement between the euro area Member States (seventeen (17) at that time) and the EFSF as a temporary crisis resolution mechanism. It has provided financial assistance to Ireland, Portugal and Greece financed through the issuance of bonds and other debt instruments on capital markets. On this facility see: http://www.efsf.europa.eu/about/index.htm.

  43. 43.

    This Treaty is available at: http://www.esm.europa.eu/about/legal-documents/index.htm.

  44. 44.

    For more details on both these facilities, see indicatively the various contributions in Wyplosz, Collignon, Gros and Belke [54].

  45. 45.

    This ESM Resolution is available at: http://www.esm.europa.eu/pdf/Establishment%20of%20the%20instrument%20for%20the%20direct%20recapitalisation%20of%20insti%20.pdf.

  46. 46.

    On the G20 see indicatively Gortsos [21], pp. 134–135.

  47. 47.

    On these capital adequacy frameworks, see indicatively Gortsos [21], pp. 248–281.

  48. 48.

    See for example Borio [5].

  49. 49.

    This was one of the main causes, in the author’s view, of the recent (2007–2009) international financial crisis, at least in some cases. This argument is further analysed in Norberg [39], pp. 1–21, Posner [42], pp. 305–332, and Rajan [43]), pp. 101–119.

  50. 50.

    For an analysis on the correlation between fragmentation and national resolution, see Schoenmaker [45].

  51. 51.

    SSM Regulation, Articles 4 and 5.

  52. 52.

    Ibid., Article 6.

  53. 53.

    See on this Smits [47], pp. 223–288, European Central Bank [11], Lastra and Louis [30], pp. 79–80, and European Parliament [12] with regard to the ECB’s monetary policy throughout the two crises.

  54. 54.

    De Larosière Report (2009), Chapter III, paragraphs 144–218.

  55. 55.

    Ibid., paragraphs 171 and 172, first sentence.

  56. 56.

    International Monetary Fund [25], p. 17.

  57. 57.

    See on this Deutsche Bundesbank [9], p. 22.

  58. 58.

    The concept was first introduced on the Political Guidelines for the next European Commission issued by the, then candidate, President of the European Commission Jean-Claude Juncker on 15 July 2014 (see Juncker [26]). On the mission letter sent on 1 November to the newly appointed Commissioner for Financial Stability, Financial Services and Capital Markets Union Lord Jonathan Hill, Juncker incorporated the project of creating a European Capital Markets Union, alongside the Banking Union, as yet another step towards ending the financial fragmentation in lending markets (see Juncker [27]).

  59. 59.

    See Mersch [36].

  60. 60.

    With regard to the supervisory initiatives to address the international financial crisis, see Smits [46]. See also European Parliament [12] with regard to the ECB’s monetary policy throughout the two crises.

  61. 61.

    CRR, Article 114, paragraph 4.

  62. 62.

    On the key terms of the PSI following the 26 October 2011 Euro Summit, see Hellenic Republic, Ministry of Finance (2012): PSI Launch, Press Release, 21 February. For the final settlement of the PSI, see Hellenic Republic, Ministry of Finance (2012): Press Release, 25 April. See also Gortsos [20], pp. 166–169, and more analytically Zettelmeyer, Trebesch and Gulati [55].

  63. 63.

    On this institution, whose capital has been set at €50 billion from the financial support mechanism for the Greek economy by euro area Member States, the ECB and the IMF, see Gortsos [20], pp. 171–172.

  64. 64.

    SSM Regulation, Articles 10–13. Several provisions of these Articles are further specified by Articles 138–139 and 141–146 of the ECB Framework Regulation.

  65. 65.

    SSM Regulation, Articles 14–15, containing provisions further specified by Articles 73–88 of the ECB Framework Regulation.

  66. 66.

    SSM Regulation, Article 16.

  67. 67.

    Ibid., Article 18, containing provisions further specified by Articles 120–137 of the ECB Framework Regulation.

  68. 68.

    SSM Regulation, Articles 19–21. This aspect is also governed by the majority of the provisions of the Intergovernmental Agreement (8457/14) of 14 May 2014. See on this Louis [32].

  69. 69.

    TFEU, Article 127, paragraph 1, first sentence.

  70. 70.

    This aspect is also governed by the ECB Decision 2014/723/EU of 17 September 2014 “on the implementation of separation between the monetary and supervision functions of the European Central Bank” (ECB/2014/39) (OJ L 300, 18.10.2014, pp. 57–62).

  71. 71.

    Credit institutions and other supervised entities and groups incorporated in a non-participating Member State may become subject to the supervisory authority of the ECB under the provisions of the SSM Regulation once a ‘close cooperation’, as provided for in Article 7, has been established. Such a cooperation is established by an ECB Decision, provided that the requirements laid down in Article 7, paragraph 2 are met. Such non-euro area participating Member States are considered to considered also to be participating Member States for the purposes of the SRM Regulation (Article, 4, paragraph 1).

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Correspondence to Professor of International Economic Law Christos V. Gortsos.

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Gortsos, C.V. The crisis-based European Union financial regulatory intervention: are we on the top of the prudential wave?. ERA Forum 16, 89–110 (2015). https://doi.org/10.1007/s12027-015-0375-2

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Keywords

  • Banking Regulation and Supervision
  • Financial Stability
  • European Banking Union
  • Single Supervisory Mechanism
  • Single Resolution Mechanism
  • European Capital Markets Union