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Almost ten years after the European Commission action plan on building a capital markets union (CMU) and despite incremental progress, e.g. in the form of the EU Listing Act, the picture looks dire. Stock exchanges, securities markets, and supervisory authorities remain largely national, and, in many cases, European companies have decided to exclusively list overseas. Notwithstanding the economic and financial benefits of market integration, CMU has become a geopolitical necessity. A unified capital market can bolster resilience, strategic autonomy, and economic sovereignty, reduce dependence on external funding, and may foster economic cooperation between member states.
The reason for the persistent stand-still in Europe’s CMU development is not so much the conflict between market- and state-based integration, but rather the hesitancy of national regulatory and supervisory bodies to relinquish powers. If EU member states wanted to get real about CMU (as they say, and as they should), they need to openly accept the loss of sovereignty that follows from a true unified capital market. Building on economic as well as historical evidence, the paper offers viable proposals on how to design competent institutions within the current European framework.
This note outlines the case for speedy capital market integration and for the adoption of a common regulatory framework and single supervisory authority from a political economy perspective. We also show the alternative case for harmonization and centralization via regulatory competition, elaborating how competition between EU jurisdictions by way of full mutual recognition may lead to a (cost-)efficient and standardized legal framework for capital markets. Lastly, the note addresses the political economy conflict that underpins the implementation of both models for integrating capital markets. We point out that, in both cases, national authorities experience a loss of legislative and jurisdictional competence at the national level. We predict that any plan to foster a stronger capital market union, following an institution based or a market-based strategy, will face opposition from powerful national stakeholders.
The lack of a European Deposit Insurance Scheme (EDIS) – often referred to as the ‘third pillar’ of Banking Union – has been criticized since the inception of the EU Banking Union. The Crisis Management and Deposit Insurance (CMDI) framework needs to rely heavily on banks’ internal loss absorbing capacity and provides little flexibility in terms of industry resolution funding. This design has, among others, led to the rare application of the CMDI, particularly in the case of small and medium sized retail banks. This reluctance of resolution authorities weakens any positive impact the CMDI may have on market discipline and ultimately financial stability. After several national governments pushed back against the establishment of an EDIS, the Commission recently took a different approach and tried to reform the CMDI comprehensively, without seeking to erect a ‘third pillar’. The overarching rationale of the CMDI Proposal is to make resolution funding more flexible. To this end, the proposal seeks to facilitate contributions from (national) deposit guarantee schemes (DGS). At the same time, the CMDI Proposal tries to broaden the scope of resolution to include smaller and medium sized banks. This paper provides an assessment of the CMDI Proposal. It argues that the CMDI Proposal is a step in the right direction but cannot overcome fundamental deficiencies in the design of the Banking Union.
The lack of a European Deposit Insurance Scheme (EDIS) – often referred to as the ‘third pillar’ of Banking Union – has been criticized since the inception of the EU Banking Union. The Crisis Management and Deposit Insurance (CMDI) framework needs to rely heavily on banks’ internal loss absorbing capacity and provides little flexibility in terms of industry resolution funding. This design has, among others, led to the rare application of the CMDI, particularly in the case of small and medium sized retail banks. This reluctance of resolution authorities weakens any positive impact the CMDI may have on market discipline and ultimately financial stability. After several national governments pushed back against the establishment of an EDIS, the Commission recently took a different approach and tried to reform the CMDI comprehensively, without seeking to erect a ‘third pillar’. The overarching rationale of the CMDI Proposal is to make resolution funding more flexible. To this end, the proposal seeks to facilitate contributions from (national) deposit guarantee schemes (DGS). At the same time, the CMDI Proposal tries to broaden the scope of resolution to include smaller and medium sized banks. This paper provides an assessment of the CMDI Proposal. It argues that the CMDI Proposal is a step in the right direction but cannot overcome fundamental deficiencies in the design of the Banking Union.
Banking Union is crucial for European integration, ensuring financial stability in the single market for financial services. The Court of Justice of the European Union (CJEU) plays an essential role in interpreting and enforcing the legal framework of the Banking Union, especially regarding the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM). This in-depth analysis scrutinises the pertinent CJEU case law and highlights its implications for the Banking Union and the EU legal order.
This document was provided/prepared by the Economic Governance and EMU Scrutiny Unit at the request of the ECON Committee.
The SVB case is a wake-up call for Europe’s regulators as it demonstrates the destructive power of a bank-run: it undermines the role of loss absorbing capital, elbowing governments to bailout affected banks. Many types of bank management weaknesses, like excessive duration risk, may raise concerns of bank losses – but to serve as a run-trigger, there needs to be a large enough group of bank depositors that fails to be fully covered by a deposit insurance scheme. Latent run-risk is the root cause of inefficient liquidations, and we argue that a run on SVB assets could have been avoided altogether by a more thoughtful deposit insurance scheme, sharply distinguishing between loss absorbing capital (equity plus bail-in debt) and other liabilities which are deemed not to be bail-inable, namely demand deposits. These evidence-based insights have direct implications for Europe’s banking regulation, suggesting a minimum and a maximum for a banks’ loss absorption capacity.
We contribute to the debate about the future of capital markets and corporate finance, which has ensued against the background of a significant boom in private markets and a corresponding decline in the number of firms and the amount of capital raised in public markets in the US and Europe.
Our research sheds light on the fluctuating significance of public and private markets for corporate finance over time, and challenges the conventional view of a linear progression from one market to the other. We argue instead that a more complex pattern of interaction between public and private markets emerges, after taking a long-term perspective and examining historical developments more closely.
We claim that there is a dynamic divide between these markets, and identify certain factors that determine the degree to which investors, capital, and companies gravitate more towards one market than the other. However, in response to the status quo, other factors will gain momentum and favor the respective other market, leading to a new (unstable) equilibrium. Hence, we observe the oscillating domains of public and private markets over time. While these oscillations imply ‘competition’ between these markets, we unravel the complementarities between them, which also militate against a secular trend towards one market. Finally, we examine the role of regulation in this dynamic divide as well as some policy implications arising from our findings.
Who should hold bail-inable debt and how can regulators police holding restrictions effectively?
(2023)
This paper analyses the demand-side prerequisites for the efficient application of the bail-in tool in bank resolution, scrutinises whether the European bank crisis management and deposit insurance (CMDI) framework is apt to establish them, and proposes amendments to remedy identified shortcomings.
The first applications of the new European CMDI framework, particularly in Italy, have shown that a bail-in of debt holders is especially problematic if they are households or other types of retail investors. Such debt holders may be unable to bear losses, and the social implications of bailing them in may create incentives for decision makers to refrain from involving them in bank resolution. In turn, however, if investors can expect resolution authorities (RAs) to behave inconsistently over time and bail-out bank capital and debt holders despite earlier vows to involve them in bank rescues, the pricing and monitoring incentives that the crisis management framework seeks to invigorate would vanish. As a result, market discipline would be suboptimal and moral hazard would persist. Therefore, the policy objectives of the CMDI framework will only be achieved if critical bail-in capital is not held by retail investors without sufficient loss-bearing capacity. Currently, neither the CMDI framework nor capital market regulation suffice to assure that this precondition is met. Therefore, some amendments are necessary. In particular, debt instruments that are most likely to absorb losses in resolution should have a high minimum denomination and banks should not be allowed to self-place such securities.
This study looks at potential windfall profits for the four banking acquisitions in 2023. Based on accounting figures, an FT article states that a total of USD 44bn was left on the table. We see accounting figures as a misleading analysis. By estimating marked-based cumulative abnormal returns (CAR), we find positive abnormal returns in all four cases which when made quantifiable, are around half of the FT’s accounting figures. Furthermore, we argue that transparent auctions with enough bidders should be preferred to negotiated bank sales.
This document was provided/prepared by the Economic Governance and EMU Scrutiny Unit at the request of the ECON Committee.
To ensure the credibility of market discipline induced by bail-in, neither retail investors nor peer banks should appear prominently among the investor base of banks’ loss absorbing capital. Empirical evidence on bank-level data provided by the German Federal Financial Supervisory Authority raises a few red flags. Our list of policy recommendations encompasses disclosure policy, data sharing among supervisors, information transparency on holdings of bail-inable debt for all stakeholders, threshold values, and a well-defined upper limit for any bail-in activity. This document was provided by the Economic Governance Support Unit at the request of the ECON Committee.
This briefing paper describes and evaluates the law and economics of institution(al) protection schemes. Throughout our analysis, we use Europe’s largest such scheme, that of German savings banks, as paradigm. We find strengths and weaknesses: Strong network-internal monitoring and early warning seems to be an important contributor to IPS network success. Similarly, the geographical quasi-cartel encourages banks to build a strong client base, including SME, in all regions. Third, the growth of the IPS member institutions may have benefitted from the strictly unlimited protection offered, in terms of euro amounts per account holder. The counterweighing weaknesses encompass the conditionality of the protection pledge and the underinvestment risk it entails, sometimes referred to as blackmailing the government, as well as the limited diversification potential of the deposit insurance within the network, and the near-incompatibility of the IPS model with the provisions of the BRRD, particularly relating to bail-in and resolution. Consequently, we suggest, as policy guidance, to treat large IPS networks similar to large banking groups, and put them as such under the direct supervision of the ECB within the SSM. Moreover, we suggest strengthening the seriousness of a deposit insurance that offers unlimited protection. Finally, to improve financial stability, we suggest embedding the IPS model into a multi-tier deposit re-insurance scheme, with a national and a European layer. This document was provided by the Economic Governance Support Unit at the request of the ECON Committee.
European banks have substantial investments in assets that are
measured without directly observable market prices (mark-to-
model). Financial disclosures of these value estimates lack
standardization and are hard to compare across banks. These
comparability concerns are concentrated in large European
banks that extensively rely on level 3 estimates with the most
unobservable inputs. Although the relevant balance sheet
positions only represent a small fraction of these large banks’
total assets (2.9%), their value equals a significant fraction of core
equity tier 1 (48.9%). Incorrect valuations thus have a potential to
impact financial stability. 85% of these bank assets are under
direct ECB supervision. Prudential regulation requires value
adjustments that are apt to shield capital against valuation risk.
Yet, stringent enforcement is critical for achieving this objective.
This document was provided by the Economic Governance
Support Unit at the request of the ECON Committee.
The great financial crisis and the euro area crisis led to a substantial reform of financial safety nets across Europe and – critically – to the introduction of supranational elements. Specifically, a supranational supervisor was established for the euro area, with discrete arrangements for supervisory competences and tasks depending on the systemic relevance of supervised credit institutions. A resolution mechanism was created to allow the frictionless resolution of large financial institutions. This resolution mechanism has been now complemented with a funding instrument.
While much more progress has been achieved than most observers could imagine 12 years ago, the banking union remains unfinished with important gaps and deficiencies. The experience over the past years, especially in the area of crisis management and resolution, has provided impetus for reform discussions, as reflected most lately in the Eurogroup statement of 16 June 2022.
This Policy Insight looks primarily at the current and the desired state of the banking union project. The key underlying question, and the focus here, is the level of ambition and how it is matched with effective legal and regulatory tools. Specifically, two questions will structure the discussions:
What would be a reasonable definition and rationale for a ‘complete’ banking union? And what legal reforms would be required to achieve it?
Banking union is a case of a new remit of EU-level policy that so far has been established on the basis of long pre-existing treaty stipulations, namely, Article 127(6) TFEU (for banking supervision) and Article 114 TFEU (for crisis management and deposit insurance). Could its completion be similarly carried out through secondary law? Or would a more comprehensive overhaul of the legal architecture be required to ensure legal certainty and legitimacy?
We investigate whether the bank crisis management framework of the European banking union can effectively bar the detrimental influence of national interests in cross-border bank failures. We find that both the internal governance structure and decision making procedure of the Single Resolution Board (SRB) and the interplay between the SRB and national resolution authorities in the implementation of supranationally devised resolution schemes provide inroads that allow opposing national interests to obstruct supranational resolution. We also show that the Single Resolution Fund (SRG), even after the ratification of the reform of the European Stability Mechanism (ESM) and the introduction of the SRF backstop facility, is inapt to overcome these frictions. We propose a full supranationalization of resolution decision making. This would allow European authorities in charge of bank crisis management to operate autonomously and achieve socially optimal outcomes beyond national borders.
We study the design features of disclosure regulations that seek to trigger the green transition of the global economy and ask whether such regulatory interventions are likely to bring about sufficient market discipline to achieve socially optimal climate targets.
We categorize the transparency obligations stipulated in green finance regulation as either compelling the standardized disclosure of raw data, or providing quality labels that signal desirable green characteristics of investment products based on a uniform methodology. Both categories of transparency requirements can be imposed at activity, issuer, and portfolio level.
Finance theory and empirical evidence suggest that investors may prefer “green” over “dirty” assets for both financial and non-financial reasons and may thus demand higher returns from environmentally-harmful investment opportunities. However, the market discipline that this negative cost of capital effect exerts on “dirty” issuers is potentially attenuated by countervailing investor interests and does not automatically lead to socially optimal outcomes.
Mandatory disclosure obligations and their (public) enforcement can play an important role in green finance strategies. They prevent an underproduction of the standardized high-quality information that investors need in order to allocate capital according to their preferences. However, the rationale behind regulatory intervention is not equally strong for all categories and all levels of “green” disclosure obligations. Corporate governance problems and other agency conflicts in intermediated investment chains do not represent a categorical impediment for green finance strategies.
However, the many forces that may prevent markets from achieving socially optimal equilibria render disclosure-centered green finance legislation a second best to more direct forms of regulatory intervention like global carbon taxation and emissions trading schemes. Inherently transnational market-based green finance concepts can play a supporting role in sustainable transition, which is particularly important as long as first-best solutions remain politically unavailable.
Die BaFin hat im August 2021 eine Richtlinie für nachhaltige Investmentvermögen vorgelegt. Diese soll regeln, unter welchen Voraussetzungen ein Fonds als „nachhaltig“, „grün“ o.ä. bezeichnet und vermarktet werden darf. Zwar sind aufsichtsrechtliche Maßnahmen, die darauf abzielen, die Qualität von Informationen zu Nachhaltigkeitscharakteristika von Finanzprodukten zu erhöhen, grundsätzlich zu begrüßen. Der Erlass der konsultierten Richtlinie ist jedoch nicht zu befürworten. Im Lichte der einschlägigen unionsrechtlichen Regelwerke und Initiativen ist unklar, welchen informationellen Mehrwert diese rein nationale Maßnahme schaffen soll. Ferner bleibt auf Grundlage des Entwurfs unklar, anhand welcher Maßstäbe die „Nachhaltigkeit“ eines Investmentvermögens beurteilt werden soll, sodass das primäre Regelungsziel einer verbesserten Anlegerinformation nicht erreicht würde.
This in-depth analysis provides evidence on differences in the practice of supervising large banks in the UK and in the euro area. It identifies the diverging institutional architecture (partially supranationalised vs. national oversight) as a pivotal determinant for a higher effectiveness of supervisory decision making in the UK. The ECB is likely to take a more stringent stance in prudential supervision than UK authorities. The setting of risk weights and the design of macroprudential stress test scenarios document this hypothesis. This document was provided by the Economic Governance Support Unit at the request of the ECON Committee.
This document was requested by the European Parliament's Committee on Economic and Monetary Affairs. It was originally published on the European Parliament’s webpage: www.europarl.europa.eu/RegData/etudes/IDAN/2021/689443/IPOL_IDA(2021)689443_EN.pdf
This in-depth analysis proposes ways to retract from supervisory COVID-19 support measures without perils for financial stability. It simulates the likely impact of the corona crisis on euro area banks’ capital and predicts a significant capital shortfall. We recommend to end accounting practices that conceal loan losses and sustain capital relief measures. Our in-depth analysis also proposes how to address the impending capital shortfall in resolution/liquidation and a supranational recapitalisation.
This paper contributes to the debate on the adequate regulatory treatment of non-bank financial intermediation (NBFI). It proposes an avenue for regulators to keep regulatory arbitrage under control and preserve sufficient space for efficient financial innovation at the same time. We argue for a normative approach to supervision that can overcome the proverbial race between hare and hedgehog in financial regulation and demonstrate how such an approach can be implemented in practice. We first show that regulators should primarily analyse the allocation of tail risk inherent in NBFI. Our paper proposes to apply regulatory burdens equivalent to prudential banking regulation if the respective transactional structures become only viable through indirect or direct access to (ad hoc) public backstops. Second, we use insights from the scholarship on regulatory networks as communities of interpretation to demonstrate how regulators can retrieve the information on transactional innovations and their risk-allocating characteristics that they need to make the pivotal determination. We suggest in particular how supervisors should structure their relationships with semi-public gatekeepers such as lawyers, auditors and consultants to keep abreast of the risk-allocating features of evolving transactional structures. Finally, this paper uses the example of credit funds as non-bank entities economically engaged in credit intermediation to illustrate the merits of the proposed normative framework and to highlight that multipolar regulatory dialogues are needed to shed light on the specific risk-allocating characteristics of recent contractual innovations.
Do current levels of bank capital in Europe suffice to support a swift recovery from the COVID-19 crisis? Recent research shows that a well-capitalized banking sector is a major factor driving the speed and breadth of recoveries from economic downturns. In particular, loan supply is negatively affected by low levels of capital. We estimate a capital shortfall in European banks of up to 600 billion euro in a severe scenario, and around 143 billion euro in a moderate scenario. We propose a precautionary recapitalization on the European level that puts the European Stability Mechanism (ESM) center stage. This proposal would cut through the sovereign-bank nexus, safeguard financial stability, and position the Eurozone for a quick recovery from the pandemic.
The use of contractual engineering to create channels of credit intermediation outside of the realm of banking regulation has been a recurring activity in Western financial systems over the last 50 years. After the financial crisis of 2007 and 2008, this phenomenon, at that time commonly referred to as ‘shadow banking’, evoked a large-scale regulatory backlash, including several specific regulatory constraints being placed on non-bank financial institutions (NBFI). This paper proposes a different avenue for regulators to keep regulatory arbitrage under control and preserve sufficient space for efficient financial innovation. Rather than engaging in the proverbial race between hare and hedgehog that is emerging with increasingly specific regulation of particular contractual arrangements, this paper argues for a normative approach to supervision. We outline this approach in detail by showing that regulators should primarily analyse the allocation of tail risk inherent in the respective contractual arrangements. Our paper proposes to assign regulatory burdens equivalent to prudential banking regulation, in case these arrangements become only viable through indirect or direct access to an (ad hoc) public backstop. In order to make the pivotal assessment, regulators will need information about recent contractual innovations and their risk-allocating characteristics. According to the scholarship on regulatory networks serving as communities of interpretation, we suggest in particular how regulators should structure their relationships with semi-public gatekeepers such as lawyers, auditors and consultants to keep abreast of the real-world implications of evolving transactional structures. This paper then uses the rise of credit funds as a non-bank entities economically engaged in credit intermediation to apply this normative framework, pointing to recent contractual innovations that call for more regulatory scrutiny in a multipolar regulatory dialogue.
In this note, we first highlight different developments for banks under direct ECB supervision within the SSM that may prompt further investigation by supervisors. We find that banks that were weakly capitalized at the start of direct ECB supervision (1) still face elevated levels of non-performing loans, (2) are less cost-efficient and (3) reduced their share of subordinated debt financing over the last years. We then stress the importance of continuous and ongoing cost-benefit analysis regarding banking supervision in Europe. We also encourage processes to question existing supervisory practices to ensure a lean and efficient banking supervision. Finally, we underline the need of continuous and intensified coordination among regulatory bodies in the Banking Union since the efficacy of European bank supervision rests on its interplay with many different institutions.
This document was requested by the European Parliament's Committee on Economic and Monetary Affairs. It was originally published on the European Parliament’s webpage.
Germany Inc. was an idiosyncratic form of industrial organization that put financial institutions at the center. This paper argues that the consumption of private benefits in related party transactions by these key agents can be understood as a compensation for their coordinating and monitoring function in Germany Inc. As a consequence, legal tools apt to curb tunneling remained weak in Germany from the perspective of outside shareholders. While banks were in a position to use their firm-level knowledge and influence to limit rent-seeking by other related parties, their own behavior was not subject to meaningful controls. With the dismantling of Germany Inc. banks seized their monitoring function and left an unprecedented void with regard to related party transactions. Hence, a “traditionalist” stance which opposes law reform for related party transactions in Germany negatively affects capital market development, growth opportunities and ultimately social welfare.
This paper is the national report for Germany prepared for the to the 20th General Congress of the International Academy of Comparative Law 2018 and gives an overview of the regulation of crowdfunding in Germany and the typical design of crowdfunding campaigns under this legal framework. After a brief survey of market data, it delineates the classification of crowdfunding transactions in German contract law and their treatment under the applicable conflict of laws regime. It then turns to the relevant rules in prudential banking regulation and capital market law. It highlights disclosure requirements that flow from both contractual obligations of the initiators of campaigns vis-à-vis contributors and securities regulation (prospectus regime). After sketching the most important duties of the parties involved in crowdfunding, the report also looks at the key features of the respective transactions’ tax treatment.
The publication of the Liikanen Group's final report in October 2012 was surrounded by high expectations regarding the implementation of the reform plans through the proposed measures that reacted to the financial and sovereign debt crises. The recommendations mainly focused on introducing a mild version of banking separation and the creation of the preconditions for bail-in measures. In this article, we present an overview of the regulatory reforms, to which the financial sector has been subject over the past years in accordance with the concepts laid out in the Liikanen Report. It becomes clear from our assessment that more specific steps have yet to be taken before the agenda is accomplished. In particular, bail-in rules must be implemented more consistently. Beyond the question of the required minimum, the authors develop the notion of a maximum amount of liabilities subject to bail-in. The combination of both components leads to a three-layer structure of bank capital: a bail-in tranche, a deposit-insured bailout tranche, and an intermediate run-endangered mezzanine tranche. The size and treatment of the latter must be put to a political debate that weighs the costs and benefits of a further increase in financial stability beyond that achieved through loss-bearing of the bail-in tranche.
This paper analyzes the bail-in tool under the Bank Recovery and Resolution Directive (BRRD) and predicts that it will not reach its policy objective. To make this argument, this paper first describes the policy rationale that calls for mandatory private sector involvement (PSI). From this analysis, the key features for an effective bail-in tool can be derived.
These insights serve as the background to make the case that the European resolution framework is likely ineffective in establishing adequate market discipline through risk-reflecting prices for bank capital. The main reason for this lies in the avoidable embeddedness of the BRRD’s bail-in tool in the much broader resolution process, which entails ample discretion of the authorities also in forcing private sector involvement. Moreover, the idea that nearly all positions on the liability side of a bank’s balance sheet should be subjected to bail-in is misguided. Instead, a concentration of PSI in instruments that fall under the minimum requirements for own funds and eligible liabilities (MREL) is preferable.
Finally, this paper synthesized the prior analysis by putting forward an alternative regulatory approach that seeks to disentangle private sector involvement as a precondition for effective bank-resolution as much as possible form the resolution process as such.
Why MREL won’t help much
(2017)
The bail-in tool as implemented in the European bank resolution framework suffers from severe shortcomings. To some extent, the regulatory framework can remedy the impediments to the desirable incentive effect of private sector involvement (PSI) that emanate from a lack of predictability of outcomes, if it compels banks to issue a sufficiently sized minimum of high-quality, easy to bail-in (subordinated) liabilities. Yet, even the limited improvements any prescription of bail-in capital can offer for PSI’s operational effectiveness seem compromised in important respects.
The main problem, echoing the general concerns voiced against the European bail-in regime, is that the specifications for minimum requirements for own funds and eligible liabilities (MREL) are also highly detailed and discretionary and thus alleviate the predicament of investors in bail-in debt, at best, only insufficiently. Quite importantly, given the character of typical MREL instruments as non-runnable long-term debt, even if investors are able to gauge the relevant risk of PSI in a bank’s failure correctly at the time of purchase, subsequent adjustment of MREL-prescriptions by competent or resolution authorities potentially change the risk profile of the pertinent instruments. Therefore, original pricing decisions may prove inadequate and so may market discipline that follows from them.
The pending European legislation aims at an implementation of the already complex specifications of the Financial Stability Board (FSB) for Total Loss Absorbing Capacity (TLAC) by very detailed and case specific amendments to both the regulatory capital and the resolution regime with an exorbitant emphasis on proportionality and technical fine-tuning. What gets lost in this approach, however, is the key policy objective of enhanced market discipline through predictable PSI: it is hardly conceivable that the pricing of MREL-instruments reflects an accurate risk-assessment of investors because of the many discretionary choices a multitude of agencies are supposed to make and revisit in the administration of the new regime. To prove this conclusion, this chapter looks in more detail at the regulatory objectives of the BRRD’s prescriptions for MREL and their implementation in the prospectively amended European supervisory and resolution framework.
Crowdfunding is a buzzword that signifies a sub-set in the new forms of finance facilitated by advances in information technology usually categorized as fintech. Concerns for financial stability, investor and consumer protection, or the prevention of money laundering or funding of terrorism hinge incrementally on including the new techniques to initiate financing relationships adequately in the regulatory framework.
This paper analyzes the German regulation of crowdinvesting and finds that it does not fully live up to the regulatory challenges posed by this novel form of digitized matching of supply and demand on capital markets. It should better reflect the key importance of crowdinvesting platforms, which may become critical providers of market infrastructure in the not too distant future. Moreover, platforms can play an important role in investor protection that cannot be performed by traditional disclosure regimes geared towards more seasoned issuers. Against this background, the creation of an exemption from the traditional prospectus regime seems to be a plausible policy choice. However, it needs to be complemented by an adequate regulatory stimulation of platforms’ role as gatekeepers.
The Judgement of the EGC in the Case T-122/15 – Landeskreditbank Baden-Württemberg - Förderbank v European Central Bank is the first statement of the European judiciary on the sub-stantive law of the Banking Union. Beyond its specific holding, the decision is of great importance, because it hints at the methodological approach the EGC will take in interpreting prudential banking regulation in the appeals against supervisory measures that fall in its jurisdiction under TFEU, arts. 256(1) subpara 1 and 263(4). Specifically, the case pertained to the scope of direct ECB oversight of significant banks in the euro area and the reassignment of this competence to national competent authorities (NCAs) in individual circumstances (Single Supervisory Mechanism (SSM) Regulation, art. 6(4) subpara 2; SSM Framework Regulation, arts. 70, 71).
According to the Bank Recovery and Resolution Directive (BRRD), introduced as a lesson from the recent financial crisis, the losses a failing bank incurred should generally be borne by its investors. Before a minimum bail-in has occurred, government money can only be injected in emergency cas-es to remedy a serious disturbance in the economy and to preserve financial stability. This policy letter argues that in case of the Italian Bank Monte dei Paschi di Siena (MPS), which the Italian gov-ernment currently plans to bail out, a resolution would most likely not cause such a systemic event. A bailout contrary to the existing rules will lead to a mispricing of bank capital and retard the re-structuring of the European banking sector, the authors write. They appeal to the European Central Bank, the Systemic Risk Board and the EU Commission to follow the rules as the test-case MPS will have a direct impact on the credibility of the new BRRD regime and the responsible institutions.
This study provides a graphic overview on core legislation in the area of economic and financial services. The presentation essentially covers the areas within the responsibility of the Economic and Monetary Affairs Committee (ECON); hence it starts with core ECON areas but also displays neighbouring areas of other Committees' competences which are closely connected to and impacting on ECON's work. It shows legislation in force, proposals and other relevant provisions on banking, securities markets and investment firms, market infrastructure, insurance and occupational pensions, payment services, consumer protection in financial services, the European System of Financial Supervision, European Monetary Union, euro bills and coins and statistics, competition, taxation, commerce and company law, accounting and auditing. Moreover, it notes selected provisions that might become relevant in the upcoming Article 50 TEU negotiations.
Bank regulators have the discretion to discipline banks by executing enforcement actions to ensure that banks correct deficiencies regarding safe and sound banking principles. We
highlight the trade-offs regarding the execution of enforcement actions for financial stability. Following this we provide an overview of the differences in the legal framework governing supervisors’ execution of enforcement actions in the Banking Union and the United States. After discussing work on the effect of enforcement action on bank behaviour and the real economy, we present data on the evolution of enforcement actions
and monetary penalties by U.S. regulators. We conclude by noting the importance of supervisors to levy efficient monetary penalties and stressing that a division of competences among different regulators should not lead to a loss of efficiency regarding
the execution of enforcement actions.
This paper analyses the bail-in tool under the BRRD and predicts that it will not reach its policy objective. To make this argument, this paper first describes the policy rationale that calls for mandatory PSI. From this analysis the key features for an effective bail-in tool can be derived. These insights serve as the background to make the case that the European resolution framework is likely ineffective in establishing adequate market discipline through risk-reflecting prices for bank capital. The main reason for this lies in the avoidable embeddedness of the BRRD’s bail-in tool in the much broader resolution process which entails ample discretion of the authorities also in forcing private sector involvement. Finally, this paper synthesized the prior analysis by putting forward an alternative regulatory approach that seeks to disentangle private sector involvement as a precondition for effective bank-resolution as much as possible form the resolution process as such.
The bail-in tool as implemented in the European bank resolution framework suffers from severe shortcomings. To some extent, the regulatory framework can remedy the impediments to the desirable incentive effect of private sector involvement (PSI) that emanate from a lack of predictability of outcomes, if it compels banks to issue a sufficiently sized minimum of high-quality, easy to bail-in (subordinated) liabilities. Yet, even the limited improvements any prescription of bail-in capital can offer for PSI’s operational effectiveness seem compromised in important respects.
The main problem, echoing the general concerns voiced against the European bail-in regime, is that the specifications for minimum requirements for own funds and eligible liabilities (MREL) are also highly detailed and discretionary and thus alleviate the predicament of investors in bail-in debt, at best, only insufficiently. Quite importantly, given the character of typical MREL instruments as non-runnable long-term debt, even if investors are able to gauge the relevant risk of PSI in a bank’s failure correctly at the time of purchase, subsequent adjustment of MREL-prescriptions by competent or resolution authorities potentially change the risk profile of the pertinent instruments. Therefore, original pricing decisions may prove inadequate and so may market discipline that follows from them.
The pending European legislation aims at an implementation of the already complex specifications of the Financial Stability Board (FSB) for Total Loss Absorbing Capacity (TLAC) by very detailed and case specific amendments to both the regulatory capital and the resolution regime with an exorbitant emphasis on proportionality and technical fine-tuning. What gets lost in this approach, however, is the key policy objective of enhanced market discipline through predictable PSI: it is hardly conceivable that the pricing of MREL-instruments reflects an accurate risk-assessment of investors because of the many discretionary choices a multitude of agencies are supposed to make and revisit in the administration of the new regime. To prove this conclusion, this chapter looks in more detail at the regulatory objectives of the BRRD’s prescriptions for MREL and their implementation in the prospectively amended European supervisory and resolution framework.
This paper investigates the potential implications of say on pay on management remuneration in Germany. We try to shed light on some key aspects by presenting quantitative data that allows us to gauge the pertinent effects of the German natural experiment that originates with the 2009 amendments to the Stock Corporation Act of 1965. In order to do this, we deploy a hand-collected data set for Germany's major firms (i.e. DAX 30), for the years 2006-2012. Rather than focusing exclusively on CEO remuneration we collected data for all members of the management board for the whole period under investigation. We observe that the compensation packages of management board members of Germany's DAX30-firms are quite closely linked to key performance measures. In addition, we find that salaries increase with the size of the company and that ownership concentration has no significant effect on compensation. Also, our findings suggest that the two-tier system seems to matter a lot when it comes to compensation. However, it would be misleading to state that we see no significant impact of the introduction of the German say on pay-regime. Our findings suggest that supervisory boards anticipate shareholder-behavior.
An important prerequisite for the efficiency of bail-in as a regulatory tool is that debt holders are able to bear the cost of a bail-in. Examining European banks’ subordinated debt we caution that households may be investors in bail-in able bonds. Since households do not fulfil the aforementioned prerequisite, we argue that European bank supervisors need to ensure that banks’ bail-in bonds are held by sophisticated investors. Existing EU market regulation insufficiently addresses mis-selling of bail-in instruments.
This paper looks into the specific influence that the European banking union will have on (future) bank client relationships. It shows that the intended regulatory influence on market conditions in principle serves as a powerful governance tool to achieve financial stability objectives.
From this vantage, it analyzes macro-prudential instruments with a particular view to mortgage lending markets – the latter have been critical in the emergence of many modern financial crises. In gauging the impact of the new European supervisory framework, it finds that the ECB will lack influence on key macro-prudential tools to push through more rigid supervisory policies vis-à-vis forbearing national authorities.
Furthermore, this paper points out that the current design of the European bail-in tool supplies resolution authorities with undue discretion. This feature which also afflicts the SRM imperils the key policy objective to re-instill market discipline on banks’ debt financing operations. The latter is also called into question because the nested regulatory technique that aims at preventing bail-outs unintendedly opens additional maneuvering space for political decision makers.
This paper looks into the specific influence that the European banking union will have on (future) bank client relationships. It shows that the intended regulatory influence on market conditions in principle serves as a powerful governance tool to achieve financial stability objectives.
From this vantage, it analyzes macro-prudential instruments with a particular view to mortgage lending markets – the latter have been critical in the emergence of many modern financial crises. In gauging the impact of the new European supervisory framework, it finds that the ECB will lack influence on key macro-prudential tools to push through more rigid supervisory policies vis-à-vis forbearing national authorities.
Furthermore, this paper points out that the current design of the European bail-in tool supplies resolution authorities with undue discretion. This feature which also afflicts the SRM imperils the key policy objective to re-instill market discipline on banks’ debt financing operations. The latter is also called into question because the nested regulatory technique that aims at preventing bail-outs unintendedly opens additional maneuvering space for political decision makers.
Negative Zinsen auf Einlagen – juristische Hindernisse und ihre wettbewerbspolitischen Auswirkungen
(2015)
Im anhaltenden Niedrigzinsumfeld tun Banken sich schwer damit, die ihnen zur Verfügung gestellte Liquidität einer renditeträchtigen Nachfrage zuzuführen. Darüberhinaus müssen sie auf Liquiditätsüberschüsse, die im Rahmen der Einlagenfazilität des Eurosystems über Nacht bei den nationalen Zentralbanken der Eurozone deponiert werden, Strafzinsen entrichtet. Vor diesem Hintergrund könnten Banken durch negative Einlagenzinsen das Anliegen verfolgen, die Nachfrage nach Aufbewahrung von (Sicht)Einlagen zu verringern. Einer solchen Strategie stehen aber aus juristischer Sicht Hindernisse entgegen, soweit der beschriebene Paradigmenwechsel auch im Rahmen existierender Kundenbeziehungen einseitig vorgenommen werden soll. Die rechtlichen Hürden sind weder Ausdruck einer realitätsfernen Haarspalterei, noch eines verbraucherschützenden Furors. Vielmehr ermöglichen sie privaten und gewerblichen Bankkunden, im Zeitpunkt der angestrebten Zinsanpassung bewusst über die Verwendung ihrer liquiden Mittel zu entscheiden.
The European Commission has published a Green Paper outlining possible measures to create a single market for capital in Europe. Our comments on the Commission’s capital markets union project use the functional finance approach as a starting point. Policy decisions, according to the functional finance perspective, should be essentially neutral (agnostic) in terms of institutions (level playing field). Our main angle, from which we assess proposals for the capital markets union agenda, are information asymmetries and the agency problems (screening, monitoring) which arise as a result. Within this perspective, we make a number of more specific proposals.
This paper contrasts the recent European initiatives on regulating corporate groups with alternative approaches to the phenomenon. In doing so it pays particular regard to the German codified law on corporate groups as the polar opposite to the piecemeal approach favored by E.U. legislation.
It finds that the European Commission’s proposal to submit (significant) related party transactions to enhanced transparency, outside fairness review, and ex ante shareholder approval is both flawed in its design and based on contestable assumptions on informed voting of institutional investors. In particular, the contemplated exemption for transactions with wholly owned subsidiaries allows controlling shareholders to circumvent the rule extensively. Moreover, vesting voting rights with (institutional) investors will not lead to the informed assessment that is hoped for, because these investors will rationally abstain from active monitoring and rely on proxy advisory firms instead whose competency to analyze non-routine significant related party transactions is questionable.
The paper further delineates that the proposed recognition of an overriding interest of the group requires strong counterbalances to adequately protect minority shareholders and creditors. Hence, if the Commission choses to go down this route it might end up with a comprehensive regulation that is akin to the unpopular Ninth Company Law Directive in spirit, though not in content. The latter prediction is corroborated by the pertinent parts of the proposal for a European Model Company Act.
How special are they? - Targeting systemic risk by regulating shadow banking : (October 5, 2014)
(2014)
This essay argues that at least some of the financial stability concerns associated with shadow banking can be addressed by an approach to financial regulation that imports its functional foundations more vigorously into the interpretation and implementation of existing rules. It shows that the general policy goals of prudential banking regulation remain constant over time despite dramatic transformations in the financial and technological landscape. Moreover, these overarching policy goals also legitimize intervention in the shadow banking sector. On these grounds, this essay encourages a more normative construction of available rules that potentially limits both the scope for regulatory arbitrage and the need for ever more rapid updates and a constant increase in the complexity of the regulatory framework. By tying the regulatory treatment of financial innovation closely to existing prudential rules and their underlying policy rationales, the proposed approach potentially ends the socially wasteful race between hare and tortoise that signifies the relation between regulators and a highly dynamic industry. In doing so it does not generally hamper market participants’ efficient discoveries where disintermediation proves socially beneficial. Instead, it only weeds-out rent-seeking circumventions of existing rules and standards.
How special are they? - Targeting systemic risk by regulating shadow banking : (October 5, 2014)
(2014)
This essay argues that at least some of the financial stability concerns associated with shadow banking can be addressed by an approach to financial regulation that imports its functional foundations more vigorously into the interpretation and implementation of existing rules. It shows that the general policy goals of prudential banking regulation remain constant over time despite dramatic transformations in the financial and technological landscape. Moreover, these overarching policy goals also legitimize intervention in the shadow banking sector. On these grounds, this essay encourages a more normative construction of available rules that potentially limits both the scope for regulatory arbitrage and the need for ever more rapid updates and a constant increase in the complexity of the regulatory framework. By tying the regulatory treatment of financial innovation closely to existing prudential rules and their underlying policy rationales, the proposed approach potentially ends the socially wasteful race between hare and tortoise that signifies the relation between regulators and a highly dynamic industry. In doing so it does not generally hamper market participants’ efficient discoveries where disintermediation proves socially beneficial. Instead, it only weeds-out rent-seeking circumventions of existing rules and standards.
Um den Teufelskreis sich wechselseitig verstärkender Banken- und Staatsschuldenkrisen zu durchbrechen, haben sich die europäischen Institutionen grundsätzlich dazu bekannt, eine Bankenunion zu schaffen. Der Dreh- und Angelpunkt der verfolgten Strategie liegt dabei darin, durch die Schaffung zentraler, d.h. supranationaler Auffangmechanismen die Ausfallrisiken von Banken und Staaten nachhaltig zu entkoppeln. Dabei ist zu beachten, dass gerade auch die einzelnen Elemente des institutionellen Reformpakets in ihrer Binnenstruktur so beschaffen sein müssen, dass vorhersehbare Ineffizienzen nicht dazu führen, dass Vorteile der Supranationalisierung aufgehoben oder gar in ihr Gegenteil verkehrt werden. Der vorliegende Beitrag diskutiert den Verordnungsentwurf der EU Kommission für einen Single Resolution Mechanism (SRM) vor dem Hintergrund dieser Forderung.