Description
The purpose of this paper by the European Shadow Financial Regulatory Committee
(ESFRC) is to provide an account of the financial crisis in Europe during the period 2010-2013 and an
analysis of how the relevant authorities reacted to the crisis.
Journal of Financial Economic Policy
Regulatory response to the financial crisis in Europe: recent developments
(2010-2013)
Santiago Carbó-Valverde Harald A. Benink Tom Berglund Clas Wihlborg
Article information:
To cite this document:
Santiago Carbó-Valverde Harald A. Benink Tom Berglund Clas Wihlborg , (2015),"Regulatory
response to the financial crisis in Europe: recent developments (2010-2013)", J ournal of Financial
Economic Policy, Vol. 7 Iss 1 pp. 29 - 50
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Regulatory response to the
fnancial crisis in Europe: recent
developments (2010-2013)
Santiago Carbó-Valverde
Bangor University, North Wales, UK
Harald A. Benink
Tilburg University, Tilburg, Netherlands
Tom Berglund
Hanken School of Economics, Helsinki, Finland, and
Clas Wihlborg
Chapman University, Orange, California, USA
Abstract
Purpose – The purpose of this paper by the European Shadow Financial Regulatory Committee
(ESFRC) is to provide an account of the fnancial crisis in Europe during the period 2010-2013 and an
analysis of how the relevant authorities reacted to the crisis.
Design/methodology/approach – These actions included measures taken by central banks,
governments or fscal authorities, and by regulatory or supervisory bodies. In a previous study
covering the regulatory developments during the fnancial crisis up until 2009, issues such as the
implementation of Basel III rules in Europe and the (mostly ad hoc and unilateral) resolution
mechanisms set in most European countries to fght the crisis were covered. This study focuses on
developments since 2010 with a focus on the concerns and actions that emerged with the sovereign debt
crisis in the euro area. In particular, the transition from the European Financial Stability Facility to the
European Stability Mechanism is assessed. The focus after 2012 has progressively turned to the
challenges of the European banking union.
Findings – These issues are jointly covered, along with some updates on the views of the ESFRC on
recent advances in other areas, such as solvency regulation. All in all, the authors fnd that the
weaknesses of the global fnancial system remain to be addressed, and they believe that the banking
union is one of the main tools and opportunities for an improved and effcient crisis management in
Europe.
Originality/value – The paper aims at contributing to the study of fnancial regulation after the
banking crisis. The experience of the euro zone in this context is assessed in this article from a wide
range of perspectives.
Keywords Banks, Regulatory change
Paper type Conceptual paper
1. Introduction and summary
The purpose of this paper by the European Shadow Financial Regulatory Committee
(ESFRC) is to provide an account of the fnancial crisis in Europe during the period
2010-2013 and an analysis of how the relevant authorities reacted to the crisis. These
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1757-6385.htm
Regulatory
response to the
fnancial crisis
in Europe
29
Received26 November 2014
Revised26 November 2014
Accepted9 December 2014
Journal of Financial Economic
Policy
Vol. 7 No. 1, 2015
pp. 29-50
©Emerald Group Publishing Limited
1757-6385
DOI 10.1108/JFEP-11-2014-0071
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actions included measures taken by central banks, governments or fscal authorities,
and by regulatory or supervisory bodies.
In a previous study, covering the regulatory developments during the fnancial crisis
up until 2009 (Litan, 2011), issues such as the implementation of Basel III rules and
resolution mechanisms in Europe were discussed. In this study, we focus on
developments after 2010. The concerns and actions that emerged with the sovereign
debt crisis in the euro area are reviewed. We specifcally pay attention to fscal,
monetary, and institutional developments intended to alleviate the crisis. In particular,
the transition from the European Financial Stability Facility (EFSF) to the European
Stability Mechanism(ESM) is assessed. Following these institutional developments, the
focus after 2012 has gradually turned to the agreements and remaining challenges of the
European banking union. In addition, some updates on the views of the ESFRCon recent
advances in other areas, such as solvency regulation, are covered.
2. The evolution of the crisis in the euro area (2010-2013)
2.1 Emerging problems in 2010
During 2010, the severity of the sovereign debt crisis became progressively more intense
in a number of peripheral countries, in particular. The stability of the whole euro area
was threatened. In response, the policy debate focused on promoting a substantial
reform of the institutional framework underpinning the euro area and, in particular, on
the coordination of fscal policy and fnancial supervision.
The situation of Greece in 2010 deserves specifc attention. Apart from the criticism
of European Union (EU) authorities for their lack of enforcement and support, a great
deal of uncertainty was generated when a number of serious defciencies were found in
the statistical information provided by Greek authorities on their public accounts. This
forced Greece to fnally request EU fnancial assistance in May 2010. At that time, the
amount was €100 billion.
The Greek event revealed that euro-area authorities did not have a proper
institutional structure and coordination for crisis management and resolution. Thus, the
required fnancial assistance had to be designed quickly and would necessarily imply
some degree of improvisation. The aid to Greece was channeled under a program of
bilateral loans from euro-area countries (€80 billion), along with the international
monetary fund (IMF). To counteract the uncertainty that also affected other troubled
European economies, the so-called European Financial Stabilisation Mechanism
(EFSM) was created. To some extent, the EFSM was a result of the lack of effectiveness
of the instruments of coordination and macroeconomic supervision of the euro area at
that moment. The EFSM’s budget of €60 billion was very limited against the projection
of the potential aid needed at that time by Greece and other countries. To address this
limitation, the EFSF was created to grant loans with a maximum guarantee of €440
billion from the euro-area member states. The IMF also co-fnanced the two programs
with a sumequal to up to 50 per cent of the amount drawn fromthe EFSMand the EFSF
by euro-area countries. The role of the EFSMand EFSFwill be covered in depth later on.
2.2 More problems in 2011
Concerns did not disappear with the transition from 2010 to 2011. In April 2011, it was
Portugal that requested the EU-IMF fnancial assistance. The resignation of the Irish
Government – in response to a rejection in parliament of an ambitious fscal adjustment
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plan – precipitated an Irish bailout. Portugal, at the time, exhibited a harsh combination
of imbalances, including the problemof achieving its fscal consolidation objective, high
households’ and frms’ leverage and a loss of private wealth associated with the
corrections in real estate prices. In May 2011, aid to Portugal was approved in the
amount of €78 billion jointly by the EFSF, the EFSM and the IMF (one-third each). As
the previous programs, the aid package was subject to strict conditionality,
In the summer of 2011, the tensions spread from peripheral countries to the whole
euro area. Economic activity was slowing down, revealing the systemic dimension that
the sovereign crisis had gained throughout the euro-area countries. The EFSM and the
EFSF had proved to be insuffcient. In July 2011, the European Council acknowledged
the need for further institutional coordination and fnancial assistance arrangements.
Newpolicies were necessary to guarantee a combination of necessary fscal enforcement
for troubled countries and more realistic conditionality. Coordination was structured
through the so-called Broad Economic Policy Guidelines (BEPGs). However, the BEPGs
turned out to be mostly a political agreement of good intentions based on
information-sharing and a redefnition of objectives. The political problems that
surfaced in Greece and Italy in November did not contribute to a climate of improved
fnancial stability. Concerns about Spain also grew, as the risk premium hit a record of
467 basis points with respect to the German bund. Debt yields across other euro-zone
peripheral countries increased dramatically. The tensions were so strong that when
Germany offered a €6 billion batch of ten-year bonds to the market by November 23, the
offering was signifcantly undersubscribed.
The need for coordination among European Governments increased. By the
beginning of November, the situation forced European Central Bank (ECB) President
Mario Draghi to state that the ECB might be willing to expand its European bond
purchase program if European Governments implemented greater fscal controls. On
December 5, 2011, Standard &Poor’s placed the debt of 15 of the 17 euro-zone nations on
a negative credit watch.
An important milestone in the fght against the sovereign debt crisis was reached on
December 8, when the ECB announced measures to support bank lending and money
market activity by conducting two longer-term refnancing operations with a maturity
of 36 months and the option of early repayment after one year.
2.3 Stabilization in 2012-2013
At the beginningof January2012, ten-year Italianbondyields reachedalevel of 7.12per cent.
On top of the mounting fnancial instability problems, it was confrmed that gross domestic
product (GDP) contracted in the fourth quarter of 2011 in Germany. Also, in January 2012,
Standard & Poor’s cut the ratings of nine euro-zone nations, including that of AAA-rated
France andAustria. InFebruary2012, the ECBagreedtoexchange its Greekbonds at aprice
below par value. By February 21, a new deal was fnally agreed between Greece and its
creditors. Creditors accepted a loss of 53.5 per cent of the face value of their debt. By March
2012, messages were sent bymonetaryauthorities onbothsides of the Atlantic that national
governments had to take the lead for the economic recovery. ECB’s President Mario Draghi
stated that the central bank had done enough to combat the sovereign debt crisis. However,
the economic situation continued to deteriorate, with unemployment surpassing 10 per cent
for the frst time in euro zone history. Evidence of the widening of the crisis was EUfnance
ministers vote to suspend payments to Hungary.
31
Regulatory
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In mid-March 2012, a newpatch was placed on the Greek bailout, with an agreement
to a second bailout program for Greece for €130 billion, jointly funded with the IMF. By
the end of that month, the combined frepower of the (temporary) EFSF and the
(permanent) ESM was raised from €500 billion to €700 billion. At the announcement
date, Greece stated that it might need a third bailout.
As the summer of 2012 was approaching, concerns turned to the situation of Spanish
banks. On May 11, Spain announced that banks in the country were going to be required
to set provisions by around €30 billion to cover €123 billion of real estate loans, and that
the country was going to launch its own stress tests conducted by independent auditors.
Also, in May 2012, the ECB decided to stop lending to some banks in Greece to limit its
risk exposure to the troubled country. By the end of the month, Spain announced the
biggest individual bank bailout on record in the country, the one of Bankia, and Spanish
credit default swaps soared after the announcement.
While conversations on the European banking union were starting to take shape in
2012, the EU was taking a more realistic approach on the conditionality imposed on
troubled euro-zone countries with a two-year extension given to Greece for its fscal
adjustment commitments.
During November and December, tensions progressively eased in sovereign debt
markets, in spite of Draghi’s warning that the European sovereign debt crisis was far from
over. During the frst months of 2013, sovereign debt yields in peripheral countries went
signifcantly down, but there were some new concerns emerging from the Cypriot crisis.
While the problems of Cyprus were evident more than a year earlier, a major concern froma
European perspective surfaced in March 2013. On March 16, 2013, the euro group, the
European Commission, the ECB and the IMF agreed a €10 billion deal with Cyprus.
However, as part of the deal, a deposit levyof 6.7 per cent for deposits upto €100,000 was set,
along with a 9.9 per cent levy for larger amount deposits. The hair cut on deposits below
€100,000 triggered concerns on deposit runs and likely contagion effects in other EU
countries. Inresponse, onMarch25, the Cyprus Government, the euro-zone fnance ministers
and the IMF announced a new plan to preserve all insured deposits of €100,000 or less
without a levy, the shut down of Laiki Bank, with a levy for all uninsured deposits of that
bank and of 40 per cent of uninsured deposits in Bank of Cyprus.
Eliminating the uncertainties created by the mismanaged resolution of the Cypriot
case required a signifcant effort. Still the spring of 2013 saw a substantial decrease in
fnancial tensions. The relative improvement of macroeconomic conditions, along with
the maintenance of ambitious fscal adjustment programs, the progress in the
recapitalization and restructuring of banking systems and structural reforms in the
labor market and in services markets brought some further stability and improved
growth estimation prospects.
Table I shows that the euro zone left recession in the second quarter after six
quarters. Euro-zone countries grew by 0.3 per cent during the second quarter of 2013,
compared with the previous quarter, according to Eurostat. Compared with the same
quarter of the previous year, seasonally adjusted GDP fell by 0.6 per cent in the euro
zone. Portugal recorded the highest growth compared with the previous quarter
(?1.1 per cent), followed by Germany, Lithuania, Malta and the United Kingdom (all
?0.7 per cent). Cyprus (?1.8 per cent), Slovenia and Italy (both ?0.3 per cent) registered
the largest decreases.
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Table I.
GDP growth in
euro-area and EU
countries
Country
Percentage change compared with
the previous quarter
Percentage change compared with the
same quarter of the previous year
2012 2013 2012 2013
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
EA-17 ?0.1 ?0.5 ?0.2 0.3 ?0.7 ?1.0 ?1.2 ?0.6
EU-27 0.0 ?0.4 ?0.1 0.3 ?0.5 ?0.7 ?0.8 ?0.2
EU-28 0.0 ?0.4 ?0.1 0.3 ?0.5 ?0.7 ?0.8 ?0.2
Belgium 0.0 ?0.1 0.0 0.2 ?0.4 ?0.5 ?0.6 0.0
Bulgaria 0.1 0.1 0.1 ?0.1 0.7 0.6 0.4 0.2
Czech Republic ?0.3 ?0.3 ?1.3 0.6 ?1.2 ?1.4 ?2.3 ?1.3
Denmark 0.8 ?0.6 ?0.2 0.6 0.0 ?0.4 ?0.8 0.6
Germany 0.2 ?0.5 0.0 0.7 0.9 0.3 ?0.3 0.5
Estonia
b
1.3 0.5 ?0.1 ?0.2 3.5 4.9 1.3 1.0
Ireland ?0.8 ?0.2 ?0.6 0.4 ?0.5 ?1.0 ?1.1 ?1.1
Greece
b
– – – – ?6.7 ?5.7 ?5.6 ?3.8
Spain ?0.4 ?0.8 ?0.4 ?0.1 ?1.7 ?2.1 ?2.0 ?1.6
France 0.2 ?0.2 ?0.1 0.5 0.0 ?0.3 ?0.5 0.4
Croatia
b
?0.3 ?0.4 0.0 ?0.2 ?1.9 ?2.3 ?1.5 ?0.7
Italy ?0.4 ?0.9 ?0.6 ?0.3 ?2.8 ?3.0 ?2.5 ?2.2
Cyprus ?0.8 ?1.5 ?1.7 ?1.8 ?2.2 ?3.6 ?4.9 ?5.7
Latvia 1.8 0.8 1.8 0.1 5.0 5.4 6.7 4.6
Lithuania 1.7 0.7 1.1 0.7 3.8 3.4 4.1 4.2
Luxembourg ?0.2 2.2 ?1.6 – ?0.3 1.6 1.0 –
Hungary 0.0 ?0.5 0.6 0.1 ?1.7 ?2.5 ?0.5 0.1
Malta 0.6 0.2 0.1 0.7 1.4 1.5 1.9 1.6
Netherlands
b
?0.9 ?0.6 ?0.4 ?0.1 ?1.5 ?1.5 ?1.4 ?1.7
Austria
d
0.1 ?0.1 0.1 0.1 0.7 0.6 0.3 0.1
Poland 0.4 0.1 0.2 0.4 1.7 0.8 0.7 1.1
Portugal ?0.8 ?1.9 ?0.4 1.1 ?3.6 ?3.8 ?4.1 ?2.1
Romania ?0.5 1.0 0.4 0.5 ?1.1 0.8 2.3 1.4
Slovenia ?0.4 ?1.0 ?0.5 ?0.3 ?2.8 ?3.2 ?3.2 ?2.2
Slovakia 0.2 0.1 0.2 0.3 1.9 1.0 0.8 0.8
Finland ?0.3 ?0.8 ?0.2 0.2 ?1.6 ?2.2 ?2.8 ?1.1
Sweden 0.2 ?0.2 0.3 ?0.2 0.6 1.8 1.3 0.1
United Kingdom 0.6 ?0.3 0.4 0.7 0.0 ?0.2 0.2 1.3
Iceland 4.1 0.3 4.4 ?6.5 1.3 1.0 2.3 1.9
Norway ?0.5 0.2 ?0.1 0.8 1.8 1.8 0.0 0.4
Switzerland 0.7 0.3 0.6 0.5 1.4 1.4 1.5 2.1
USA 0.7 0.0 0.3 0.6 3.1 2.0 1.3 1.6
Japan ?0.9 0.3 1.0 0.9 0.4 0.3 0.1 1.3
Notes: Data not available;
a
The seasonal adjustment does not include a working-day correction for
Ireland, Portugal, Romania and Slovakia;
b
Percentage change compared with the same quarter of the
previous year calculated from non-seasonally adjusted data;
c
Percentage change compared with the
same quarter of the previous year calculated from working-day adjusted data;
d
Growth rates are
calculated using the trend component;
Source: Eurostat
33
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In May 2013, Excessive Defcit Procedures deadlines were postponed for some
economies including those of Spain, France, Slovenia, Portugal and The Netherlands.
Also, in May, the ECB decided to reduce the offcial rate by 0.25 percentage point to 0.5
per cent, and the marginal lending facility to 1.0 per cent, as well as to narrow the
corridor defned by the latter and the interest rate on the deposit facility, which remained
at zero.
The combination of fscal consolidation and monetary policy support was the main
strategy still in 2013. As noted by some analysts (Buti and Padoan, 2013), remaining
interest rate differentials suggested that downside risks could not be ruled out, and the
effcacy of fscal austerity policies remained under question by investors.
3. Crisis management
3.1 Monetary policy leadership
As tensions spread during the summer of 2012, in particular, the “whatever it takes”
statement brought some relief to the tensions in European debt markets. The promise of
support from the ECB was made even more explicit when the Outright Monetary
Transactions (OMT) programwas announced in September 2012. This was followed by
a series of announcements during 2013, in which the ECB forcefully emphasized that:
• the commitment of monetary policy to low interest rates and expansionary
liquidity actions is a long-term one; and
• there is signifcant downside risk that is threatening the so-far weak economic
recovery in the euro zone.
Later events show that the OMT apparently has been effective as a signaling device.
Remarkably, the need to actually implement it has not materialized. As shown in some
recent analyses, the OMT has not only contributed to calm the markets but also
triggered some questions with respect to its fscal implications. As shown in a recent
analysis by De Grauwe and Ji (2013), ECB bond buying transforms public bonds into
monetary base, and sovereign-default risk into infation risk. Ultimately, the important
question is: what is the non-infationary limit to monetary base expansion with these
types of programs?
3.2 EU governance efforts and the frewall mechanisms
3.2.1 Reforming the stability and growth pact. The sovereign debt crisis has shown the
existence of structural weaknesses in the institutional architecture of the monetary
union. The design of the euro zone as a monetary union was originally based on the
principle of subsidiarity that implied substantial decentralization and unilateralism in
economic and fnancial policies. However, the fnancial crisis has made clear the
inconsistencies of sharing a currency if such monetary union is not accompanied by
coordination in fscal policies. Such inconsistencies have been acknowledged in the past
few years, although the different efforts to correct them have had a limited scope.
In practical terms, the changes implemented initially consisted of a reform of the
so-called Stability and Growth Pact (SGP). These reforms consisted, frst, of the creation
of a “Six-Pack” system, then a “Two-Pack” system and, ultimately, the “Fiscal
Compact”.
SGP was initially approved in 1997. In 2011, the Six-Pack reform was aimed to
address:
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[…] gaps and weaknesses in the framework identifed during the recent economic fnancial
crisis […] and strengthen both the fscal surveillance and enforcement provisions of the SGP
by adding an expenditure benchmark to review countries’ fscal positions, making the
Treaty’s debt criterion operational, introducing an early and gradual system of fnancial
sanctions for euro-area member states, and requiring new minimum standards for national
budgetary frameworks (European Commission, 2014a).
The evolution of the sovereign debt crisis revealed that further efforts were needed for
additional enforcement and coordination on the fscal side of economic policies within
the euro zone. This gave rise to the so-called Two-Pack regulations, which were released
in May 2013. They introduced additional surveillance and monitoring procedures to the
Six-Pack reforms. The Two-Pack reforms set a common and more comprehensive
surveillance regime for countries in the Economic and Monetary Union (EMU) with a
particular focus on the countries experiencing serious fnancial stability problems.
Following the Six-Pack and Two-Pack reforms, the Fiscal Compact is the other main
effort to revise the SGP over the past few years. The Fiscal Compact requires member
states to enshrine in national law a balanced budget rule with a lower limit of a
structural defcit amounting to 0.5 per cent of GDP. During 2010-2013, there have also
been efforts to set longer-term objectives, and probably the most important one is the
so-called euro-Plus pact, which sets the Europe 2020 strategy. The euro-Plus pact was
adopted by the European Council in December 2011. It sets ambitious goals for 2020, i.e.
to have 75 per cent of the population aged 20-64 years employed along with goals related
to environmental and social issues. To provide for a better coordination of the various
economic policy decisions under this new framework, it was agreed to set up the
European Semester. This takes place during the frst six months of each year and will
conclude with the formulation of specifc fscal, macroeconomic and structural
recommendations for each country.
3.2.2 Common fnancial support mechanisms. The setting of intergovernmental
support mechanisms between 2010 and 2013 sawan initial milestone in May 2010, when
the EU member states established the EFSF.
The EFSFprovides a partial protection certifcate to newly issued bonds of a member
state. The certifcate gives the holder a fxed credit protection of 20-30 per cent of the
principle amount of the bond. Additionally, a co-investment fund is also possible to
allow a combination of public and private funding which would then be used to
purchase bonds on either the primary and secondary markets on behalf of a benefciary
member state.
In October 2010, it was decided to create a more permanent rescue mechanism, the
ESM, which had to be effective by October 2012. The ESMwas launched as a permanent
bailout mechanism for euro-area member states. From that date, the ESM became the
main instrument to fnance new programs, substituting for the EFSF, although these
two previous mechanisms continued their operations to complete the on-going
programs for Greece, Portugal and Ireland. The ESM is a permanent international
fnancial institution that issues bonds or other debt instruments on fnancial markets to
raise capital to provide assistance to member states. Unlike the EFSF, it is not a system
of guarantees.
The ESM-subscribed capital of €700 billion is provided by euro-area member states.
A total of €80 billion of this is in the form of paid-in capital, and the remaining €620
billion is “callable” capital. This subscribed capital provides a lending capacity for the
35
Regulatory
response to the
fnancial crisis
in Europe
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(
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ESMof €500 billion. The ESMcan be activated upon a request froma member state, and
it is always attached to conditionality measures. Following the ESM Pricing Policy, a
margin of 30 basis points was applicable to the Financial Institutions Recapitalisation
Facility for Spain. The frst disbursement under the Spanish facility was made on
December 11, 2012, for a total amount of €39.5 billion on ESM bonds. The bonds were
provided to the Bank of Spain and transferred to the Spanish Fund for Orderly
Resolution of Banks (FROB). The FROB used them for two groups of banks, as defned
in the Memorandum of Understanding for fnancial assistance: “Group 1 banks” were
four fnancial institutions that were nationalized and the Spanish bad bank SAREB, the
asset management company set to transfer the impaired assets of troubled Spanish
banks[1]. “Group 2 banks included four banks requiring recapitalization. The Financial
Assistance Facility Agreement for Spain specifes that its obligations under the
Financial Institutions RecapitalisationFacility signedwith the ESMwill rank pari passu
with all other present and future unsecured and unsubordinated loans and obligations of
the benefciary member state arising from its present or future relevant indebtedness.
The second disbursement under the Spanish facility was made on February 5, 2013,
for a total amount of €1.86 billion, again through the delivery of ESM bonds. The
funding was used to recapitalize four Group 2 banks, which could not reach the required
capital levels through other means (Group 2 banks). The capital injections made by the
FROBin both Groups 1 and 2 banks were done either in tangible capital or in contingent
convertible bonds.
4. Regulatory reform initiatives: solvency, common supervision and
resolution frameworks
This section addresses the main regulatory initiatives for fnancial regulation in the EU.
Over the past few years, the ESFRC has particularly focused on two areas of reform:
(1) The bank solvency regulation and the related initiatives for a full adoption of
Basel III.
(2) The proposals for a Europeanbankingunion, includingthe commonsupervision
and resolution framework, a project that has probably become the most
important regulatory initiative to be implemented in the euro zone in the next
few years.
Given the broad scope of current fnancial regulation challenges – in part, as a response
to the fnancial crisis – we also offer a broad view of other regulatory initiatives, their
scope and their status in Table II, distinguishing between the banking sector, the
insurance sector and fnancial markets.
4.1. Structural regulation
There are currently different approaches and proposals on both sides of the Atlantic on
how to put many of these measures together to create a new fnancial system
architecture that may prevent systemic events and future crisis. Probably, the three
most prominent ones are the Volcker rule for US banks, the Vickers report for UKbanks
and the Liikanen EU bank report. Recovery and resolution plans (“living wills”) belong
to this category of reforms as well, as they are intended to induce banks to simplify their
organizational structures.
JFEP
7,1
36
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2
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(
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)
Table II.
Selected regulatory
initiatives in the EU
Banking sector
CRR/CRD IV Although certain elements of the CRR/CRD IV package are still subject to
fnalization and recalibration, a signifcant number of policy tools are
already available for macro-prudential authorities. Many of these policy
tools can be considered as standard micro-prudential instruments used for
macro-prudential purposes and being in line with international standards,
in particular the Basel Committee’s new global standards for capital and
liquidity (Basel III). In addition to defning a set of instruments that
macro-prudential authorities can apply to address risks to fnancial
stability, the CRR/CRD IV package also sets out strict notifcation and
coordination mechanisms for authorities. Importantly, most of these
instruments will also be available for the ECB when acting in its capacity of
a macro-prudential authority in the EU
SSM regulation The regulation establishes an SSM with strong powers for the ECB (in
cooperation with national competent authorities) for the supervision of all
banks in participating member states (euro-area countries and
non-euro-area member states which join the system)
Bank recovery and
resolution directive
(BRRD)
The BRRD sets out a resolution framework for credit institutions and
investment frms, with harmonized tools and powers relating to prevention,
early intervention and resolution for all EU member states
SRM regulation The SRM regulation establishes a single system, with a single resolution
board and single bank resolution fund, for effcient and harmonized
resolution of banks within the SSM. The SRM would be governed by two
legal texts: the SRM regulation covering the main aspects of the mechanism,
and an Intergovernmental Agreement related to some specifc aspects of the
Single Resolution Fund
DGS directive The DGS Directive deals mainly with the harmonization and simplifcation
of rules and criteria applicable to deposit guarantees a faster payout, and an
improved fnancing of schemes for all EU member states
Insurance sector
Solvency II Directive/
Omnibus II Directive
The Solvency II Directive is the framework directive that aims to harmonize
the different regulatory regimes for insurance corporations in the European
Economic Area. Solvency II includes capital requirements, supervision
principles and disclosure requirements. The Omnibus II Directive aligns the
Solvency II Directive with the legislative working methods introduced by
the Lisbon Treaty, incorporates new supervisory measures given to the
European Insurance and Occupational Pensions Authority and makes
technical modifcations
Financial markets
The European Market
Infrastructure
Regulation
The regulation aims to bring more safety and transparency to the over-the-
counter derivatives market and sets out rules, inter alia, for central
counterparties and trade repositories
Regulation on improving
the safety and effciency
of securities settlement
in the EU and on central
securities depositories
The regulation introduces an obligation of dematerialization for most
securities, harmonized settlement periods for most transactions in such
securities, settlement discipline measures and common rules for central
securities depositories
(continued)
37
Regulatory
response to the
fnancial crisis
in Europe
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A good summary of the main provisions of these regulatory initiatives and their
differences has been published by the IMF (Viñals et al., 2013), and is summarized in
Table III. Although we do not cover these initiatives extensively – as this is not the
purpose of this chapter – it is worthwhile to note some highlights of each of them:
The Volcker rule bans fnancial institutions from proprietary trading, and it is
somehow seen as a “modern” Glass-Steagall Act. The Volcker reform restructures the
US fnancial regulatory system to restore public confdence and states that banks must
make decisions regarding their corporate structures and their activities, including how
to deal with their existing investments in equity and hedge funds:
• In the UK, Sir John Vickers’s proposals place retail and small and medium-sized
enterprises (SME) deposits in ring-fenced subsidiaries, and riskier trading
business outside the fence. The reform gives banks fexibility in deciding which
part of the business should be ring-fenced and operated as a separate entity.
• As for the Liikanen report, it recommends that EU banks’ trading businesses be
placed in separate subsidiaries, fencing off the risky trading arm of the bank. It
also requires banks to hold more capital against riskier businesses and to hold
debt that could be turned into equity to recapitalize an ailing bank. The report
includes recommendations that a portion of bankers’ compensation is in the form
of “bail-in” debt issued.
4.2 Solvency requirements
The main efforts to reform the solvency regulation of European banks are being made
through the so-called Capital Requirements Regulation and Directive (CRR/CRD IV).
This directive, which has been subject to several changes over the past few years, aims
at implementing the Basel Committee’s capital and liquidity framework for
internationally active banks (the so-called Basel III) in the EU.
The CRR/CRDIVproposal includes stricter macro-prudential requirements on banks
to address increased risks to fnancial stability as the ones that have been seen during
Table II.
Financial Instruments
Directive and Regulation
(MiFID II/MiFIR)
The proposals will apply to investment frms, market operators and
services providing post-trade transparency information in the EU. They are
set out in two pieces of legislation: a directly applicable regulation dealing,
inter alia, with transparency and access to trading venues, and a directive
governing authorization and organization of trading venues and investor
protection.
Money market fund
regulation
The proposal addresses the systemic risks posed by this type of investment
entity by introducing new rules aimed at strengthening their liquidity
profle and stability. It also sets out provisions that seek, inter alia, to
enhance their management and transparency, as well as to standardize
supervisory reporting obligations
Regulation on reporting
and transparency of
securities fnancing
transactions
The proposal contains measures aimed at increasing the transparency of
securities lending and repurchase agreements through the obligation to
report all transactions to a central database. This seeks to facilitate regular
supervision and improve transparency towards investors and on re-
hypothecation arrangements
Source: European Central Bank, Financial Stability Review, May 2014, and own elaboration
JFEP
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Table III.
Comparing the
structural reform
proposals
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39
Regulatory
response to the
fnancial crisis
in Europe
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the fnancial crisis. These measures include a broad range of issues, such as the level of
capital, liquidity requirements, large exposure requirements, the level of the capital
conservation buffer, public disclosure requirements, intra-fnancial sector exposures
and risk weights for assets.
The structure of the requirements is summarized in Figure 1.
The CRR/CRD IV also includes the implementation of a liquidity coverage ratio by
2018.
Although the basic features of implementing the CRD and CRR have been already
covered by the ESFRC in a previous publication (Litan, 2011), the most recent
developments noted above, in particular those referring to the CRD IV, will imply
additional signifcant efforts frommember states that deserve some attention. As noted
by the European Banking Authority (EBA) (2013), there are areas of the CRD IV where
the degree of discretion by member states will be larger than others. In particular, this
affects responsibilities of national authorities in areas such as authorization,
supervision, capital buffers and sanctions and requirements on internal risk
management. Others, however, will have necessarily to take the form of a regulation as
the provisions on calculating capital requirements (Table IV):
The CRR also incorporates some specifc features which are not mandated by Basel III
regulations. In particular, the “Single Rulebook” will eventually become the frst single set of
harmonized prudential rules throughout the EU. According to the European Commission
(2014b): this will ensure uniform application of Basel III in all member states, it will close
regulatory loopholes and will thus contribute to a more effective functioning of the Internal
Market. The new rules remove a large number of national options and discretions from the
CRD, and allows member states to apply stricter requirements only where these are justifed
by national circumstances (e.g. real estate), needed on fnancial stability grounds or because of
a bank’s specifc risk.
Figure 1.
Structure of
CRD/CRR
requirements
JFEP
7,1
40
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Even if a single rulebook will probably eliminate some sources of potential
heterogeneous application of the CRD rules, some level of discretion will always apply.
This has been recognized by European authorities and made clear by the European
Commission. As shown in Table V, some fexibility is guaranteed.
Meanwhile, it is important to note that given the calendar set for the main
requirements, banks are already adjusting progressively to these requirements. As
shown in Figure 2, the Bank for International Settlements (BIS) estimates (Cohen, 2013)
that the adjustment is being done both by increasing capital and by reducing
risk-weighted assets. In the advanced economy banks, roughly three-quarters of the
overall increase of 3.0 per cent corresponds to higher capital, while the rest resulted from
a decline in risk-weighted assets. In Europe, the change in capital is around 2.0 per cent,
with more than half of the change being explained by reduction of risk-weighted assets,
and the rest by capital increases.
The BIS estimates for Europe are in line with those of the European Central Bank
(Figure 3). In particular, in the Financial Stability Review of May 2013, the ECB noted
that:
[…] according to the banks’ responses, these regulatory changes had induced a number of the
banks to reduce their risk-weighted assets (especially related to riskier loans) and to increase
nominal capital levels (via retained earnings and the raising of newcapital). At the same time,
a number of banks indicated that the new and more stringent regulatory requirements had
contributed to the net tightening of their credit standards (and the increase in lending margins)
observed over the past two years.
4.3. Supervision and resolution mechanisms: the banking union
The European banking union was originally designed as a tool for crisis prevention.
However, it has been recently discussed as a more ample project, with several
implications for fnancial stability in several ways, including the transmission of
banking shocks across Europe and the development of sovereign crises. In fact, most
international observers see fnancial market fragmentation and ad hoc domestic bank
bailouts, and bail-in policies as a key source of vulnerability for the euro zone as a whole.
Somehow, the banking union project follows up on the efforts made in Europe to better
design the fnancial safety net, comprising the set of regulations and supervision rules
and bodies dealing with fnancial stability in the EU. The most important effort in this
sense was the set of proposals of the so-called Larosière group in 2009.
Table IV.
Less prescriptive and
high prescriptive
provisions of the
CRD IV directive/
CRR regulation
Directive (strong links with national law, less
prescriptive)
Regulation (detailed and highly prescriptive
provisions establishing a single rule book)
Access to taking up/pursuit of business Capital
Exercise of freedom of establishment and free
movement of services Liquidity
Prudential supervision Leverage
Capital buffers Counterparty credit risk
Corporate governance
Sanctions
Source: European Banking Authority
41
Regulatory
response to the
fnancial crisis
in Europe
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During 2012 and 2013, there were several proposals made to progress on these goals.
However, the theoretical design goes much further than the political consensus and the
practice.
One way of showing the status of the banking union is comparing the theoretical
designs with the current developments, as shown in Figure 4. The current situation is
described on the left-hand side of the exhibit, with fnancial fragmentation (different
Figure 2.
Sources of changes in
bank capital ratios
(2009-2012)
Normalized to
percentage points of
end-2009
risk-weighted assets
Figure 3.
Impact of CRD IV
and other changes in
regulatory
requirements on
banks’ risk-weighted
assets and capital
position
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domestic fnancial conditions), multiple banking supervision and deposit guarantee
frameworks and decentralized resolution mechanisms. At the right-hand side of the
exhibit, we depict the desired structure of a strong banking union with a single
supervisor with ample powers, a single resolution authority (including common bail-out
and bail-in mechanisms), the harmonization of the necessary legal environments (even
including the EU Treaty) and a system that prevents the too-big-to-fail problem for
systemic fnancial institutions. However, the situation is still far from the desired
outcome. The current status of the project is somehow closer to the structure shown in
the central column of Figure 4(a) weak union with a single supervisor, a net of domestic
resolution authorities with little integration, little consensus on bail-out measures and
the problemof legacyassets – whichconsists of howto deal withthe losses of the current
crisis – likely to be assumed by each domestic counterpart.
The conclusions of the Council (European Council, 2013) suggest that: in the short
run, the key priority is to complete the Banking Union in line with the European Council
conclusions of December 2012 and March 2013. This is essential to ensuring fnancial
stability, reducing fnancial fragmentation and restoring normal lending to the
economy.
The Council mentions the following three main goals in the short run:
(1) A new Single Supervisory Mechanism (SSM);
(2) the transition toward the SSM, where the Council suggests that a balance sheet
assessment will be conducted, comprising an asset quality review (AQR) and
subsequently a stress test; and
(3) an operational framework for the direct bank recapitalization by the ESM as
agreed by the euro group.
In the current discussions within the EU, the main resolution measures would include:
• Bail-in measures (the imposition of losses, with an order of seniority, on
shareholders and unsecured creditors);
• the sale of (part of a) business;
• establishment of a bridge institution (the temporary transfer of good bank assets
to a publicly controlled entity); and
• asset separation (the transfer of impaired assets to an asset management vehicle).
Figure 4.
The theoretical
progress to a strong
banking union
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Bail-in mechanisms are essential, as they establish the necessary liability responsibility
scheme to face the losses of bank resolution mechanisms before tapping public funds
(i.e. imposing part of the losses on the taxpayers). Under the current European Council’s
general approach, eligible deposits from natural persons and micro, SMEs, as well as
liabilities to the European Investment Bank would have preference over the claims of
ordinary unsecured, non-preferred creditors and depositors from large corporations.
The deposit guarantee scheme (DGS), which would always step in for covered deposits
(i.e. deposits below €100,000), will have a higher ranking than eligible deposits. Other
liabilities that would be permanently excluded from bail-in are covered deposits,
secured liabilities (i.e. covered bonds), liabilities to employees of failing institutions
(salary and pension benefts), commercial claims relating to goods and services critical
for the daily functioning of the institution; liabilities arising from a participation in
payment systems which have a remaining maturity of less than seven days; and
inter-bank liabilities with an original maturity of less than seven days.
There are other key ingredients where the progress has been much more limited. In
particular, the mechanisms for bank recapitalizations, which has been set as very
restrictive and quantitatively limited. The current agreement is to set up ex-ante
resolution funds to ensure that the resolution tools can be applied effectively. These
national funds would have to reach, within ten years, a target level of at least 0.8 per cent
of covered deposits of all the credit institutions authorized in their country. To reach the
target level, institutions would have to make annual contributions based on their
liabilities, excluding own funds, and adjusted for risk. A frst exemption to this rule is
that member states to establish their national fnancing arrangement through
mandatory contributions without setting up a separate fund. The member states
following this alternative would have to raise at least the same amount of fnancing and
make it available to their resolution authority immediately upon its request. This
alternative seems quantitatively equivalent to a common resolution framework but, in
practical terms, involves more fragmentation and lack of centralized control.
5. Concluding remarks: the path toward European banking union
As recently noted by analysts, given the uncertainties and the risks that complicate the
path toward European banking union:
[…] it is advisable to conceive its implementation with realismand prudence, thus avoiding to
nourish illusions that could backfre, abruptly interrupting the gradual transition to a unifed
banking system, compromising the credibility of European policies and bureaucracy and
generating new fnancial instability (Bruni, 2013).
This diffcult transition with mixes of political and economic features has been
described by the Bruegel group, as shown in Figure 5, suggesting that a full
implementation introduces some uncertainty about the deadlines because it will
probably require a change in the EU Treaty (Véron, 2013).
The ESFRC (ESFRC, 2012) has described these challenges as a combination of short-
and long-term crisis management tools. In this sense, it has been unfortunate that
European crisis management became a hostage to the negotiations to create a European
banking union in the past few years. Crisis management requires prompt action to
allocate losses in asset values, whereas the European banking union is a longer-term
project to enhance integration, effciency and stability of fnancial markets and
institutions. The solutions to the present crisis should not be made conditional on
45
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agreement with respect to controversial aspects of the banking union. In the longer term,
there are substantial potential benefts from a European banking union, but the
implementation of its components (supervision, recovery and resolution procedures and
pan-European deposit insurance) must be considered carefully froman economic as well
as a legal point of view. The advantages of shifting responsibility for banking
supervision from the national to the EMU level are that an EMU supervisor can apply
consistent standards across the union, conficts of interest between national supervisors
in host- and home countries of cross-border banks can be avoided, costs of dealing with
several supervisors can be reduced and “regulatory capture” of national supervisors by
large systemically important fnancial institutions on the national level becomes less
likely. Furthermore, the de-nationalization of supervision reduces national
fragmentation of fnancial markets and improves the transmission mechanism for
monetary policy within the euro zone.
A harmonized regime for recovery and resolution would reduce fragmentation
further. Incorporation of bail-ins in the resolution regime would reduce the risk that
excessive bank risk-taking creates sovereign risk. However, there are substantial
hurdles to overcome before a common regime for recovery and resolution can be
realized. In the short term, an agreement to implement recovery and resolution
procedures on the national level should be suffcient from the perspective of short-term
crisis management. In the longer term, the issue of how to coordinate the role of the
common supervisor with national recovery and resolution procedures must be solved.
As for the current situation, the ESFRC (2013) notes that fve years after the Lehman
Brothers bankruptcy that contributed to the deepening of the fnancial crisis, a
European banking union seems more urgent than ever. In Europe, the banking union is
envisioned as a remedy to these problems. It would create entities for supervision and
resolution with authority and capacity to deal with the largest banks in the euro zone
with a minimum demand for taxpayer involvement. The too-big-to-fail problem would
be addressed by the creation of a mechanismfor resolution that would allocate losses to
shareholders, as well as unsecured creditors of the banks, in a pre-determined and
predictable order. This “bail-in” mechanism would also alleviate the distortion of
risk-taking incentives of banks with access to excessively cheap funding fromcreditors
expecting to be bailed out.
Figure 5.
The bridge toward a
European banking
union
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The progress to the envisioned full banking union is slowfor reasons that are easy to
understand and entirely predictable. So far, there is an agreement on the SSM for the
largest 130-150 banks in the euro area and other EU countries that will voluntarily join
the mechanism. This is an important frst step, but without effective resolution
mechanisms on the national or the EU level, the objectives of the banking union cannot
be achieved. Although the agreement that the ECB will become the single banking
supervisor in November 2014 is an important step, it is still not clear howto achieve the
important objectives which the banking union is expected to reach. These objectives
need to be addressed urgently, but the EU’s Recovery and Resolution Directive sets a
deadline of 2016 for national resolution mechanisms with bail-in provisions to be in
place. In the meantime, there will be ambiguity with respect to the consequences of the
supervisor’s fndings. In particular, bail-outs are likely to remain the rule for resolving
large banks in distress, or bail-ins will be ad hoc and politically tainted, as in the Cyprus
case.
According to press information from the EU ministers of fnance meeting in Vilnius
in September 2013, the fnal institutional form of the banking union and, in particular,
the controversial question of which institution should be the common resolution
authority were debated. This is an important question, but it is not the most urgent one.
More urgent, in our assessment, is another question: howcan the agreement on the SSM
be leveraged to solve the current urgent problems of fragility and fragmentation in the
euro zone? To address this question, the ESFRC makes the following observations on
the three overlapping phases that defne the currently envisioned road to the European
banking union.
5.1 Phases 1 and 2
The AQRand national resolution and recovery procedures: it is clearly important for the
ECB to have a clear viewof the strengths and weaknesses of the banks, particularly the
large ones, when it takes over the responsibility for supervision in 2014. Having a sound
informational basis is evidently important for a supervisor that needs to be taken
seriously. Moreover, it would be detrimental to the reputation of the ECB in its new
supervisory role if a major bank would collapse only shortly after it has taken on its new
role. The AQR is likely to have consequences. It is possible and not unlikely that the
review reveals that many banks are in a worse condition than it is generally believed. If
so, steps must be taken to write off asset values and/or increase their equity capital.
Some banks may have to be closed down or resolved in such a way that contagion effects
are minimized. At present, the ECB is not in a legal position to request – and enforce –
measures to alleviate such situations. Thus, the ECB can fnd itself in the awkward
position of starting its supervisory role with problem banks under its purview without
the means to take effective action.
The ESFRC recommends that the effective implementation of resolution and
recovery procedures, following a bail-in mechanism based on the Recovery and
Resolution Directive or the adoption of a temporary intervention law, must exist when
the results of the AQR become available. The ECB should not accept supervision of
banks fromcountries without effective procedures. It lies in the strong interest of banks
to be supervised by the ECB, and therefore, they can be expected to put pressure on
national legislatures to act. The reputation effect for banks being shut out from ECB
supervision can be strong. Finally, we note that the AQR should not be conceived and
47
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implemented in the narrow sense that the term “asset quality review” suggests. The
quality assessment should also address the viability of a bank’s business model and its
governance structure.
As for the issue of complex cross-border banks, an important lesson fromthe Lehman
Brothers bankruptcy is that great value losses can occur in insolvency proceedings
when there are jurisdictional conficts and the fnancial institution is opaque. In the case
of Lehman Brothers, the bankruptcy of its US entities went relatively smoothly, but the
bankruptcy of its subsidiaries in several jurisdictions was costly and time consuming.
The main reason why substantial and unnecessary losses occurred was that the legal
organization of Lehman Brothers did not resemble its operational and functional
organization. The operations of its legally separate subsidiaries were tightly integrated,
with the consequence that subsidiaries found themselves cash strapped when the parent
went bankrupt. Assets associated with activities in one subsidiary could be booked in
another subsidiary. European cross-border banks are generally operating as
subsidiaries in host countries, in spite of close operational and functional integration.
The host country banks operate as de facto branches, in spite of being separate legal
entities under host country jurisdiction.
The resolution of a cross-border bank in the EU will, for these reasons, encounter
exactly the problems of Lehman Brothers if responsibility for resolution is entirely a
national responsibility. The banking union in its complete formrepresents a remedy for
this problem, but in the phases before a Single Resolution Mechanism(SRM) has become
reality, the Lehman problem will exist. The Recovery and Resolution Directive requires
national resolution authorities to address this issue, but it offers no specifc solution,
except that resolution authorities in host- and home countries should cooperate. The
conficts among these authorities are not easily resolved, however, if the bank in distress
is opaque and de facto organized as a bank with several branches.
The jurisdictional conficts can be minimized with a requirement that host
country subsidiaries must be operationally separable from a distressed home bank
within 24 hours. New Zealand has such a requirement as a part of its Open
Resolution Procedures.
The ESFRC recommends that the EU implements a “separability” rule for the
period before the SRM is in place. This rule would require that subsidiaries must be
able to conduct its important functions within 24 hours after closing as a result of
distress of the home bank. Without such a rule, the complexity of resolving a
cross-border bank may leave the authorities with no choice except a bailout. The
separability includes information and risk management systems, participation in
payment systems, customers’ access to deposits and clarity with respect to the
booking and origination of assets and claims. Living wills can help prepare
resolution authorities, but without a clear separability requirement, the
jurisdictional conficts are most likely inevitable.
5.2 Phase 3
Toward a European Resolution Authority: there have been many political discussions
on the question of how a truly European resolution authority should be created.
Important divisions exist between member states, also on the question of Treaty change
and the question whether the European Commission should play an important role in
the process. The ESFRC thinks that it is unfortunate that a large part of the discussions
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has been focusing on this issue, while urgent questions on the frst two phases of
implementation of the Banking Union are not yet answered and deserve urgent
attention.
Note
1. The amounts (euro billion) received by Group 1 banks and SAREB were: BFA-Bankia: 17.95;
Catalunya Caixa: 9.08; NCG Banco: 5.42; Banco de Valencia: 4.50; SAREB: 2.5.
References
Bruni, F. (2013), Speech in the Workshop on The EU Banking Union and its Implications on the
Non-EU Countries, University of Belgrade, 9 September, available at: www.
unicreditanduniversities.eu/uploads/assets/workshops/Bratislava_23_October_2013_
programme_prel.pdf
Buti, M., and Padoan, P.C. (2013), “Howto make Europe’s incipient recovery durable: a rejoinder”,
8 October 2013, Vox EU, available at: www.voxeu.org/article/how-make-europes-incipient-
recovery-durable-rejoinder (accessed 28 September 2014).
Carbó-Valverde and Rodriguez (2013), “The European banking union from the Spanish
perspective: myths and reality”, Spanish Economic and Financial Outlook, Vol. 2 No. 4,
pp. 25-34.
Cohen, B. (2013), “How have banks adjusted to higher capital requirements?”, BIS Quarterly
Review, September 2013, pp. 25-41.
De Grauwe, P. and Ji, Y. (2013), “Fiscal implications of the ECB’s bond-buying programme”, 14
June VoxEU, available at: www.voxeu.org/article/fscal-implications-ecb-s-bond-buying-
programme (accessed 28 September 2014).
European Banking Authority (EBA) (2013), memo, 21 March, available at:http://europa.eu/rapid/
press-release_MEMO-13-272_en.htm?locale?en (accessed 28 September 2014).
European Commission (EC) (2014a), “Stability and growth pact”, available at:http://ec.europa.eu/
economy_fnance/economic_governance/sgp/index_en.htm (accessed 28 September 2014).
European Council (EC) (2013), “Conclusions”, EUCO 104/2/13 REV 2, 28 June, available at: www.
consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/137634.pdf (accessed 28
September 2014).
European Shadow Financial Regulatory Committee (ESFRC) (2012), Statement No. 36:
“Resolution and Recovery in a Banking Union”, 22 October, London, available at: www.
esfrc.eu/sitebuildercontent/sitebuilderfles/statement36.pdf (accessed 28 September 2014).
European ShadowFinancial Regulatory Committee (ESFRC) (2013), Statement No. 37: “Preparing
for a European Banking Union”, 16 September, Brussels, available at: www.esfrc.eu/id49.
html (accessed 28 September 2014).
Litan, R. (Ed.) ( 2011), “The world in crisis: insights from six shadow fnancial regulatory
committees from around the world”, Wharton Financial Institutions Center, University of
Pennsylvania, Philadelphia.
Véron, N. (2013), “Arealistic bridge towards European banking union”, 27 June 2013: available at:
www.bruegel.org/publications/publication-detail/publication/783-a-realistic-bridge-
towards-european-banking-union/ (accessed 28 September 2014).
Viñals, J., Pazarbasioglu, C., Surti, J., Narain, A., Erbenova, M. and Chow, J. (2013), “Creating a
safer fnancial system: will the Volcker, Vickers, and liikanen structural measures help?”,
IMF discussion notes, May 14.
49
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fnancial crisis
in Europe
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Further reading
European Commission (EC) (2009), “The high-level group on fnancial supervision in the EU,
report, 25 February, available at:http://ec.europa.eu/internal_market/fnances/docs/de_
larosiere_report_en.pdf (accessed 28 September 2014).
European Commission (EC) (2011), “Background on the Euro plus pact”, available at:http://ec.
europa.eu/europe2020/pdf/euro_plus_pact_background_december_2011_en.pdf (accessed
28 September 2014).
European Commission (EC) (2013), Communication COM, 490.
European Commission (EC) (2014b), “Regulatory capital”, available at:http://ec.europa.eu/
internal_market/bank/regcapital/ (accessed 28 September 2014).
Willet, T.D., Wihlborg, C. and Zhang, N. (2010), “The euro crisis; it isn’t just fscal”, World
Economics, Vol. 11 No. 4 (December), pp. 25-36.
About the authors
Santiago Carbó-Valverde is a Professor of Economics and Finance at the Bangor Business School,
Bangor University, North Wales, and Head of Financial Studies at the Spanish economic and
social research foundation FUNCAS. Santiago Carbó-Valverde is the corresponding author and
can be contacted at: [email protected]
Harald A. Benink is a Professor of Banking and Finance at Tilburg University in The
Netherlands. He is also a Research Associate at the Financial Markets Group of the London School
of Economics. Furthermore, he is a Chairman of the European Shadow Financial Regulatory
Committee.
Tom Berglund is a Professor of Applied Microeconomics and the Theory of the Firm at
Hanken School of Economics, and Director of Hanken Centre for Corporate Governance. He is a
chairperson of the Nordic Corporate Governance Network and a member of the European Shadow
Financial Regulatory Committee.
Clas Wihlborg is the Fletcher Jones Chair in International Business at Chapman University in
Orange, California, and a Visiting Professor at University West in Trollhättan., Sweden.
For instructions on how to order reprints of this article, please visit our website:
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doc_284203783.pdf
The purpose of this paper by the European Shadow Financial Regulatory Committee
(ESFRC) is to provide an account of the financial crisis in Europe during the period 2010-2013 and an
analysis of how the relevant authorities reacted to the crisis.
Journal of Financial Economic Policy
Regulatory response to the financial crisis in Europe: recent developments
(2010-2013)
Santiago Carbó-Valverde Harald A. Benink Tom Berglund Clas Wihlborg
Article information:
To cite this document:
Santiago Carbó-Valverde Harald A. Benink Tom Berglund Clas Wihlborg , (2015),"Regulatory
response to the financial crisis in Europe: recent developments (2010-2013)", J ournal of Financial
Economic Policy, Vol. 7 Iss 1 pp. 29 - 50
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Regulatory response to the
fnancial crisis in Europe: recent
developments (2010-2013)
Santiago Carbó-Valverde
Bangor University, North Wales, UK
Harald A. Benink
Tilburg University, Tilburg, Netherlands
Tom Berglund
Hanken School of Economics, Helsinki, Finland, and
Clas Wihlborg
Chapman University, Orange, California, USA
Abstract
Purpose – The purpose of this paper by the European Shadow Financial Regulatory Committee
(ESFRC) is to provide an account of the fnancial crisis in Europe during the period 2010-2013 and an
analysis of how the relevant authorities reacted to the crisis.
Design/methodology/approach – These actions included measures taken by central banks,
governments or fscal authorities, and by regulatory or supervisory bodies. In a previous study
covering the regulatory developments during the fnancial crisis up until 2009, issues such as the
implementation of Basel III rules in Europe and the (mostly ad hoc and unilateral) resolution
mechanisms set in most European countries to fght the crisis were covered. This study focuses on
developments since 2010 with a focus on the concerns and actions that emerged with the sovereign debt
crisis in the euro area. In particular, the transition from the European Financial Stability Facility to the
European Stability Mechanism is assessed. The focus after 2012 has progressively turned to the
challenges of the European banking union.
Findings – These issues are jointly covered, along with some updates on the views of the ESFRC on
recent advances in other areas, such as solvency regulation. All in all, the authors fnd that the
weaknesses of the global fnancial system remain to be addressed, and they believe that the banking
union is one of the main tools and opportunities for an improved and effcient crisis management in
Europe.
Originality/value – The paper aims at contributing to the study of fnancial regulation after the
banking crisis. The experience of the euro zone in this context is assessed in this article from a wide
range of perspectives.
Keywords Banks, Regulatory change
Paper type Conceptual paper
1. Introduction and summary
The purpose of this paper by the European Shadow Financial Regulatory Committee
(ESFRC) is to provide an account of the fnancial crisis in Europe during the period
2010-2013 and an analysis of how the relevant authorities reacted to the crisis. These
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1757-6385.htm
Regulatory
response to the
fnancial crisis
in Europe
29
Received26 November 2014
Revised26 November 2014
Accepted9 December 2014
Journal of Financial Economic
Policy
Vol. 7 No. 1, 2015
pp. 29-50
©Emerald Group Publishing Limited
1757-6385
DOI 10.1108/JFEP-11-2014-0071
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actions included measures taken by central banks, governments or fscal authorities,
and by regulatory or supervisory bodies.
In a previous study, covering the regulatory developments during the fnancial crisis
up until 2009 (Litan, 2011), issues such as the implementation of Basel III rules and
resolution mechanisms in Europe were discussed. In this study, we focus on
developments after 2010. The concerns and actions that emerged with the sovereign
debt crisis in the euro area are reviewed. We specifcally pay attention to fscal,
monetary, and institutional developments intended to alleviate the crisis. In particular,
the transition from the European Financial Stability Facility (EFSF) to the European
Stability Mechanism(ESM) is assessed. Following these institutional developments, the
focus after 2012 has gradually turned to the agreements and remaining challenges of the
European banking union. In addition, some updates on the views of the ESFRCon recent
advances in other areas, such as solvency regulation, are covered.
2. The evolution of the crisis in the euro area (2010-2013)
2.1 Emerging problems in 2010
During 2010, the severity of the sovereign debt crisis became progressively more intense
in a number of peripheral countries, in particular. The stability of the whole euro area
was threatened. In response, the policy debate focused on promoting a substantial
reform of the institutional framework underpinning the euro area and, in particular, on
the coordination of fscal policy and fnancial supervision.
The situation of Greece in 2010 deserves specifc attention. Apart from the criticism
of European Union (EU) authorities for their lack of enforcement and support, a great
deal of uncertainty was generated when a number of serious defciencies were found in
the statistical information provided by Greek authorities on their public accounts. This
forced Greece to fnally request EU fnancial assistance in May 2010. At that time, the
amount was €100 billion.
The Greek event revealed that euro-area authorities did not have a proper
institutional structure and coordination for crisis management and resolution. Thus, the
required fnancial assistance had to be designed quickly and would necessarily imply
some degree of improvisation. The aid to Greece was channeled under a program of
bilateral loans from euro-area countries (€80 billion), along with the international
monetary fund (IMF). To counteract the uncertainty that also affected other troubled
European economies, the so-called European Financial Stabilisation Mechanism
(EFSM) was created. To some extent, the EFSM was a result of the lack of effectiveness
of the instruments of coordination and macroeconomic supervision of the euro area at
that moment. The EFSM’s budget of €60 billion was very limited against the projection
of the potential aid needed at that time by Greece and other countries. To address this
limitation, the EFSF was created to grant loans with a maximum guarantee of €440
billion from the euro-area member states. The IMF also co-fnanced the two programs
with a sumequal to up to 50 per cent of the amount drawn fromthe EFSMand the EFSF
by euro-area countries. The role of the EFSMand EFSFwill be covered in depth later on.
2.2 More problems in 2011
Concerns did not disappear with the transition from 2010 to 2011. In April 2011, it was
Portugal that requested the EU-IMF fnancial assistance. The resignation of the Irish
Government – in response to a rejection in parliament of an ambitious fscal adjustment
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plan – precipitated an Irish bailout. Portugal, at the time, exhibited a harsh combination
of imbalances, including the problemof achieving its fscal consolidation objective, high
households’ and frms’ leverage and a loss of private wealth associated with the
corrections in real estate prices. In May 2011, aid to Portugal was approved in the
amount of €78 billion jointly by the EFSF, the EFSM and the IMF (one-third each). As
the previous programs, the aid package was subject to strict conditionality,
In the summer of 2011, the tensions spread from peripheral countries to the whole
euro area. Economic activity was slowing down, revealing the systemic dimension that
the sovereign crisis had gained throughout the euro-area countries. The EFSM and the
EFSF had proved to be insuffcient. In July 2011, the European Council acknowledged
the need for further institutional coordination and fnancial assistance arrangements.
Newpolicies were necessary to guarantee a combination of necessary fscal enforcement
for troubled countries and more realistic conditionality. Coordination was structured
through the so-called Broad Economic Policy Guidelines (BEPGs). However, the BEPGs
turned out to be mostly a political agreement of good intentions based on
information-sharing and a redefnition of objectives. The political problems that
surfaced in Greece and Italy in November did not contribute to a climate of improved
fnancial stability. Concerns about Spain also grew, as the risk premium hit a record of
467 basis points with respect to the German bund. Debt yields across other euro-zone
peripheral countries increased dramatically. The tensions were so strong that when
Germany offered a €6 billion batch of ten-year bonds to the market by November 23, the
offering was signifcantly undersubscribed.
The need for coordination among European Governments increased. By the
beginning of November, the situation forced European Central Bank (ECB) President
Mario Draghi to state that the ECB might be willing to expand its European bond
purchase program if European Governments implemented greater fscal controls. On
December 5, 2011, Standard &Poor’s placed the debt of 15 of the 17 euro-zone nations on
a negative credit watch.
An important milestone in the fght against the sovereign debt crisis was reached on
December 8, when the ECB announced measures to support bank lending and money
market activity by conducting two longer-term refnancing operations with a maturity
of 36 months and the option of early repayment after one year.
2.3 Stabilization in 2012-2013
At the beginningof January2012, ten-year Italianbondyields reachedalevel of 7.12per cent.
On top of the mounting fnancial instability problems, it was confrmed that gross domestic
product (GDP) contracted in the fourth quarter of 2011 in Germany. Also, in January 2012,
Standard & Poor’s cut the ratings of nine euro-zone nations, including that of AAA-rated
France andAustria. InFebruary2012, the ECBagreedtoexchange its Greekbonds at aprice
below par value. By February 21, a new deal was fnally agreed between Greece and its
creditors. Creditors accepted a loss of 53.5 per cent of the face value of their debt. By March
2012, messages were sent bymonetaryauthorities onbothsides of the Atlantic that national
governments had to take the lead for the economic recovery. ECB’s President Mario Draghi
stated that the central bank had done enough to combat the sovereign debt crisis. However,
the economic situation continued to deteriorate, with unemployment surpassing 10 per cent
for the frst time in euro zone history. Evidence of the widening of the crisis was EUfnance
ministers vote to suspend payments to Hungary.
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In mid-March 2012, a newpatch was placed on the Greek bailout, with an agreement
to a second bailout program for Greece for €130 billion, jointly funded with the IMF. By
the end of that month, the combined frepower of the (temporary) EFSF and the
(permanent) ESM was raised from €500 billion to €700 billion. At the announcement
date, Greece stated that it might need a third bailout.
As the summer of 2012 was approaching, concerns turned to the situation of Spanish
banks. On May 11, Spain announced that banks in the country were going to be required
to set provisions by around €30 billion to cover €123 billion of real estate loans, and that
the country was going to launch its own stress tests conducted by independent auditors.
Also, in May 2012, the ECB decided to stop lending to some banks in Greece to limit its
risk exposure to the troubled country. By the end of the month, Spain announced the
biggest individual bank bailout on record in the country, the one of Bankia, and Spanish
credit default swaps soared after the announcement.
While conversations on the European banking union were starting to take shape in
2012, the EU was taking a more realistic approach on the conditionality imposed on
troubled euro-zone countries with a two-year extension given to Greece for its fscal
adjustment commitments.
During November and December, tensions progressively eased in sovereign debt
markets, in spite of Draghi’s warning that the European sovereign debt crisis was far from
over. During the frst months of 2013, sovereign debt yields in peripheral countries went
signifcantly down, but there were some new concerns emerging from the Cypriot crisis.
While the problems of Cyprus were evident more than a year earlier, a major concern froma
European perspective surfaced in March 2013. On March 16, 2013, the euro group, the
European Commission, the ECB and the IMF agreed a €10 billion deal with Cyprus.
However, as part of the deal, a deposit levyof 6.7 per cent for deposits upto €100,000 was set,
along with a 9.9 per cent levy for larger amount deposits. The hair cut on deposits below
€100,000 triggered concerns on deposit runs and likely contagion effects in other EU
countries. Inresponse, onMarch25, the Cyprus Government, the euro-zone fnance ministers
and the IMF announced a new plan to preserve all insured deposits of €100,000 or less
without a levy, the shut down of Laiki Bank, with a levy for all uninsured deposits of that
bank and of 40 per cent of uninsured deposits in Bank of Cyprus.
Eliminating the uncertainties created by the mismanaged resolution of the Cypriot
case required a signifcant effort. Still the spring of 2013 saw a substantial decrease in
fnancial tensions. The relative improvement of macroeconomic conditions, along with
the maintenance of ambitious fscal adjustment programs, the progress in the
recapitalization and restructuring of banking systems and structural reforms in the
labor market and in services markets brought some further stability and improved
growth estimation prospects.
Table I shows that the euro zone left recession in the second quarter after six
quarters. Euro-zone countries grew by 0.3 per cent during the second quarter of 2013,
compared with the previous quarter, according to Eurostat. Compared with the same
quarter of the previous year, seasonally adjusted GDP fell by 0.6 per cent in the euro
zone. Portugal recorded the highest growth compared with the previous quarter
(?1.1 per cent), followed by Germany, Lithuania, Malta and the United Kingdom (all
?0.7 per cent). Cyprus (?1.8 per cent), Slovenia and Italy (both ?0.3 per cent) registered
the largest decreases.
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Table I.
GDP growth in
euro-area and EU
countries
Country
Percentage change compared with
the previous quarter
Percentage change compared with the
same quarter of the previous year
2012 2013 2012 2013
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
EA-17 ?0.1 ?0.5 ?0.2 0.3 ?0.7 ?1.0 ?1.2 ?0.6
EU-27 0.0 ?0.4 ?0.1 0.3 ?0.5 ?0.7 ?0.8 ?0.2
EU-28 0.0 ?0.4 ?0.1 0.3 ?0.5 ?0.7 ?0.8 ?0.2
Belgium 0.0 ?0.1 0.0 0.2 ?0.4 ?0.5 ?0.6 0.0
Bulgaria 0.1 0.1 0.1 ?0.1 0.7 0.6 0.4 0.2
Czech Republic ?0.3 ?0.3 ?1.3 0.6 ?1.2 ?1.4 ?2.3 ?1.3
Denmark 0.8 ?0.6 ?0.2 0.6 0.0 ?0.4 ?0.8 0.6
Germany 0.2 ?0.5 0.0 0.7 0.9 0.3 ?0.3 0.5
Estonia
b
1.3 0.5 ?0.1 ?0.2 3.5 4.9 1.3 1.0
Ireland ?0.8 ?0.2 ?0.6 0.4 ?0.5 ?1.0 ?1.1 ?1.1
Greece
b
– – – – ?6.7 ?5.7 ?5.6 ?3.8
Spain ?0.4 ?0.8 ?0.4 ?0.1 ?1.7 ?2.1 ?2.0 ?1.6
France 0.2 ?0.2 ?0.1 0.5 0.0 ?0.3 ?0.5 0.4
Croatia
b
?0.3 ?0.4 0.0 ?0.2 ?1.9 ?2.3 ?1.5 ?0.7
Italy ?0.4 ?0.9 ?0.6 ?0.3 ?2.8 ?3.0 ?2.5 ?2.2
Cyprus ?0.8 ?1.5 ?1.7 ?1.8 ?2.2 ?3.6 ?4.9 ?5.7
Latvia 1.8 0.8 1.8 0.1 5.0 5.4 6.7 4.6
Lithuania 1.7 0.7 1.1 0.7 3.8 3.4 4.1 4.2
Luxembourg ?0.2 2.2 ?1.6 – ?0.3 1.6 1.0 –
Hungary 0.0 ?0.5 0.6 0.1 ?1.7 ?2.5 ?0.5 0.1
Malta 0.6 0.2 0.1 0.7 1.4 1.5 1.9 1.6
Netherlands
b
?0.9 ?0.6 ?0.4 ?0.1 ?1.5 ?1.5 ?1.4 ?1.7
Austria
d
0.1 ?0.1 0.1 0.1 0.7 0.6 0.3 0.1
Poland 0.4 0.1 0.2 0.4 1.7 0.8 0.7 1.1
Portugal ?0.8 ?1.9 ?0.4 1.1 ?3.6 ?3.8 ?4.1 ?2.1
Romania ?0.5 1.0 0.4 0.5 ?1.1 0.8 2.3 1.4
Slovenia ?0.4 ?1.0 ?0.5 ?0.3 ?2.8 ?3.2 ?3.2 ?2.2
Slovakia 0.2 0.1 0.2 0.3 1.9 1.0 0.8 0.8
Finland ?0.3 ?0.8 ?0.2 0.2 ?1.6 ?2.2 ?2.8 ?1.1
Sweden 0.2 ?0.2 0.3 ?0.2 0.6 1.8 1.3 0.1
United Kingdom 0.6 ?0.3 0.4 0.7 0.0 ?0.2 0.2 1.3
Iceland 4.1 0.3 4.4 ?6.5 1.3 1.0 2.3 1.9
Norway ?0.5 0.2 ?0.1 0.8 1.8 1.8 0.0 0.4
Switzerland 0.7 0.3 0.6 0.5 1.4 1.4 1.5 2.1
USA 0.7 0.0 0.3 0.6 3.1 2.0 1.3 1.6
Japan ?0.9 0.3 1.0 0.9 0.4 0.3 0.1 1.3
Notes: Data not available;
a
The seasonal adjustment does not include a working-day correction for
Ireland, Portugal, Romania and Slovakia;
b
Percentage change compared with the same quarter of the
previous year calculated from non-seasonally adjusted data;
c
Percentage change compared with the
same quarter of the previous year calculated from working-day adjusted data;
d
Growth rates are
calculated using the trend component;
Source: Eurostat
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In May 2013, Excessive Defcit Procedures deadlines were postponed for some
economies including those of Spain, France, Slovenia, Portugal and The Netherlands.
Also, in May, the ECB decided to reduce the offcial rate by 0.25 percentage point to 0.5
per cent, and the marginal lending facility to 1.0 per cent, as well as to narrow the
corridor defned by the latter and the interest rate on the deposit facility, which remained
at zero.
The combination of fscal consolidation and monetary policy support was the main
strategy still in 2013. As noted by some analysts (Buti and Padoan, 2013), remaining
interest rate differentials suggested that downside risks could not be ruled out, and the
effcacy of fscal austerity policies remained under question by investors.
3. Crisis management
3.1 Monetary policy leadership
As tensions spread during the summer of 2012, in particular, the “whatever it takes”
statement brought some relief to the tensions in European debt markets. The promise of
support from the ECB was made even more explicit when the Outright Monetary
Transactions (OMT) programwas announced in September 2012. This was followed by
a series of announcements during 2013, in which the ECB forcefully emphasized that:
• the commitment of monetary policy to low interest rates and expansionary
liquidity actions is a long-term one; and
• there is signifcant downside risk that is threatening the so-far weak economic
recovery in the euro zone.
Later events show that the OMT apparently has been effective as a signaling device.
Remarkably, the need to actually implement it has not materialized. As shown in some
recent analyses, the OMT has not only contributed to calm the markets but also
triggered some questions with respect to its fscal implications. As shown in a recent
analysis by De Grauwe and Ji (2013), ECB bond buying transforms public bonds into
monetary base, and sovereign-default risk into infation risk. Ultimately, the important
question is: what is the non-infationary limit to monetary base expansion with these
types of programs?
3.2 EU governance efforts and the frewall mechanisms
3.2.1 Reforming the stability and growth pact. The sovereign debt crisis has shown the
existence of structural weaknesses in the institutional architecture of the monetary
union. The design of the euro zone as a monetary union was originally based on the
principle of subsidiarity that implied substantial decentralization and unilateralism in
economic and fnancial policies. However, the fnancial crisis has made clear the
inconsistencies of sharing a currency if such monetary union is not accompanied by
coordination in fscal policies. Such inconsistencies have been acknowledged in the past
few years, although the different efforts to correct them have had a limited scope.
In practical terms, the changes implemented initially consisted of a reform of the
so-called Stability and Growth Pact (SGP). These reforms consisted, frst, of the creation
of a “Six-Pack” system, then a “Two-Pack” system and, ultimately, the “Fiscal
Compact”.
SGP was initially approved in 1997. In 2011, the Six-Pack reform was aimed to
address:
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[…] gaps and weaknesses in the framework identifed during the recent economic fnancial
crisis […] and strengthen both the fscal surveillance and enforcement provisions of the SGP
by adding an expenditure benchmark to review countries’ fscal positions, making the
Treaty’s debt criterion operational, introducing an early and gradual system of fnancial
sanctions for euro-area member states, and requiring new minimum standards for national
budgetary frameworks (European Commission, 2014a).
The evolution of the sovereign debt crisis revealed that further efforts were needed for
additional enforcement and coordination on the fscal side of economic policies within
the euro zone. This gave rise to the so-called Two-Pack regulations, which were released
in May 2013. They introduced additional surveillance and monitoring procedures to the
Six-Pack reforms. The Two-Pack reforms set a common and more comprehensive
surveillance regime for countries in the Economic and Monetary Union (EMU) with a
particular focus on the countries experiencing serious fnancial stability problems.
Following the Six-Pack and Two-Pack reforms, the Fiscal Compact is the other main
effort to revise the SGP over the past few years. The Fiscal Compact requires member
states to enshrine in national law a balanced budget rule with a lower limit of a
structural defcit amounting to 0.5 per cent of GDP. During 2010-2013, there have also
been efforts to set longer-term objectives, and probably the most important one is the
so-called euro-Plus pact, which sets the Europe 2020 strategy. The euro-Plus pact was
adopted by the European Council in December 2011. It sets ambitious goals for 2020, i.e.
to have 75 per cent of the population aged 20-64 years employed along with goals related
to environmental and social issues. To provide for a better coordination of the various
economic policy decisions under this new framework, it was agreed to set up the
European Semester. This takes place during the frst six months of each year and will
conclude with the formulation of specifc fscal, macroeconomic and structural
recommendations for each country.
3.2.2 Common fnancial support mechanisms. The setting of intergovernmental
support mechanisms between 2010 and 2013 sawan initial milestone in May 2010, when
the EU member states established the EFSF.
The EFSFprovides a partial protection certifcate to newly issued bonds of a member
state. The certifcate gives the holder a fxed credit protection of 20-30 per cent of the
principle amount of the bond. Additionally, a co-investment fund is also possible to
allow a combination of public and private funding which would then be used to
purchase bonds on either the primary and secondary markets on behalf of a benefciary
member state.
In October 2010, it was decided to create a more permanent rescue mechanism, the
ESM, which had to be effective by October 2012. The ESMwas launched as a permanent
bailout mechanism for euro-area member states. From that date, the ESM became the
main instrument to fnance new programs, substituting for the EFSF, although these
two previous mechanisms continued their operations to complete the on-going
programs for Greece, Portugal and Ireland. The ESM is a permanent international
fnancial institution that issues bonds or other debt instruments on fnancial markets to
raise capital to provide assistance to member states. Unlike the EFSF, it is not a system
of guarantees.
The ESM-subscribed capital of €700 billion is provided by euro-area member states.
A total of €80 billion of this is in the form of paid-in capital, and the remaining €620
billion is “callable” capital. This subscribed capital provides a lending capacity for the
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ESMof €500 billion. The ESMcan be activated upon a request froma member state, and
it is always attached to conditionality measures. Following the ESM Pricing Policy, a
margin of 30 basis points was applicable to the Financial Institutions Recapitalisation
Facility for Spain. The frst disbursement under the Spanish facility was made on
December 11, 2012, for a total amount of €39.5 billion on ESM bonds. The bonds were
provided to the Bank of Spain and transferred to the Spanish Fund for Orderly
Resolution of Banks (FROB). The FROB used them for two groups of banks, as defned
in the Memorandum of Understanding for fnancial assistance: “Group 1 banks” were
four fnancial institutions that were nationalized and the Spanish bad bank SAREB, the
asset management company set to transfer the impaired assets of troubled Spanish
banks[1]. “Group 2 banks included four banks requiring recapitalization. The Financial
Assistance Facility Agreement for Spain specifes that its obligations under the
Financial Institutions RecapitalisationFacility signedwith the ESMwill rank pari passu
with all other present and future unsecured and unsubordinated loans and obligations of
the benefciary member state arising from its present or future relevant indebtedness.
The second disbursement under the Spanish facility was made on February 5, 2013,
for a total amount of €1.86 billion, again through the delivery of ESM bonds. The
funding was used to recapitalize four Group 2 banks, which could not reach the required
capital levels through other means (Group 2 banks). The capital injections made by the
FROBin both Groups 1 and 2 banks were done either in tangible capital or in contingent
convertible bonds.
4. Regulatory reform initiatives: solvency, common supervision and
resolution frameworks
This section addresses the main regulatory initiatives for fnancial regulation in the EU.
Over the past few years, the ESFRC has particularly focused on two areas of reform:
(1) The bank solvency regulation and the related initiatives for a full adoption of
Basel III.
(2) The proposals for a Europeanbankingunion, includingthe commonsupervision
and resolution framework, a project that has probably become the most
important regulatory initiative to be implemented in the euro zone in the next
few years.
Given the broad scope of current fnancial regulation challenges – in part, as a response
to the fnancial crisis – we also offer a broad view of other regulatory initiatives, their
scope and their status in Table II, distinguishing between the banking sector, the
insurance sector and fnancial markets.
4.1. Structural regulation
There are currently different approaches and proposals on both sides of the Atlantic on
how to put many of these measures together to create a new fnancial system
architecture that may prevent systemic events and future crisis. Probably, the three
most prominent ones are the Volcker rule for US banks, the Vickers report for UKbanks
and the Liikanen EU bank report. Recovery and resolution plans (“living wills”) belong
to this category of reforms as well, as they are intended to induce banks to simplify their
organizational structures.
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Table II.
Selected regulatory
initiatives in the EU
Banking sector
CRR/CRD IV Although certain elements of the CRR/CRD IV package are still subject to
fnalization and recalibration, a signifcant number of policy tools are
already available for macro-prudential authorities. Many of these policy
tools can be considered as standard micro-prudential instruments used for
macro-prudential purposes and being in line with international standards,
in particular the Basel Committee’s new global standards for capital and
liquidity (Basel III). In addition to defning a set of instruments that
macro-prudential authorities can apply to address risks to fnancial
stability, the CRR/CRD IV package also sets out strict notifcation and
coordination mechanisms for authorities. Importantly, most of these
instruments will also be available for the ECB when acting in its capacity of
a macro-prudential authority in the EU
SSM regulation The regulation establishes an SSM with strong powers for the ECB (in
cooperation with national competent authorities) for the supervision of all
banks in participating member states (euro-area countries and
non-euro-area member states which join the system)
Bank recovery and
resolution directive
(BRRD)
The BRRD sets out a resolution framework for credit institutions and
investment frms, with harmonized tools and powers relating to prevention,
early intervention and resolution for all EU member states
SRM regulation The SRM regulation establishes a single system, with a single resolution
board and single bank resolution fund, for effcient and harmonized
resolution of banks within the SSM. The SRM would be governed by two
legal texts: the SRM regulation covering the main aspects of the mechanism,
and an Intergovernmental Agreement related to some specifc aspects of the
Single Resolution Fund
DGS directive The DGS Directive deals mainly with the harmonization and simplifcation
of rules and criteria applicable to deposit guarantees a faster payout, and an
improved fnancing of schemes for all EU member states
Insurance sector
Solvency II Directive/
Omnibus II Directive
The Solvency II Directive is the framework directive that aims to harmonize
the different regulatory regimes for insurance corporations in the European
Economic Area. Solvency II includes capital requirements, supervision
principles and disclosure requirements. The Omnibus II Directive aligns the
Solvency II Directive with the legislative working methods introduced by
the Lisbon Treaty, incorporates new supervisory measures given to the
European Insurance and Occupational Pensions Authority and makes
technical modifcations
Financial markets
The European Market
Infrastructure
Regulation
The regulation aims to bring more safety and transparency to the over-the-
counter derivatives market and sets out rules, inter alia, for central
counterparties and trade repositories
Regulation on improving
the safety and effciency
of securities settlement
in the EU and on central
securities depositories
The regulation introduces an obligation of dematerialization for most
securities, harmonized settlement periods for most transactions in such
securities, settlement discipline measures and common rules for central
securities depositories
(continued)
37
Regulatory
response to the
fnancial crisis
in Europe
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A good summary of the main provisions of these regulatory initiatives and their
differences has been published by the IMF (Viñals et al., 2013), and is summarized in
Table III. Although we do not cover these initiatives extensively – as this is not the
purpose of this chapter – it is worthwhile to note some highlights of each of them:
The Volcker rule bans fnancial institutions from proprietary trading, and it is
somehow seen as a “modern” Glass-Steagall Act. The Volcker reform restructures the
US fnancial regulatory system to restore public confdence and states that banks must
make decisions regarding their corporate structures and their activities, including how
to deal with their existing investments in equity and hedge funds:
• In the UK, Sir John Vickers’s proposals place retail and small and medium-sized
enterprises (SME) deposits in ring-fenced subsidiaries, and riskier trading
business outside the fence. The reform gives banks fexibility in deciding which
part of the business should be ring-fenced and operated as a separate entity.
• As for the Liikanen report, it recommends that EU banks’ trading businesses be
placed in separate subsidiaries, fencing off the risky trading arm of the bank. It
also requires banks to hold more capital against riskier businesses and to hold
debt that could be turned into equity to recapitalize an ailing bank. The report
includes recommendations that a portion of bankers’ compensation is in the form
of “bail-in” debt issued.
4.2 Solvency requirements
The main efforts to reform the solvency regulation of European banks are being made
through the so-called Capital Requirements Regulation and Directive (CRR/CRD IV).
This directive, which has been subject to several changes over the past few years, aims
at implementing the Basel Committee’s capital and liquidity framework for
internationally active banks (the so-called Basel III) in the EU.
The CRR/CRDIVproposal includes stricter macro-prudential requirements on banks
to address increased risks to fnancial stability as the ones that have been seen during
Table II.
Financial Instruments
Directive and Regulation
(MiFID II/MiFIR)
The proposals will apply to investment frms, market operators and
services providing post-trade transparency information in the EU. They are
set out in two pieces of legislation: a directly applicable regulation dealing,
inter alia, with transparency and access to trading venues, and a directive
governing authorization and organization of trading venues and investor
protection.
Money market fund
regulation
The proposal addresses the systemic risks posed by this type of investment
entity by introducing new rules aimed at strengthening their liquidity
profle and stability. It also sets out provisions that seek, inter alia, to
enhance their management and transparency, as well as to standardize
supervisory reporting obligations
Regulation on reporting
and transparency of
securities fnancing
transactions
The proposal contains measures aimed at increasing the transparency of
securities lending and repurchase agreements through the obligation to
report all transactions to a central database. This seeks to facilitate regular
supervision and improve transparency towards investors and on re-
hypothecation arrangements
Source: European Central Bank, Financial Stability Review, May 2014, and own elaboration
JFEP
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39
Regulatory
response to the
fnancial crisis
in Europe
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the fnancial crisis. These measures include a broad range of issues, such as the level of
capital, liquidity requirements, large exposure requirements, the level of the capital
conservation buffer, public disclosure requirements, intra-fnancial sector exposures
and risk weights for assets.
The structure of the requirements is summarized in Figure 1.
The CRR/CRD IV also includes the implementation of a liquidity coverage ratio by
2018.
Although the basic features of implementing the CRD and CRR have been already
covered by the ESFRC in a previous publication (Litan, 2011), the most recent
developments noted above, in particular those referring to the CRD IV, will imply
additional signifcant efforts frommember states that deserve some attention. As noted
by the European Banking Authority (EBA) (2013), there are areas of the CRD IV where
the degree of discretion by member states will be larger than others. In particular, this
affects responsibilities of national authorities in areas such as authorization,
supervision, capital buffers and sanctions and requirements on internal risk
management. Others, however, will have necessarily to take the form of a regulation as
the provisions on calculating capital requirements (Table IV):
The CRR also incorporates some specifc features which are not mandated by Basel III
regulations. In particular, the “Single Rulebook” will eventually become the frst single set of
harmonized prudential rules throughout the EU. According to the European Commission
(2014b): this will ensure uniform application of Basel III in all member states, it will close
regulatory loopholes and will thus contribute to a more effective functioning of the Internal
Market. The new rules remove a large number of national options and discretions from the
CRD, and allows member states to apply stricter requirements only where these are justifed
by national circumstances (e.g. real estate), needed on fnancial stability grounds or because of
a bank’s specifc risk.
Figure 1.
Structure of
CRD/CRR
requirements
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Even if a single rulebook will probably eliminate some sources of potential
heterogeneous application of the CRD rules, some level of discretion will always apply.
This has been recognized by European authorities and made clear by the European
Commission. As shown in Table V, some fexibility is guaranteed.
Meanwhile, it is important to note that given the calendar set for the main
requirements, banks are already adjusting progressively to these requirements. As
shown in Figure 2, the Bank for International Settlements (BIS) estimates (Cohen, 2013)
that the adjustment is being done both by increasing capital and by reducing
risk-weighted assets. In the advanced economy banks, roughly three-quarters of the
overall increase of 3.0 per cent corresponds to higher capital, while the rest resulted from
a decline in risk-weighted assets. In Europe, the change in capital is around 2.0 per cent,
with more than half of the change being explained by reduction of risk-weighted assets,
and the rest by capital increases.
The BIS estimates for Europe are in line with those of the European Central Bank
(Figure 3). In particular, in the Financial Stability Review of May 2013, the ECB noted
that:
[…] according to the banks’ responses, these regulatory changes had induced a number of the
banks to reduce their risk-weighted assets (especially related to riskier loans) and to increase
nominal capital levels (via retained earnings and the raising of newcapital). At the same time,
a number of banks indicated that the new and more stringent regulatory requirements had
contributed to the net tightening of their credit standards (and the increase in lending margins)
observed over the past two years.
4.3. Supervision and resolution mechanisms: the banking union
The European banking union was originally designed as a tool for crisis prevention.
However, it has been recently discussed as a more ample project, with several
implications for fnancial stability in several ways, including the transmission of
banking shocks across Europe and the development of sovereign crises. In fact, most
international observers see fnancial market fragmentation and ad hoc domestic bank
bailouts, and bail-in policies as a key source of vulnerability for the euro zone as a whole.
Somehow, the banking union project follows up on the efforts made in Europe to better
design the fnancial safety net, comprising the set of regulations and supervision rules
and bodies dealing with fnancial stability in the EU. The most important effort in this
sense was the set of proposals of the so-called Larosière group in 2009.
Table IV.
Less prescriptive and
high prescriptive
provisions of the
CRD IV directive/
CRR regulation
Directive (strong links with national law, less
prescriptive)
Regulation (detailed and highly prescriptive
provisions establishing a single rule book)
Access to taking up/pursuit of business Capital
Exercise of freedom of establishment and free
movement of services Liquidity
Prudential supervision Leverage
Capital buffers Counterparty credit risk
Corporate governance
Sanctions
Source: European Banking Authority
41
Regulatory
response to the
fnancial crisis
in Europe
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JFEP
7,1
42
D
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n
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a
d
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d
b
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P
O
N
D
I
C
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E
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t
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:
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1
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
During 2012 and 2013, there were several proposals made to progress on these goals.
However, the theoretical design goes much further than the political consensus and the
practice.
One way of showing the status of the banking union is comparing the theoretical
designs with the current developments, as shown in Figure 4. The current situation is
described on the left-hand side of the exhibit, with fnancial fragmentation (different
Figure 2.
Sources of changes in
bank capital ratios
(2009-2012)
Normalized to
percentage points of
end-2009
risk-weighted assets
Figure 3.
Impact of CRD IV
and other changes in
regulatory
requirements on
banks’ risk-weighted
assets and capital
position
43
Regulatory
response to the
fnancial crisis
in Europe
D
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a
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1
6
(
P
T
)
domestic fnancial conditions), multiple banking supervision and deposit guarantee
frameworks and decentralized resolution mechanisms. At the right-hand side of the
exhibit, we depict the desired structure of a strong banking union with a single
supervisor with ample powers, a single resolution authority (including common bail-out
and bail-in mechanisms), the harmonization of the necessary legal environments (even
including the EU Treaty) and a system that prevents the too-big-to-fail problem for
systemic fnancial institutions. However, the situation is still far from the desired
outcome. The current status of the project is somehow closer to the structure shown in
the central column of Figure 4(a) weak union with a single supervisor, a net of domestic
resolution authorities with little integration, little consensus on bail-out measures and
the problemof legacyassets – whichconsists of howto deal withthe losses of the current
crisis – likely to be assumed by each domestic counterpart.
The conclusions of the Council (European Council, 2013) suggest that: in the short
run, the key priority is to complete the Banking Union in line with the European Council
conclusions of December 2012 and March 2013. This is essential to ensuring fnancial
stability, reducing fnancial fragmentation and restoring normal lending to the
economy.
The Council mentions the following three main goals in the short run:
(1) A new Single Supervisory Mechanism (SSM);
(2) the transition toward the SSM, where the Council suggests that a balance sheet
assessment will be conducted, comprising an asset quality review (AQR) and
subsequently a stress test; and
(3) an operational framework for the direct bank recapitalization by the ESM as
agreed by the euro group.
In the current discussions within the EU, the main resolution measures would include:
• Bail-in measures (the imposition of losses, with an order of seniority, on
shareholders and unsecured creditors);
• the sale of (part of a) business;
• establishment of a bridge institution (the temporary transfer of good bank assets
to a publicly controlled entity); and
• asset separation (the transfer of impaired assets to an asset management vehicle).
Figure 4.
The theoretical
progress to a strong
banking union
JFEP
7,1
44
D
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a
n
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a
r
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2
0
1
6
(
P
T
)
Bail-in mechanisms are essential, as they establish the necessary liability responsibility
scheme to face the losses of bank resolution mechanisms before tapping public funds
(i.e. imposing part of the losses on the taxpayers). Under the current European Council’s
general approach, eligible deposits from natural persons and micro, SMEs, as well as
liabilities to the European Investment Bank would have preference over the claims of
ordinary unsecured, non-preferred creditors and depositors from large corporations.
The deposit guarantee scheme (DGS), which would always step in for covered deposits
(i.e. deposits below €100,000), will have a higher ranking than eligible deposits. Other
liabilities that would be permanently excluded from bail-in are covered deposits,
secured liabilities (i.e. covered bonds), liabilities to employees of failing institutions
(salary and pension benefts), commercial claims relating to goods and services critical
for the daily functioning of the institution; liabilities arising from a participation in
payment systems which have a remaining maturity of less than seven days; and
inter-bank liabilities with an original maturity of less than seven days.
There are other key ingredients where the progress has been much more limited. In
particular, the mechanisms for bank recapitalizations, which has been set as very
restrictive and quantitatively limited. The current agreement is to set up ex-ante
resolution funds to ensure that the resolution tools can be applied effectively. These
national funds would have to reach, within ten years, a target level of at least 0.8 per cent
of covered deposits of all the credit institutions authorized in their country. To reach the
target level, institutions would have to make annual contributions based on their
liabilities, excluding own funds, and adjusted for risk. A frst exemption to this rule is
that member states to establish their national fnancing arrangement through
mandatory contributions without setting up a separate fund. The member states
following this alternative would have to raise at least the same amount of fnancing and
make it available to their resolution authority immediately upon its request. This
alternative seems quantitatively equivalent to a common resolution framework but, in
practical terms, involves more fragmentation and lack of centralized control.
5. Concluding remarks: the path toward European banking union
As recently noted by analysts, given the uncertainties and the risks that complicate the
path toward European banking union:
[…] it is advisable to conceive its implementation with realismand prudence, thus avoiding to
nourish illusions that could backfre, abruptly interrupting the gradual transition to a unifed
banking system, compromising the credibility of European policies and bureaucracy and
generating new fnancial instability (Bruni, 2013).
This diffcult transition with mixes of political and economic features has been
described by the Bruegel group, as shown in Figure 5, suggesting that a full
implementation introduces some uncertainty about the deadlines because it will
probably require a change in the EU Treaty (Véron, 2013).
The ESFRC (ESFRC, 2012) has described these challenges as a combination of short-
and long-term crisis management tools. In this sense, it has been unfortunate that
European crisis management became a hostage to the negotiations to create a European
banking union in the past few years. Crisis management requires prompt action to
allocate losses in asset values, whereas the European banking union is a longer-term
project to enhance integration, effciency and stability of fnancial markets and
institutions. The solutions to the present crisis should not be made conditional on
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agreement with respect to controversial aspects of the banking union. In the longer term,
there are substantial potential benefts from a European banking union, but the
implementation of its components (supervision, recovery and resolution procedures and
pan-European deposit insurance) must be considered carefully froman economic as well
as a legal point of view. The advantages of shifting responsibility for banking
supervision from the national to the EMU level are that an EMU supervisor can apply
consistent standards across the union, conficts of interest between national supervisors
in host- and home countries of cross-border banks can be avoided, costs of dealing with
several supervisors can be reduced and “regulatory capture” of national supervisors by
large systemically important fnancial institutions on the national level becomes less
likely. Furthermore, the de-nationalization of supervision reduces national
fragmentation of fnancial markets and improves the transmission mechanism for
monetary policy within the euro zone.
A harmonized regime for recovery and resolution would reduce fragmentation
further. Incorporation of bail-ins in the resolution regime would reduce the risk that
excessive bank risk-taking creates sovereign risk. However, there are substantial
hurdles to overcome before a common regime for recovery and resolution can be
realized. In the short term, an agreement to implement recovery and resolution
procedures on the national level should be suffcient from the perspective of short-term
crisis management. In the longer term, the issue of how to coordinate the role of the
common supervisor with national recovery and resolution procedures must be solved.
As for the current situation, the ESFRC (2013) notes that fve years after the Lehman
Brothers bankruptcy that contributed to the deepening of the fnancial crisis, a
European banking union seems more urgent than ever. In Europe, the banking union is
envisioned as a remedy to these problems. It would create entities for supervision and
resolution with authority and capacity to deal with the largest banks in the euro zone
with a minimum demand for taxpayer involvement. The too-big-to-fail problem would
be addressed by the creation of a mechanismfor resolution that would allocate losses to
shareholders, as well as unsecured creditors of the banks, in a pre-determined and
predictable order. This “bail-in” mechanism would also alleviate the distortion of
risk-taking incentives of banks with access to excessively cheap funding fromcreditors
expecting to be bailed out.
Figure 5.
The bridge toward a
European banking
union
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The progress to the envisioned full banking union is slowfor reasons that are easy to
understand and entirely predictable. So far, there is an agreement on the SSM for the
largest 130-150 banks in the euro area and other EU countries that will voluntarily join
the mechanism. This is an important frst step, but without effective resolution
mechanisms on the national or the EU level, the objectives of the banking union cannot
be achieved. Although the agreement that the ECB will become the single banking
supervisor in November 2014 is an important step, it is still not clear howto achieve the
important objectives which the banking union is expected to reach. These objectives
need to be addressed urgently, but the EU’s Recovery and Resolution Directive sets a
deadline of 2016 for national resolution mechanisms with bail-in provisions to be in
place. In the meantime, there will be ambiguity with respect to the consequences of the
supervisor’s fndings. In particular, bail-outs are likely to remain the rule for resolving
large banks in distress, or bail-ins will be ad hoc and politically tainted, as in the Cyprus
case.
According to press information from the EU ministers of fnance meeting in Vilnius
in September 2013, the fnal institutional form of the banking union and, in particular,
the controversial question of which institution should be the common resolution
authority were debated. This is an important question, but it is not the most urgent one.
More urgent, in our assessment, is another question: howcan the agreement on the SSM
be leveraged to solve the current urgent problems of fragility and fragmentation in the
euro zone? To address this question, the ESFRC makes the following observations on
the three overlapping phases that defne the currently envisioned road to the European
banking union.
5.1 Phases 1 and 2
The AQRand national resolution and recovery procedures: it is clearly important for the
ECB to have a clear viewof the strengths and weaknesses of the banks, particularly the
large ones, when it takes over the responsibility for supervision in 2014. Having a sound
informational basis is evidently important for a supervisor that needs to be taken
seriously. Moreover, it would be detrimental to the reputation of the ECB in its new
supervisory role if a major bank would collapse only shortly after it has taken on its new
role. The AQR is likely to have consequences. It is possible and not unlikely that the
review reveals that many banks are in a worse condition than it is generally believed. If
so, steps must be taken to write off asset values and/or increase their equity capital.
Some banks may have to be closed down or resolved in such a way that contagion effects
are minimized. At present, the ECB is not in a legal position to request – and enforce –
measures to alleviate such situations. Thus, the ECB can fnd itself in the awkward
position of starting its supervisory role with problem banks under its purview without
the means to take effective action.
The ESFRC recommends that the effective implementation of resolution and
recovery procedures, following a bail-in mechanism based on the Recovery and
Resolution Directive or the adoption of a temporary intervention law, must exist when
the results of the AQR become available. The ECB should not accept supervision of
banks fromcountries without effective procedures. It lies in the strong interest of banks
to be supervised by the ECB, and therefore, they can be expected to put pressure on
national legislatures to act. The reputation effect for banks being shut out from ECB
supervision can be strong. Finally, we note that the AQR should not be conceived and
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implemented in the narrow sense that the term “asset quality review” suggests. The
quality assessment should also address the viability of a bank’s business model and its
governance structure.
As for the issue of complex cross-border banks, an important lesson fromthe Lehman
Brothers bankruptcy is that great value losses can occur in insolvency proceedings
when there are jurisdictional conficts and the fnancial institution is opaque. In the case
of Lehman Brothers, the bankruptcy of its US entities went relatively smoothly, but the
bankruptcy of its subsidiaries in several jurisdictions was costly and time consuming.
The main reason why substantial and unnecessary losses occurred was that the legal
organization of Lehman Brothers did not resemble its operational and functional
organization. The operations of its legally separate subsidiaries were tightly integrated,
with the consequence that subsidiaries found themselves cash strapped when the parent
went bankrupt. Assets associated with activities in one subsidiary could be booked in
another subsidiary. European cross-border banks are generally operating as
subsidiaries in host countries, in spite of close operational and functional integration.
The host country banks operate as de facto branches, in spite of being separate legal
entities under host country jurisdiction.
The resolution of a cross-border bank in the EU will, for these reasons, encounter
exactly the problems of Lehman Brothers if responsibility for resolution is entirely a
national responsibility. The banking union in its complete formrepresents a remedy for
this problem, but in the phases before a Single Resolution Mechanism(SRM) has become
reality, the Lehman problem will exist. The Recovery and Resolution Directive requires
national resolution authorities to address this issue, but it offers no specifc solution,
except that resolution authorities in host- and home countries should cooperate. The
conficts among these authorities are not easily resolved, however, if the bank in distress
is opaque and de facto organized as a bank with several branches.
The jurisdictional conficts can be minimized with a requirement that host
country subsidiaries must be operationally separable from a distressed home bank
within 24 hours. New Zealand has such a requirement as a part of its Open
Resolution Procedures.
The ESFRC recommends that the EU implements a “separability” rule for the
period before the SRM is in place. This rule would require that subsidiaries must be
able to conduct its important functions within 24 hours after closing as a result of
distress of the home bank. Without such a rule, the complexity of resolving a
cross-border bank may leave the authorities with no choice except a bailout. The
separability includes information and risk management systems, participation in
payment systems, customers’ access to deposits and clarity with respect to the
booking and origination of assets and claims. Living wills can help prepare
resolution authorities, but without a clear separability requirement, the
jurisdictional conficts are most likely inevitable.
5.2 Phase 3
Toward a European Resolution Authority: there have been many political discussions
on the question of how a truly European resolution authority should be created.
Important divisions exist between member states, also on the question of Treaty change
and the question whether the European Commission should play an important role in
the process. The ESFRC thinks that it is unfortunate that a large part of the discussions
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has been focusing on this issue, while urgent questions on the frst two phases of
implementation of the Banking Union are not yet answered and deserve urgent
attention.
Note
1. The amounts (euro billion) received by Group 1 banks and SAREB were: BFA-Bankia: 17.95;
Catalunya Caixa: 9.08; NCG Banco: 5.42; Banco de Valencia: 4.50; SAREB: 2.5.
References
Bruni, F. (2013), Speech in the Workshop on The EU Banking Union and its Implications on the
Non-EU Countries, University of Belgrade, 9 September, available at: www.
unicreditanduniversities.eu/uploads/assets/workshops/Bratislava_23_October_2013_
programme_prel.pdf
Buti, M., and Padoan, P.C. (2013), “Howto make Europe’s incipient recovery durable: a rejoinder”,
8 October 2013, Vox EU, available at: www.voxeu.org/article/how-make-europes-incipient-
recovery-durable-rejoinder (accessed 28 September 2014).
Carbó-Valverde and Rodriguez (2013), “The European banking union from the Spanish
perspective: myths and reality”, Spanish Economic and Financial Outlook, Vol. 2 No. 4,
pp. 25-34.
Cohen, B. (2013), “How have banks adjusted to higher capital requirements?”, BIS Quarterly
Review, September 2013, pp. 25-41.
De Grauwe, P. and Ji, Y. (2013), “Fiscal implications of the ECB’s bond-buying programme”, 14
June VoxEU, available at: www.voxeu.org/article/fscal-implications-ecb-s-bond-buying-
programme (accessed 28 September 2014).
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press-release_MEMO-13-272_en.htm?locale?en (accessed 28 September 2014).
European Commission (EC) (2014a), “Stability and growth pact”, available at:http://ec.europa.eu/
economy_fnance/economic_governance/sgp/index_en.htm (accessed 28 September 2014).
European Council (EC) (2013), “Conclusions”, EUCO 104/2/13 REV 2, 28 June, available at: www.
consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/137634.pdf (accessed 28
September 2014).
European Shadow Financial Regulatory Committee (ESFRC) (2012), Statement No. 36:
“Resolution and Recovery in a Banking Union”, 22 October, London, available at: www.
esfrc.eu/sitebuildercontent/sitebuilderfles/statement36.pdf (accessed 28 September 2014).
European ShadowFinancial Regulatory Committee (ESFRC) (2013), Statement No. 37: “Preparing
for a European Banking Union”, 16 September, Brussels, available at: www.esfrc.eu/id49.
html (accessed 28 September 2014).
Litan, R. (Ed.) ( 2011), “The world in crisis: insights from six shadow fnancial regulatory
committees from around the world”, Wharton Financial Institutions Center, University of
Pennsylvania, Philadelphia.
Véron, N. (2013), “Arealistic bridge towards European banking union”, 27 June 2013: available at:
www.bruegel.org/publications/publication-detail/publication/783-a-realistic-bridge-
towards-european-banking-union/ (accessed 28 September 2014).
Viñals, J., Pazarbasioglu, C., Surti, J., Narain, A., Erbenova, M. and Chow, J. (2013), “Creating a
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49
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Further reading
European Commission (EC) (2009), “The high-level group on fnancial supervision in the EU,
report, 25 February, available at:http://ec.europa.eu/internal_market/fnances/docs/de_
larosiere_report_en.pdf (accessed 28 September 2014).
European Commission (EC) (2011), “Background on the Euro plus pact”, available at:http://ec.
europa.eu/europe2020/pdf/euro_plus_pact_background_december_2011_en.pdf (accessed
28 September 2014).
European Commission (EC) (2013), Communication COM, 490.
European Commission (EC) (2014b), “Regulatory capital”, available at:http://ec.europa.eu/
internal_market/bank/regcapital/ (accessed 28 September 2014).
Willet, T.D., Wihlborg, C. and Zhang, N. (2010), “The euro crisis; it isn’t just fscal”, World
Economics, Vol. 11 No. 4 (December), pp. 25-36.
About the authors
Santiago Carbó-Valverde is a Professor of Economics and Finance at the Bangor Business School,
Bangor University, North Wales, and Head of Financial Studies at the Spanish economic and
social research foundation FUNCAS. Santiago Carbó-Valverde is the corresponding author and
can be contacted at: [email protected]
Harald A. Benink is a Professor of Banking and Finance at Tilburg University in The
Netherlands. He is also a Research Associate at the Financial Markets Group of the London School
of Economics. Furthermore, he is a Chairman of the European Shadow Financial Regulatory
Committee.
Tom Berglund is a Professor of Applied Microeconomics and the Theory of the Firm at
Hanken School of Economics, and Director of Hanken Centre for Corporate Governance. He is a
chairperson of the Nordic Corporate Governance Network and a member of the European Shadow
Financial Regulatory Committee.
Clas Wihlborg is the Fletcher Jones Chair in International Business at Chapman University in
Orange, California, and a Visiting Professor at University West in Trollhättan., Sweden.
For instructions on how to order reprints of this article, please visit our website:
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