The Challenges of the EU Banking Union - will it succeed in dealing with the next financial crisis? Bruges European Economic Policy (BEEP) Briefings 36/2015

The EU Banking Union combines micro- and macro-prudential regulation. It aims at breaking the “doom loop” between banks and sovereign debt, promoting financial stability and mitigating the next financial shock to the real EU economy, at the lowest possible cost to the financial institutions and to the taxpayers. Success, or failure, is determined by how the banking union copes with the challenges to its two main pillars, the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM). Under the SSM, in its new supervisory role, the ECB may be subject to conflicts between the objectives of price and financial stability, and the single-supervisor role may be sub-optimal. Two regulators might have been preferable and more focus on ECB accountability will now be required. The shock-absorbing Single Resolution Fund (SRF), which is part of the SRM, may not have the capacity to deal with a crisis of the size of the one of 2008. Especially as the nature and severity of a future financial crisis cannot be forecasted. The design of the banking union is not the result of theoretical studies, but a political compromise to deal with an acute crisis. The theoretical studies that are included in this paper are not supportive of the banking union in its current form. Nevertheless, there is a good chance that the EU Banking Union may succeed, as ECB supervision of the 123 systemically important banks should contain potential demands on the SRM. In the event of a crisis that is too severe for the banking union to absorb with its current capability, the crucial assumption is that there is political will to rapidly provide new resources. The same applies, if a major financial crisis develops before the banking union is fully operational.

Europe’s New Post-Trade Infrastructure Rules. ECMI Policy Brief No. 20, 8 November 2012

After more than a decade of indecision, the EU is finally now set to implement a consistent regulatory architecture for clearing and settlement. Following the agreement on a European market infrastructure Regulation (EMIR), the European Commission has proposed harmonised rules for centralised settlement depositaries (CSDs), while the European Central Bank is moving forward with its plans for a central eurozone settlement engine. This paper analyses three components of the new post-trade infrastructure measures: 1) the regulatory framework for and supervision of central counterparties under the new EMIR legislation, 2) the authorisation requirements of trade repositories and 3) the draft CSD Regulation and the progress with the ECB’s Target 2 Securities project. It then discusses the impact of the new rules, and argues that, analogous to the unexpected impact of MiFID on trading infrastructures, a similar EMIR revolution may be on its way.

Should non-euro area countries join the single supervisory mechanism? Bruegel Policy Contribution 2013/06, 13 March 2013

Irrespective of the euro crisis, a European banking union makes sense, including for non-euro area countries, because of the extent of European Union financial integration. The Single Supervisory Mechanism (SSM) is the first element of the banking union. From the point of view of non-euro countries, the draft SSM regulation as amended by the EU Council includes strong safeguards relating to decision-making, accountability, attention to financial stability in small countries and the applicability of national macro-prudential measures. Non-euro countries will also have the right to leave the SSM and thereby exempt themselves from a supervisory decision. The SSM by itself cannot bring the full benefits of the banking union, but would foster financial integration, improve the supervision of cross-border banks, ensure greater consistency of supervisory practices, increase the quality of supervision,avoid competitive distortions and provide ample supervisory information. While the decision to join the SSM is made difficult by the uncertainty about other elements of the banking union, including the possible burden sharing, we conclude that non-euro EU members should stand ready to join the SSM and be prepared for the negotiations of the other elements of the banking union.

The Single Supervisory Mechanism: A Sound First Step in Europe’s Banking Union? Egmont European Affairs Paper, March 2013

The financial and economic crisis has hit Europe in its core. While the crisis may not have originated in the European Union, it has laid bare structural weaknesses in the EU’s policy framework. Both public finances and the banking sector have been heavily affected. For a long time, the EU failed to take into account sufficiently the perverse link that existed between the two. Negative evolutions in one field of the crisis often dragged along the other in its downward spiral. In June 2012, in the early hours of a yet another EU Summit, the leaders of the eurozone finally decided to address the link between the banking and sovereign debt crises. Faced with soaring public borrowing costs in Spain and Italy, they decided to allow for the direct European recapitalisation of banks when the Member State itself would no longer be in a position to do so. In exchange, supervision of the banking sector would be lifted to the European level by means of a Single Supervisory Mechanism. The Single Supervisory Mechanism, or SSM in the EU jargon, is a first step in the broader revision of policies towards banks in Europe. The eventual goal is the creation of a Banking Union, which is to carry out effective surveillance and – if needed – crisis management of the banking sector. The SSM is to rely on national supervisors and the ECB, with the ECB having final authority on the matter. The involvement of the latter made it clear that the SSM would be centred on the eurozone – while it is to remain open to other Member States willing to join. Due to the ongoing problems and the link between the creation of the SSM and the recapitalisation of banks, the SSM became one of the key legislative priorities of the EU. In December 2012, Member States reached an agreement on the design of the SSM. After discussions with the European Parliament (which were still ongoing at the time of writing), the process towards making the SSM operational can be initiated. The goal is to have the SSM fully up and running in the first half of 2014. The decisions that were taken in June 2012 are likely to have had a bigger impact than the eurozone’s Heads of State and Government could have realised at the time for two important reasons. On the one hand, creating the SSM necessitates a full Banking Union and therefore shared risk. On the other hand, the decisions improved the ECB’s perception of the willingness of governments to take far-reaching measures. This undoubtedly played a significant role in the creation of the Outright Monetary Transactions programme by the ECB, which has led to a substantial easing of the crisis in the short-term. 1 These short-term gains should now be matched with a stable long-term framework for bank supervision and crisis management. The agreement on the SSM should be the first step in the direction of this goal. This paper provides an analysis of the SSM and its role in the creation of a Banking Union. The paper starts with a reminder of why the EU decided to put in place the SSM (§1) and the state of play of the ongoing negotiations on the SSM (§2). Subsequently, the supervisory responsibilities of the SSM are detailed, including its scope and the division of labour between the national supervisors and the ECB (§3). The internal functioning of the SSM (§4) and its relation to the other supervisors are discussed afterwards (§5). As mentioned earlier, the SSM is part of a wider move towards a Banking Union. Therefore, this paper sheds light on the other building blocks of this ambitious project (§6). The transition towards the Banking Union is important and will prove to be a bumpy ride. Before formulating a number of conclusions, this Working Paper therefore provides an overview of the planned road ahead (§7).

Bail-in Provisions in State Aid and Resolution Procedures: Are they consistent with systemic stability? CEPS Policy Brief No. 318, 21 May 2014

This CEPS Policy Brief examines the provisions for bail-in in the European Union – that is, the principle whereby any public measure to recapitalise a bank with insufficient prudential capital must be preceded by a write-down or conversion into equity of creditors’ claims – in state aid policies and in the new resolution framework for failing banks, with two aims: i) to assess whether and how they are coordinated and ii) more importantly, whether they address satisfactorily the question of systemic stability that may arise when investors fear that creditors’ claims are likely to be bailed-in in a bank crisis. The issue is especially relevant in the present context, as the comprehensive assessment exercise underway for EU banks falling under the direct supervision of the European Central Bank may lead supervisors to require substantial capital injections simultaneously for many of the banks involved, possibly shaking investors’ confidence across EU banking markets. The authors conclude that the two sets of rules are, broadly speaking, mutually consistent and that they already contain sufficient safeguards to address systemic stability concerns. However, the balance of the elements underpinning the European Commission’s decisions in individual cases may not be clear to bank creditors and potential investors in financial markets. The impression of unneeded rigidity on this very sensitive issue has been heightened by official statements over-emphasising that each case will be assessed individually under competition rules, thus feeding the concern that the systemic dimension of the issue may have been underestimated. Therefore, further clarification by the Commission may be needed on how the various criteria will be applied during the ongoing transition to banking union – perhaps through a new communication completing the state aid framework for banks in view of the adoption of the new resolution rules.

Migration and Integration. Common Challenges and Responses from Europe and Asia

With the signing of the ASEAN Framework Agreement for the Integration of Priority Sectors (FA) in 2004, migration and integration issues gained significance on the agenda. Primarily concerned with increasing economic growth, this framework excludes the integration of low and unskilled migrant workers; instead, ASEAN efforts to address migration and integration issues have been limited to Mutual Recognition Agreements for skilled labour and professionals. After an analysis of migration policy in the region, we highlight specific barriers to the integration of labour migrants in two priority sectors – nursing, which is highly regulated by the state, and Information, Communications and Technology (ICT), which is typically selfregulated and privately run. Despite a MRA for nursing allowing registered nurses to practice in another ASEAN country under supervision of local nurses without registering with the host country’s nursing regulatory authority, in practice, there are major barriers to the free movement of nurses within ASEAN in terms of skills recognition, licensure requirements and other protectionist measures. Although regulations governing the inflow of ICT professionals are not as stringent as those for healthcare professionals, private costs associated with job search and gaining foreign employment are higher in the ICT sector, largely due to limited information on international mobility within the industry. Three sets of barriers to greater integration are discussed. First, the economic and political diversity within ASEAN makes integration more problematic than in the European Union. Second, the primary concern with value-adding economic growth means that regional agreements are focused on skilled and professional labour migration only. Third, the “ASEAN way” of doing things – via a strong emphasis on consensus and non-interference with domestic policies – often means that the FA provision for the free movement of labour is usually trumped by domestic policies that do not reflect the same desire for labour integration.

Capital Markets Union: a vision for the long term. Bruegel Policy Contribution ISSUE 2015/05 April 2015

Capital Markets Union (CMU) is a welcome initiative. It could augment economic risk sharing, set the right conditions for more dynamic development of risk capital for high-growth firms and improve choices and returns for savers. This offers major potential for benefits in terms of jobs, growth and financial resilience. • CMU cannot be a short-term cyclical instrument to replace subdued bank lending, because financial ecosystems change slowly. Shifting financial intermediation towards capital markets and increasing cross-border integration will require action on multiple fronts, including increasing the transparency, reliability and comparability of information and addressing financial stability concerns. Some quick wins might be available but CMU’s real potential can only be achieved with a long-term structural policy agenda. • To sustain the current momentum, the EU should first commit to a limited number of key reforms, including more integrated accounting enforcement and supervision of audit firms. Second, it should set up autonomous taskforces to prepare proposals on the more complex issues: corporate credit information, financial infrastructure, insolvency, financial investment taxation and the retrospective review of recent capital markets regulation. The aim should be substantial legislative implementation by the end of the current EU parliamentary term.

Monetary policy and banking supervision: coordination instead of separation. CEPS Policy Brief No. 286, 12 December 2012

Introduction. Following the June 2012 European Council decision to place the ‘Single Supervisory Mechanism’ (SSM) within the European Central Bank, the general presumption in the policy discussions has been that there should be ‘Chinese walls’ between the supervisory and monetary policy arms of the ECB. The current legislative proposal, in fact, is explicit on this account. On the contrary, however, this paper finds that there is no need to impose a strict separation between these two functions. The authors argue, in fact, that a strict separation of supervision and monetary policy is not even desirable during a financial crisis when the systemic stability of the financial system represents the biggest threat to a monetary policy that aims at price stability. In their view, the key problem hampering the ECB today is that it lacks detailed information on the state of health of the banking system, which is often highly confidential. Chinese walls would not solve this problem. Moreover, in light of the fact that the new, proposed Supervisory Board will be composed to a large extent of representatives of the same institutions that also dominate the Governing Council, the paper finds that it does not make sense to have Chinese walls between two boards with largely overlapping memberships. In addition, it recommends that some members of the Supervisory Boards should be “independents” in order to reduce the tendency of supervisors to unduly delay the recognition of losses.