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33 [November 2016]
In the wake of the recent financial crisis, significant regulatory actions have been taken aimed at limiting risks emanating from banks’ trading activities. The goal of this paper is to look at the alternative reforms in the US, the UK and the EU, specifically with respect to the role of proprietary trading. Our conclusions can be summarized as follows: First, the focus on a prohibition of proprietary trading, as reflected in the Volcker Rule in the US and in the current proposal of the European Commission (Barnier proposal), is inadequate. It does not necessarily reduce risk-taking and it is likely to crowd out desired trading activities, thereby possibly affecting financial stability negatively. Second, trading separation into legally distinct or ring-fenced entities within the existing banking organizations, as suggested under the Vickers Report for the UK and the Liikanen proposal for the EU, is a more effective solution. Separation limits cross-subsidies between banking and proprietary trading and diminishes contagion risk, while still allowing for synergies and risk management across banking, non-proprietary trading and proprietary trading.
32
This Paper gives an overview of the German banking system and current challenges it is facing. It starts with an overview of the so-called ‘Three-Pillar-Banking-System’ and a detailed description of the current structure of the banking system in Germany. A brief comparison of the banking system in Germany with the ones in other European countries points out its uniqueness. The consequences of the financial crisis of 2007/2008 and further challenges for the German banking system are discussed, as well as the the ongoing debate around the question whether the strong government involvement should be sustained.
31
European households face tremendous obstacles when intending to open a savings account outside their home country. The shortage of deposits has become a major reason for banks’ declining loan supply and ultimately is responsible for a substantial part of the investment weakness and GDP decline in affected European countries.
Policy makers have made important efforts to promote European deposit market integration and to stimulate cross border flows of savings within the European Union. But these efforts will only yield the intended benefits if a number of additional non-tariff trade barriers are removed. Currently, these barriers prevent households in surplus countries to transfer their savings to banks in deficit countries where their deposits are most urgently needed.
30
IFRS 9 introduces new impairment rules responding to the G20 critique that IAS 39 results in the delayed and insufficient recognition of credit losses. In a case study of a Greek government bond for the period 2009 to 2011 when Greece’s credit rating declined sharply, this study highlights the discretion that preparers have when estimating impairments. IFRS 9 relies more on management expectations and will lead to earlier impairments. However, these appear still delayed and low if compared to the fair value losses.
29
The global financial crisis (as well as the European sovereign debt crisis) has led to a substantial redesign of rules and institutions – aiming in particular at underwriting financial stability. At the same time, the crisis generated a renewed interest in properly appraising systemic financial vulnerabilities. Employing most recent data and applying a variety of largely only recently developed methods we provide an assessment of indicators of financial stability within the Euro Area. Taking a “functional” approach, we analyze comprehensively all financial intermediary activities, regardless of the institutional roof – banks or non-bank (shadow) banks – under which they are conducted. Our results reveal a declining role of banks (and a commensurate increase in non-bank banking). These structural shifts (between institutions) are coincident with regulatory and supervisory reforms (implemented or firmly anticipated) as well as a non-standard monetary policy environment. They might, unintendedly, actually imply a rise in systemic risk. Overall, however, our analyses suggest that financial imbalances have been reduced over the course of recent years. Hence, the financial intermediation sector has become more resilient. Nonetheless, existing (equity) buffers would probably not suffice to face substantial volatility shocks.
28
There is a large, but yet growing debate about the need to complement the European monetary union with a stronger fiscal union. This paper reviews the potential trade-offs between effectiveness, moral hazard problems, and permanent redistribution. In particular, we contribute to the question of how member states may be willing to enter into a stronger fiscal union if the evolution of this union may imply large redistribution under incomplete contracting. We discuss clawback mechanisms that have been suggested in the literature, but conclude that clawbacks are undesirable, as they would essentially destroy the insurance value of a fiscal union. Instead, we propose that a clearly defined exit option as a guarantee against involuntary redistribution can make entry into a stronger fiscal union less risky and hence more attractive for member states.
27
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.
26
The paper traces the developments from the formation of the European Economic and Monetary Union to this date. It discusses the fact that the primary mandate of the European System of Central Banks (ESCB) is confined to safeguarding price stability and does not include general economic policy. Finally, the paper contributes to the discussion on whether the primary law of the European Union would support a eurozone exit. The Treaty of Maastricht imposed the strict obligation on the European Union (EU) to establish an economic and monetary union, now Article 3(4) TEU. This economic and monetary union is, however, not designed as a separate entity but as an integral part of the EU. The single currency was to become the currency of the EU and to be the legal tender in all Member States unless an exemption was explicitly granted in the primary law of the EU, as in the case of the UK and Denmark. The newly admitted Member States are obliged to introduce the euro as their currency as soon as they fulfil the admission criteria. Technically, this has been achieved by transferring the exclusive competence for the monetary policy of the Member States whose currency is the euro on the EU, Article 3(1)(c) TFEU and by bestowing the euro with the quality of legal tender, the only legal tender in the EU, Article 128(1) sentence 3 TFEU.
25
Regulatory failures, which came to the fore after the financial crisis of 2007-2009, lead to the question of why some activities by financial institutions were not regulated prior to the crisis of 2007, even though regulators knew about certain dangers to financial stability? The repo-market, although centrally involved in the last crisis, still awaits stringent regulation. At the same time, the regulatory cycle seems to come to an end, boding ill for future crises which will be amplified by this market. In this situation, NGOs are needed to make regulators act upon their knowledge and to tighten their regulations.
24
On 23 July 2014, the U.S. Securities and Exchange Commission (SEC) passed the “Money Market Reform: Amendments to Form PF ,” designed to prevent investor runs on money market mutual funds such as those experienced in institutional prime funds following the bankruptcy of Lehman Brothers. The present article evaluates the reform choices in the U.S. and draws conclusions for the proposed EU regulation of money market funds.
23
Robustness, validity, and significance of the ECB's asset quality review and stress test exercise
(2014)
As we are moving toward a eurozone banking union, the European Central Bank (ECB) is going to take over the regulatory oversight of 128 banks in November 2014. To that end, the ECB conducted a comprehensive assessment of these banks, which included an asset quality review (AQR) and a stress test. The fundamental question is how accurately will the financial condition of these banks have been assessed by the ECB when it commences its regulatory oversight? And, can the comprehensive assessment lead to a full repair of banks’ balance sheets so that the ECB takes over financially sound banks and is the necessary regulation in place to facilitate this? Overall, the evidence presented in this paper based on the design of the comprehensive assessment as well as own stress test exercises suggest that the ECB’s assessment might not comprehensively deal with the problems in the financial sector and risks may remain that will pose substantial threats to financial stability in the eurozone.
22
Research results confirm the existence of various forms of international tax planning by multinational firms. Prominent examples for firms employing tax avoidance strategies are Amazon, Google and Starbucks. Increasing availability of administrative data for Europe has enabled researchers to study behavioural responses of European multinationals to taxation. The present paper summarizes what we can learn from these recent studies in general and about German multinationals in particular.
21
SAFE Professor Michalis Haliassos was a member of the National Council for Research and Technology (ESET) established by the Government of Greece for the period 2010-2013. The council, consisting of eleven scientists from a range of disciplines, has now published their communiqué "National Strategic Framework for Research and Innovation 2014 -2020".
To promote the advancement of research, technology and innovation in Greece, the strategic plan proposed by the authors seeks to identify areas of existing research strength and excellence that can be further advanced to become engines for progress and growth in Greece, as well as flaws inherent to the present system. The authors stress the need to address current constraints to growth, which include the declining education system; the confusion and weaknesses of R&D governance and management; the discontinuities and inefficiencies of resource allocation and investment; the lack of adaptation to clearly-defined national priorities; and the inadequate opportunities and funding for high-quality research and development to flourish. They stress the need for prioritisation and efficient allocation; stability of the policy frame; predictability of planning; provision of opportunity; recognition of excellence; and responsiveness to current and future needs.
20
Die Anpassung der EU-Richtlinie über Märkte für Finanzinstrumente (MiFID II) und die Einführung einer begleitenden Verordnung (MiFIR) im Jahr 2014 werden erhebliche Auswirkungen auf die Finanzmärkte in Europa haben und zu einer grundlegenden Neuordnung der Finanzmarktstrukturen führen. Ausgehend von einer Diskussion der Zielerreichung der ursprünglichen Richtlinie (MiFID I) aus dem Jahr 2004 werden im vorliegenden Artikel die Zielsetzungen und Maßnahmen der Neuregelung beleuchtet. Wesentliche Elemente im Hinblick auf Marktstrukturen und den Wertpapierhandel sind die Einführung einer neuen Handelsplatzkategorie, des organisierten Handelssystems („Organised Trading Facility“; OTF), sowie die Ausweitung der bislang für Aktien geltenden Transparenzvorschriften auf weitere Finanzinstrumente. Zudem werden eine Handelsverpflichtung für Aktien und Derivate sowie eine Clearingpflicht für Derivate, die auf geregelten Märkten gehandelt werden, neu eingeführt. Schließlich werden der algorithmische Handel und der Hochfrequenzhandel auf europäischer Ebene reguliert, wobei die Regelungen weitgehend dem 2013 eingeführten deutschen Hochfrequenzhandelsgesetz angelehnt sind. Im Ausblick wird zunächst der weitere Prozess der Regulierung skizziert (insbesondere die sog. Level II-Maßnahmen). Abschließend werden mögliche Auswirkungen von MiFID II und MiFIR auf die Marktstruktur und den Wertpapierhandel aufgezeigt.
19
This essay reviews a cornerstone of the European Banking Union project, the resolution of systemically important banks. The focus is on the inherent conflict between a possible intervention by resolution authorities, conditional on a crisis situation, and effective prevention prior to a crisis. Moreover, the paper discusses the rules for bail-in debt and conversion rules for different layers of debt. Finally, some organizational requirements to achieve effective resolution results will be analyzed.
18
In this study prepared for the ECON Committee of the European Parliament, Gellings, Jungbluth and Langenbucher present a graphic overview on core legislation in the area of economic and financial services in Europe. The mapping overview can serve as background for further deliberations. The study covers legislation in force, proposals and other relevant provisions in fourteen policy areas, i.e. 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.
17
Die Struktur der makroprudenziellen Politik in der Europäischen Union ist ausgesprochen komplex und für den außenstehenden Betrachter fast undurchdringlich geworden. Deshalb wurde mit den Titeln der drei Kapitel des vorliegenden Aufsatzes „Der Prozess“, „Das Schloss“ und „Das Urteil“ bewusst auf Werke von Franz Kafka angespielt. Während sich der erste Teil der Arbeit vor allem mit der Komplexität des funktionellen Transmissionsprozesses in der makroprudenziellen Politik beschäftigt, widmet sich das zweite Kapitel, also der „Schloss-Teil“, ihren institutionellen Verflechtungen. Und am Ende werden die Ausführungen in einem „Wert-Urteil“ zusammengefasst.
16
n a contribution prepared for the Athens Symposium on “Banking Union, Monetary Policy and Economic Growth”, Otmar Issing describes forward guidance by central banks as the culmination of the idea of guiding expectations by pure communication. In practice, he argues, forward guidance has proved a misguided idea. What is presented as state of the art monetary policy is an example of pretence of knowledge. Forward guidance tries to give the impression of a kind of rule-based monetary policy. De facto, however, it is an overambitious discretionary approach which, to be successful, would need much more (or rather better) information than is currently available. In Issing's view, communication must be clear and honest about the limits of monetary policy in a world of uncertainty.
15
In the wake of the Global Financial Crisis that started in 2007, policymakers were forced to respond quickly and forcefully to a recession caused not by short-term factors, but rather by an over-accumulation of debt by sovereigns, banks, and households: a so-called “balance sheet recession.” Though the nature of the crisis was understood relatively early on, policy prescriptions for how to deal with its consequences have continued to diverge. This paper gives a short overview of the prescriptions, the remaining challenges and key lessons for monetary policy.
14
Der vorliegende Artikel analysiert systematisch die Erreichung der MiFID-Ziele anhand der wissenschaftlichen Literatur. Ziel der MiFID ist es, die Rahmenbedingungen für einen effizienten und kostengünstigen Wertpapierhandel zu schaffen. Erreicht werden soll dies durch die Verschärfung des Wettbewerbs, die Integration der Märkte, die Offenlegung von Handelsintentionen und -geschäften sowie die Stärkung der rechtlichen Position der Investoren. Im Ergebnis zeigt sich, dass die Förderung des Wettbewerbes als erfolgreich bewertet wird, aber die regulatorischen Möglichkeiten der Marktintegration nicht ausgeschöpft werden. Ferner wird die Forderung nach einheitlichen Transparenzbestimmungen für alle Ordermechanismen nur teilweise umgesetzt. Der Anleger erfährt letztlich gegenüber Finanzintermediären durch die MiFID keinen höheren Schutz.
13
In the United States, on April 1, 2014, the set of rules commonly known as the "Volcker Rule", prohibiting proprietary trading activities in banks, became effective. The implementation of this rule took more than three years, as “proprietary trading” is an inherently vague concept, overlapping strongly with genuinely economically useful activities such as market-making. As a result, the final Rule is a complex and lengthy combination of prohibitions and exemptions.
In January 2014, the European Commission put forward its proposal on banking structural reform. The proposal includes a Volcker-like provision, prohibiting large, systemically relevant financial institutions from engaging in proprietary trading or hedge fund-related business. This paper offers lessons to be learned from the implementation process for the Volcker rule in the US for the European regulatory process.
12
Die Stellungnahme befasst sich mit einem wichtigen Aspekt der Offenlegung der Bezüge von Entscheidungsträgern im Bankensektor. Komplementär zu der Diskussion um die Veröffentlichung der Vergütung von Vorstandsmitgliedern börsennotierter Unternehmen ist auch auf Landeseben versucht worden, die Transparenz der Vergütung von Führungskräften kommunaler oder landeseigener Unternehmen zu erhöhen. Namentlich sind die Träger der Sparkassen durch den neuen § 19 Abs. 6 des Sparkassengesetzes von Nordrhein-Westfalen verpflichtet worden, darauf „hinzuwirken“, dass die „gewährten Bezüge jedes einzelnen Mitglieds des Vorstands, des Verwaltungsrates und ähnlicher Gremien unter Namensnennung“ veröffentlich werden. Diese Vorschrift ist jedoch weitgehend wirkungslos geblieben; nicht zuletzt weil das OLG Köln in einer einstweiligen Verfügung die Vorschrift mangels Gesetzgebungskompetenz des Landes als nichtig behandelt hat. In dieser Situation ist am 8. August 2013 der Vorschlag eines Gesetzes „zur Offenlegung der Bezüge von Sparkassenführungskräften im Internet“ durch die Fraktion der Piraten im Landtag Nordrhein-Westfalen eingebracht worden. Der Entwurf ist Gegenstand der Stellungnahme, die Helmut Siekmann für den Haushalts- und Finanzausschuss des Landtags Nordrhein-Westfalen erstellt hat. Sie stellt maßgebend darauf ab, dass die Sparkassen als Anstalten des öffentlichen Rechts einen öffentlichen Auftrag zu erfüllen haben und den Grundsätzen des Verwaltungsorganisationsrechts unterliegen. Als Teil der (leistenden) Verwaltung müssen sie Transparenz- und Kontrollansprüchen der Bürger und ihren Repräsentanten in den Parlamenten genügen.
11
Securities transaction tax in France: impact on market quality and inter-market price coordination
(2014)
The general concept of a Securities Transaction Tax is controversial among academics and politicians. While theoretical research is quite advanced, the empirical guidance in a fragmented market context is still scarce. Possible negative effects for market liquidity and market efficiency are theoretically predicted, but have not been empirically tested yet. In light of the agreement of eleven European member states to implement an STT, this study aims to give a comprehensive overview of the effects of the STT, introduced in France in 2012, on liquidity demand, liquidity supply, volatility and inter-market information transmission. The results show that the STT has led to a decline in liquidity demand, has had a detrimental effect on liquidity supply and negatively influences the inter-market information transmission efficiency. However, no effect on volatility can be observed.
10
This note proposes a new set-up for the fund backing the Single Resolution Mechanism (SRM). The proposed fund is a Multi-Tier Resolution Fund (MTRF), restricting the joint and several supranational liability to a limited range of losses, bounded by national liability at the upper and the lower end. The layers are, in ascending order: a national fund (first losses), a European fund (second losses), the national budget (third losses), the ESM (fourth losses, as a backup for sovereigns). The system works like a reinsurance scheme, providing clear limits to European-level joint liability, and therefore confining moral hazard. At the same time, it allows for some degree of risk sharing, which is important for financial stability if shocks to the financial system are exogenous (e.g., of a supranational macroeconomic nature). The text has four parts. Section A describes the operation of the Multi-Tier Resolution Fund, assuming the fund capital to be fully paid-in (“Steady State“). Section B deals with the build-up phase of the fund capital (“Build up“). Section C discusses how the proposal deals with the apparent incentive conflicts. The final Section D summarizes open questions which need further thought (“Open Questions“).
9
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.
8
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.
7
The financial crisis which started in 2007 has caused a tremendous challenge for monetary policy. The simple concept of inflation targeting has lost its position as state of the art. There is a debate on whether the mandate of a central bank should not be widened. And, indeed, monetary policy has been very accommodative in the last couple of years and central banks have modified their communication strategies by introducing forward guidance as a new policy tool. This paper addresses the consequences of these developments for the credibility, the reputation and the independence of central banks. It also comments on the recent debate among economists concerning the question whether the ECB's OMT program is compatible with its mandate.
6
In this note, a new concept for a European deposit guarantee scheme is proposed, which takes account of the strong political reservations against a mutualization of the liability for bank deposits. The three-stage model for deposit insurance outlined in the text builds on existing national deposit guarantee schemes, offering loss compensation on a European level and at the same time preventing excessive risk and moral hazard taking by individual banks.
5
Until about 25 years ago, almost all European countries had a so-called “three pillar” banking system comprising private banks, (public) savings banks and (mutual) cooperative banks. Since that time, several European countries have implemented far-reaching changes in their banking systems, which have more than anything else affected the two “pillars” of the savings and cooperative banks. The article describes the most important changes in Germany, Austria, France, Italy and Spain and characterizes the former and the current roles of savings banks and cooperative banks in these countries. A particular focus is placed on the German case, which is almost unique in so far as the German savings banks and cooperative banks have maintained most of their traditional features. The article concludes with a plea for diversity of institutional forms of banks and argues that it is important to safeguard the strengths of those types of banks that do not conform to the model of a large shareholder-oriented commercial bank.
4
This note reviews the legal issues and concerns that are likely to play an important role in the ongoing deliberations of the Federal Constitutional Court of Germany concerning the legality of ECB government bond purchases such as those conducted in the context of its earlier Securities Market Programme or potential future Outright Monetary Transactions.
3
Der vorliegende Beitrag zeigt auf, dass die zunehmende Komplexität der Aufgaben von Zentralbanken zu einer strukturellen Überforderung führen kann. Aufgrund der funktionellen Komplexität einer makroprudenziellen Prozesspolitik auf der Ziel- und Instrumentenebene sollte eher nach einer Reduktion als nach einer Ausweitung des makroprudenziellen Werkzeugkastens Ausschau gehalten werden. Weiterhin steht die sich derzeit teilweise noch vergrößernde institutionelle Komplexität der makroprudenziellen Politik ihrer funktionellen Komplexität um nichts nach. Bei entsprechenden Vorkehrungen können die bereits eingetretenen und die potenziellen Überforderungen jedoch zumindest teilweise in verkraftbare Herausforderungen überführt werden. Der Aufsatz schließt mit Empfehlungen für entsprechende Maßnahmen.
2
The German corporate governance code includes a recommendation as to diversity on corporate boards. Two draft bills on gender quotas are currently under way in legislative proceedings. However, the ruling coalition rejects those, advocating a “flexible quota”. The present study provides an overview on legislative proposals currently presented and on academic scholarship on the issue. Legal obstacles to the introduction of a “fix” quota under German law are discussed and the “soft” version of “flexible” quotas is advocated.
1
The European Commission recently put forward a proposal for a regulation to amend and strengthen the 2009 version of the EU's rules on the regulation of credit rating agencies ("CRA3"). Among other things, Art. 35a of the draft proposal introduces strict liability for rating agencies. This liability proposal is at odds with the aim to strengthen competition in the rating sector and could have a chilling effect on capital markets. The paper analyses existing rules on civil liability of rating agencies under different legal systems. Subsequently, the provision under Art. 35a of the Draft Proposal is examinded more closely. Suggestions on possible improvemts of the proposal are made.