A Monetary Union Requires a Banking Union. Bruges European Economic Policy (BEEP) Briefing 33/2014

This paper argues that a monetary union requires a banking union. While the USA developed both during a time span of two centuries, the EMU was created in the course of two decades and remains unfinished as the economic pillar is largely missing. The financial crisis and the Eurocrisis have shown that a genuine banking union is even more needed for the Eurozone than a budget or a fiscal union to let the euro survive.

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.

Banking Sector Soundness, Innovation, and Development: Emerging Europe and South Asia. ACES Working Papers, 2012

While most academic and practitioner researchers agree that a country’s commercial banking sector’s soundness is a very significant indicator of a country’s financial market health, there is considerably less agreement and substantial confusion surrounding what constitutes a healthy bank in the aftermath of 2007+ financial crisis. Global banks’ balance sheets, corporate governance, management compensation and bonuses, toxic assets, and risky behavior are all under scrutiny as academics and regulators alike are trying to quantify what are “healthy, safe and good practices” for these various elements of banking. The current need to quantify, measure, evaluate, and compare is driven by the desire to spot troubled banks, “bad and risky” behavior, and prevent real damage and contagion in the financial markets, investors, and tax payers as it did in the recent crisis. Moreover, future financial crisis has taken on a new urgency as vast amounts of capital flows (over $1 trillion) are being redirected to emerging markets. This study differs from existing methods in the literature as it entail designing, constructing, and validating a critical dimension of financial innovation in respect to the eight developing countries in the South Asia region as well as eight countries in emerging Europe at the country level for the period 2001 – 2008, with regional and systemic differentials taken into account. Preliminary findings reveal that higher stages of payment systems development have generated efficiency gains by reducing the settlement risk and improving financial intermediation; such efficiency gains are viewed as positive financial innovations and positively impact the banking soundness. Potential EU candidate countries: Albania; Montenegro; Serbia

What if the Next Financial Crisis Hits the Banking Union? A Call for an “If All Else Fails” Clause. European Policy Brief No. 16, September 2013

This Policy Brief argues that the envisaged design of the Banking Union risks not being sufficient to deal with the next large-scale financial crisis. Therefore, an “if all else fails” clause should be approved, stating that the Banking Union members can provide joint last resort financing to deal with a future crisis. An agreement on the clause should be feasible because it is beneficial to all Member States.

The Great Financial Plumbing: From Northern Rock to Banking Union. CEPS Paperback, 19 October 2015

The financial and economic crises have led to an enormous plumbing exercise, involving a fundamental re-design of the global and European regulatory and supervisory system. This book systematically assesses the big items on the G-20 and EU agendas and the effectiveness with which they have been implemented in the EU. Its publication coincides with the demand by European Commissioner Jonathan Hill, in the context of the Capital Markets Union, for a 'comprehensive review' of the impact and coherence of EU legislation in the area of financial services. Karel Lannoo argues in the book that much has been done by European policy-makers to make the financial system safer and to prevent banking crises of the magnitude that erupted in 2008 and 2011, but that the new framework puts an enormous burden on banks and supervisors to implement and enforce it correctly. With the huge amount of secondary or 'level-2' legislation in place, this process has spiralled out of control, and as member states always find new ways of ‘gold-plating’ EU rules, the EU always finds further reasons to achieve a 'single rulebook'. This process has to be brought to a halt, and mutual recognition, a basic single-market principle, reinforced. The new framework also brings huge advantages, which should offer benefits to all parties. Banking Union is a huge step forward, which introduces 'one-stop shopping' for banks in the eurozone, another basic single market principle, and a true single supervisor. The clarity of the new resolution framework should, if correctly applied, trigger early intervention and bring an end to forbearance, thereby enforcing market discipline in the banking sector. It should also avoid reliance on taxpayers' money to bail-out banks in trouble, which totalled 14% of EU GDP during the crisis.