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.

Banks at the Service of the Economy? European Policy Brief No. 17, November 2013

This Policy Brief discusses a few simple measures to improve both the commercial and investment banking landscapes, with or without formal separation. Covering deposits with quality collateral would make them safer and would help create an easier guarantee and resolution mechanism at the larger eurozone level. Strong central counterparties and transparency requirements would improve market mechanisms and market discipline in capital markets and investment banking. Specific governance measures would also help improve the financial sector. Finally, a better control of bank solvency, together with improved capital market transparency and accessibility, should encourage the progressive deleveraging of commercial banks, and enhance the long term funding of the economy by capital markets.

Modell Deutschland as an Interdenominational Compromise, CES Germany & Europe Working Papers, No. 00.3, 2000

Usually, Germany’s social market economy is understood to embody a compromise between a liberal market order and a corporatist welfare state. While this reading of the German case is certainly not entirely wrong, this paper argues that only if we account for the close intellectual correspondence between lutheran Protestantism and economic liberalism on the one hand and between Catholicism and welfare corporatism on the other, can we fully comprehend the nature of the German post-war compromise. In particular, this perspective allows to better explain the anti-liberal undercurrents of Germany’s soziale Marktwirtschaft. It was especially the role which Protestant Ordoliberals ascribed to the state in upholding economic order and market discipline which accounts for the major difference between ‘classic’ and ‘German-style’ economic liberalism. Yet, the postwar economic order did not represent a deliberately struck compromise between the two major Christian denominations. Rather, Germany’s social market economy was the result of the failure of German Protestant Ordoliberals to prevent the reconstruction of the catholic Bismarckian welfare state after the authoritarian solution, which Ordoliberals had endorsed so strongly up until 1936 and from which they had hoped the re-inauguration of Protestant hegemony, had so utterly failed. Since the ordoliberal doctrine up to the present day lacks a clear understanding of the role of the corporatist welfare state within the German political economy, its insights into the functioning logic of German capitalism have remained limit. The paper also claims that accounting for the denominational roots of the postwar compromise allows us to better understand the relationship between consociationalism and corporatism in ‘Modell Deutschland’.

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.

Pre-empting technical barriers in the Single Market. CEPS Policy Brief No. 277, 11 July 2012

Effective enforcement and compliance with EU law is not just a legal necessity, it is also of economic interest since the potential of the Single Market will be fully exploited. Enforcement barriers generate unjustified costs and hindrances or uncertainty for cross-border business and might deprive consumers from receiving the full benefit of greater choice and/or cheaper offers. The EU has developed several types of enforcement efforts (preventive initiatives, pre-infringement initiatives and formal infringement procedures). More recently, the emphasis has been placed on effective prevention. This CEPS Policy Brief analyses the functioning of one preventive mechanism (the 98/34 Directive) and assesses its potential to detect and prevent technical or other barriers in the course of the last 25 years. Based on an empirical approach, it shows that this amazing mechanism has successfully prevented thousands of new technical barriers from arising in the internal goods market.