Sustainable Architecture for Finance in Europe (SAFE)
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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 paper analyzes the relationship between monetary policy and financial stability in the Banking Union. There is no uniform global model regarding the relationship between monetary policy-making on the one hand, and prudential supervision on the other. Before the crisis, EU Member States followed different approaches, some of them uniting monetary and supervisory functions in one institution, others assigning them to different, neatly separated institutions. The financial crisis has underlined that monetary policy and prudential supervision deeply affect each other, especially in case of systemic events. Even in normal times, monetary and supervisory decisions might conflict with each other. After the crisis, some jurisdictions have moved towards a more holistic approach under which monetary policy takes supervisory considerations into account, while supervisory decisions pay due regard to monetary policy.
The Banking Union puts prudential supervision in the hands of the European Central Bank (ECB), the institution responsible for monetary policy. Nevertheless, at its establishment there was the political understanding that the ECB should follow a policy of meticulous separation in the discharge of its different functions. This raises the question whether the ECB may pursue a holistic approach to monetary policy and supervisory decision-making, respectively. On the basis of a purposive reading of the monetary policy mandate and the SSM Regulation, the paper answers this question in the affirmative. Effective monetary policy (or supervision) requires financial stability (or smooth monetary policy transmission). Moreover, without a holistic approach, the SSM Regulation is more likely to provoke the adoption of mutually defeating decisions by the Governing Board. The reputation of the ECB would suffer considerably under such a situation – in a field where reputation is of paramount importance for effective policy.
As any meticulous separation between monetary and supervisory functions turns out to be infeasible, the paper explores the reasons. Parting from Katharina Pistor’s legal theory of finance, which puts the emphasis on exogenous factors to explain the (non)enforcement of legal rules, the paper suggests a legal instability theorem which focuses on endogenous reasons, such as law’s indeterminacy, contextuality, and responsiveness to democratic deliberation. This raises the question whether the holistic approach would be democratically legitimate under the current framework of the ESCB. The idea of technocratic legitimacy that exempts the ECB from representative structures is effectively called into question by the legal instability theorem. This does not imply that the independence of the ECB should be given up, as there are no viable alternatives to protect monetary policy against the time inconsistency problem. Rather, any solution might benefit from recognizing the ECB in its mixed technocratic and political shape as a centerpiece of European integration and improving.
In its first ten years (2014-2023), the banking union was successful in its prudential agenda but failed spectacularly in its underlying objective: establishing a single banking market in the euro area. This goal is now more important than ever, and easier to attain than at any time in the last decade. To make progress, cross-border banks should receive a specific treatment within general banking union legislation. Suggestions are made on how to make such regulatory carve-out effective and legally sound.
Supranational supervision
(2022)
We exploit the establishment of a supranational supervisor in Europe (the Single Supervisory Mechanism) to learn how the organizational design of supervisory institutions impacts the enforcement of financial regulation. Banks under supranational supervision are required to increase regulatory capital for exposures to the same firm compared to banks under the local supervisor. Local supervisors provide preferential treatment to larger institutes. The central supervisor removes such biases, which results in an overall standardized behavior. While the central supervisor treats banks more equally, we document a loss in information in banks’ risk models associated with central supervision. The tighter supervision of larger banks results in a shift of particularly risky lending activities to smaller banks. We document lower sales and employment for firms receiving most of their funding from banks that receive a tighter supervisory treatment. Overall, the central supervisor treats banks more equally but has less information about them than the local supervisor.
Ausgehend von einer Erläuterung der Kriseninterpretation (crisis narrative), wie sie in dem Bericht der Liikanen-Kommission zugrunde liegt, werden die nach Ansicht des Verfassers zentralen Vorschläge des Kommissionsberichts ausgewählt, vorgestellt und in den größeren Rahmen einer erneuerten Ordnungspolitik für die Finanzmärkte Europas eingeordnet. Die mit den Vorschlägen eng zusammenhängenden Reformelemente der Bankenunion werden in diesem Text bewusst ausgeklammert. Die beiden zentralen Strukturvorschläge des Liikanen-Berichts betreffen die Abspaltung der Handelsgeschäfte von dem Universalbankengeschäft für große, internationale Banken (der Trennbankenvorschlag), sowie die verpflichtende Emission nachrangigen, glaubwürdig haftenden Fremdkapitals (der strenge Bail-in Vorschlag). Glaubwürdigkeit der Haftungszusage wird durch strenge Halterestriktionen erreicht. Vorhersehbare Folgerungen einer Einführung dieser Strukturregeln für die Finanzindustrie und -märkte werden in einem abschließenden Teil angesprochen.
In the aftermath of the global financial crisis, both resolution planning, i.e. contingency planning by both regulated institutions and public authorities in order to prepare their actions in financial crisis, and concepts for structural bank reform have been identified as possible solutions to ending “Too Big To Fail” and foster market discipline among bank owners, bank managers and investors in bank debt. Both concepts thus complement the global quest for reliable procedures and tools for bank resolution that would minimise systemic implications once large and complex financial institutions have reached the stage of insolvency. Given the complex task of orchestrating swift and effective resolution actions, especially with regard to cross-border banking groups and financial conglomerates, planning ahead in good times has since been widely recognised as crucial for enhancing resolvability. At least part of the impediments to resolution will be found in organisational, financial and legal complexity that has evolved in banks and groups over time. To remove these impediments, interference with existing corporate and group structures is all but inevitable. However, in both international standard setting and at the European Union level, issues related to resolution planning (within the context of bank resolution reform) and structural banking reforms to date have been discussed rather separately. This lack of consistency is questionable, given the obvious need to reconcile both approaches in order to facilitate effective implementation and enforcement especially with regard to large, complex banking groups. Based on an analysis both of the Bank Recovery and Resolution Directive and the SRM Regulation, this paper explores how these problems could be dealt with within the context of the European Banking Union.
This paper summarizes the key proposals of the report by the Liikanen Commission. It starts with an explanation of a crisis narrative underlying the Report and its proposals. The proposals aim for a revitalization of market discipline in financial markets. The two main structural proposals of the Liikanen Report are: first, for large banks, the separation of the trading business from other parts of the banking business (the "Separation Proposal"), and the mandatory issuing of subordinated bank debt thought to be liable (the strict "Bail-in Proposal"). The credibility of this commitment to private liability is achieved by strict holding restrictions. The anticipated consequences of the introduction of these structural regulations for the financial industry and markets are addressed in a concluding part.
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.
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).
Following the financial crash and the subsequent recession, European policymakers have undertaken major reforms regarding the European Economic and Monetary Union (EMU). Yet, the success rate is mixed. Several reform proposals have either completely failed due to opposition forces or are still pending, sometimes for years. This article provides an overview of reforms in four major policy fields: financial stabilisation, economic governance, fiscal solidarity, and cooperative dissolution. Building on the conceptual foundation of policy analysis, it distinguishes between policy outputs and outcomes. Policy output refers to legislation being adopted or agreement on treaty changes, while policy outcomes depict the result from the implementation process.