Time to Set Banking Regulation Right. CEPS Paperbacks. March 2012

Excessive leverage and risk-taking by large international banks were the main causes of the 2008-09 financial crisis and the ensuing sharp drop in economic activity and employment. World leaders and central bankers promised that it would not happen again and, to this end, undertook to overhaul banking regulation, first and foremost by rectifying Basel prudential rules. This study argues that the new Basel III Accord and the ensuing EU Capital Requirements Directive IV fail to correct the two main shortcomings of international prudential rules: 1) reliance on banks’ risk management models for the calculation of capital requirements and 2) the lack of accountability by supervisors. Accordingly, the authors propose the calculation of capital requirements without risk adjustment and creation of a system of mandated action by supervisors modelled on the US framework of Prompt Corrective Action (PCA). They also recommend that banks should be required to issue large amounts of debentures that are convertible into equity in order to strengthen market discipline on management and shareholders.

European Central Bank accountability: how the monetary dialogue could be improved. Bruegel Policy Contribution 2014/04, March 2014

According to the European Union Treaties, the European Central Bank (ECB) is accountable to the European Parliament. In practice, this accountability takes mainly the form of a quarterly Monetary Dialogue between the president of the ECB and the European Parliament Economic and Monetary Affairs committee. We assess the impact of the Monetary Dialogue. We describe the ECB’s accountability practices, compare them to those of other major central banks and provide an assessment of the dialogue in the last five years. The Monetary Dialogue could be improved and we make recommendations on this. We also consider what role the Monetary Dialogue could play in the current context of the ECB’s evolving role. We discuss in particular forward guidance and quantitative easing. We review the main features and the way in which those policies have been implemented by other central banks. We then suggest the appropriate role for the Monetary Dialogue in relation to each of those policies. We conclude with some observations on the function of the Monetary Dialogue after the establishment of a banking union in Europe.

ECB Banking Supervision and beyond. CEPS Task Force Report, December 2014

With publication of the results of its Comprehensive Assessment at the end of October 2014, the European Central Bank has set the standard for its new mandate as supervisor. But this was only the beginning. The heavy work started in early November, with the day-to-day supervision of the 120 most significant banks in the eurozone under the Single Supervisory Mechanism. The centralisation of the supervision in the eurozone will pose a number of challenges for the ECB in the coming months and years ahead. This report analyses these challenges in detail, drawing on the discussions and presentations in the CEPS Task Force on ECB Banking Supervision, and reinforced by extensive research undertaken by the rapporteur. José María Roldán, Presidente, Asociación Española de Banca, served as Chairman of the Task Force.

Swiss Banking Secrecy; The Erosion of an Institution. IES WORKING PAPER 2/2008

Switzerland has for a long time been an important centre of banking services in Europe and beyond. Consequently, the banking sector has become important to Switzerland’s prosperity. This paper focuses on a central reason behind the success of the Swiss banking sector: the institution of banking secrecy, deeply enshrined in the Swiss history and tradition. The rapid development of international markets that eventually gave rise to a “group structuration process” has, however, progressively eroded Swiss banking secrecy. It has had to bend before the duty of transparency within the groups in order not to promote financial criminality through accelerated asset inflows. Switzerland has also had to develop a comprehensive legislative frame to tackle financial criminality, and to enter into international agreements providing for mutual assistance. This process has undoubtedly and irremediably weakened the Swiss banking secrecy. Most importantly, nevertheless, the questionable ethical and socio-economic grounds of this controversial institution could and should also start to erode it from within.

Changing Banking Supervision in the Eurozone: the ECB as a Policy Entrepreneur. Bruges Political Research Paper No. 38, December 2014

In 2012, the European Union adopted a transformational change to its banking policy for the Eurozone. It dropped the model of decentralized supervision and regulatory competition between countries, and replaced it with a single supervisor and harmonization. Transferring banking supervision to the ECB also alters the existing constitutional order. The policy process leading to this transformational change was rapid and highly political, which was different compared to earlier incremental changes to banking policy. Kingdon's model, whereby policy entrepreneurs seize opportunities at times when the independent streams of solutions, problems and politics converge, partly explains this transformation. The study of EU banking policy suggests, however, that the multiple streams framework should pay more attention to the way in which entrepreneurs engineer fluctuations within the streams and thereby contribute to creating opportunities for change. This paper identifies the ECB as an effective entrepreneur which also played an active role in political bargaining.

Should the ‘outs’ join the European banking union? Bruegel Policy Contribution Issue 2016/03 February 2016

For political reasons, European Union member states’ opinions on joining banking union range from outright refusal to active consideration. The main stance is to wait and see how the banking union develops. The wait-and-see positions are often motivated by the consideration that joining banking union might imply joining the euro. However, in the long term, banking union’s ultimate rationale is linked to cross-border banking in the single market, which goes beyond the single currency. This Policy Contribution documents the banking linkages between the nine ‘outs’ and 19 ‘ins’ of the banking union. We find that some of the major banks based in Sweden and Denmark have substantial banking claims across the Nordic and Baltic regions. We also find large banking claims from banks based in the banking union on central and eastern Europe. The United Kingdom has a special position, with London as both a global and European financial centre. We find that the out countries could profit from joining banking union, because it would provide a stable arrangement for managing financial stability. Banking union allows for an integrated approach towards supervision (avoiding ring fencing of activities and therefore a higher cost of funding) and resolution (avoiding coordination failure). On the other hand, countries can preserve sovereignty over their banking systems outside the banking union.

Banking crisis yet again and how to fix it. CEPS Commentary, 15 February 2016

Almost out of the blue, a combination of diverse factors has elicited a run on bank stocks and junior and senior debt, raising the spectre of a renewed systemic bank crisis within the European Union. The policy response cannot come from the European Central Bank but, instead, must consist of regulatory responses capable of dispelling the uncertainty over future prudential capital requirements while also temporarily suspending the rules on state aid cum bail-in that had ignited the crisis.

The United States dominates global investment banking: does it matter for Europe? Bruegel Policy Contribution 2016/06, March 2016

In the aftermath of the global financial crisis, the market share of US investment banks is increasing, while that of their European counterparts is declining. We present evidence that US investment banks are on the verge of taking over pole position in European investment banking. Meanwhile, since 2015, Chinese investment banks have overtaken American and European investment banks in the Asia-Pacific market. Credit rating agencies and investment banks are the gatekeepers of the capital markets. The European supervisory institutions can effectively supervise the European operations of these US-managed players. On the political side, we suggest that the European Commission should continue to view its, albeit declining, banking industry as a strategic sector. The Commission, the European Central Bank and the Bank of England should jointly develop a strategic agenda for the EU-US Regulatory Dialogue. Finally, corporates rely on investment banks to issue new securities. We recommend that the big European corporates should cherish the (few) remaining European investment banks, by giving them at least one place in otherwise US- dominated banking syndicates. That could help to avoid complete dependence on US investment banks.