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.

The systemic roots of Russia’s recession. Bruegel Policy Contribution ISSUE 2015/15, OCTOBER 2015

The Russian economy grew rapidly between 2000 and 2007, but growth decelerated after the 2008-09 global financial crisis, and since mid-2014 Russia has moved into recession. A number of short-term factors have caused recession: lower oil prices, the conflict with Ukraine, European Union and United States sanctions against Russia and Russian counter-sanctions. However Russia's negative output trends have deeper structural and institutional roots. They can be tracked back about a decade to when previous market-reform policies started to be reversed in favour of dirigisme, leading to further deterioration of the business and investment climate. • Russia must address its short-term problems, but in the medium-to-long term it must deal with its fundamental structural and institutional disadvantages: oil and commodity dependence and an unfriendly business and investment climate underpinned by poor governance. Compared to many other commodity producers, Russia is better placed to diversify its economy, mostly due to its excellent human capital. Ruble depreciation makes this task easier

Enhancing financial stability in developing Asia. Bruegel Working Paper 2015/10, October 2015

This paper outlines guidelines for policymakers pursuing financial stability in developing Asia. It aims at supporting Asian policymakers’ judgment by providing policy views and recommendations that are based on the analysis of the recent sequence of events in the United States and Europe and of earlier crisis episodes, including those in Asia during the 1990s

The growing intergenerational divide in Europe. Bruegel Policy Contribution Issue 2015/17, November 2015

During the economic and financial crisis, the divide between young and old in the European Union increased in terms of economic well-being and allocation of resources by governments. As youth unemployment and youth poverty rates increased, government spending shifted away from education, families and children towards pensioners. To address the sustainability of pension systems, some countries implemented pension reforms. We analysed changes to benefit ratios, meaning the ratio of the income of pensioners to the income of the active working population, and found that reforms often favoured current over future pensioners, increasing the intergenerational divide. We recommend reforms in three areas to address the intergenerational divide: improving European macroeconomic management, restoring fairness in government spending so the young are not disadvantaged, and pension reforms that share the burden fairly between generations.

What role for social investment in the new economic governance of the Eurozone? EPC Policy Brief, 10 November 2015

The EU, and the Eurozone in particular, has been going through a period of prolonged economic difficulty. While there are some signs of recovery, growth rates remain too low, only returning to the already modest growth rates of the pre-crisis period. This not only affects the creation of jobs, but also, through lower tax revenues and stagnant GDP levels, the consolidation of public finances.

The limitations of policy coordination in the euro area under the European Semester. Bruegel Policy Contribution 2015/19, November 2015

The European Semester is a yearly process of the European Union to improve economic policy coordination and ensure the implementation of the EU’s economic rules. Each Semester concludes with recommendations for the euro area as a whole and for each EU member state. We show that implementation of recommendations was poor at the beginning of the Semester in 2011, and has deteriorated since. The European Semester is not particularly effective at enforcing even the EU’s fiscal and macroeconomic imbalance rules. We find that euro-area recommendations with tangible economic goals are not well reflected in the recommendations issued to member states. Finally, we review various proposals to improve the efficiency of the European Semester and conclude that while certain steps could be helpful, policy coordination will likely continue to have major limitations.

Macroprudential supervision: from theory to policy. Bruegel Working Paper 2015/15, November 2015

While there is now consensus that financial supervision has to focus on the aggregate (macroprudential), in addition to the individual (microprudential), there is no agreed macroprudential framework for measuring financial imbalances and applying policies to correct such imbalances. This paper focuses on these two open questions in the so-called time dimension of macroprudential policy.

Completing the Banking Union: Deposit Insurance. CEPS Policy Brief No. 335, 3 December 2015

It is generally agreed that a Banking Union should have common or ‘single’ institutions responsible for carrying out three basic functions: supervision, resolution and deposit insurance. So far, however, agreement has been reached in the EU on only the first two of these functions. The Commission has now presented its proposal on how to complete the Banking Union with a European Deposit Insurance Scheme (EDIS). It is an innovative and courageous proposal. It is courageous because it will clearly be very controversial in a number of member states (especially Germany) and it is innovative because it proposes a three-stage process, starting with re-insurance, then switching to co-insurance and finally to full direct insurance of deposits via a ‘single’ Deposit Insurance Fund (DIF). This final stage should be reached in 2024, which is also the date at which the Single Resolution Fund (SRF) will become the only source of financing for bank resolution. The Commission’s proposal calls for integrating the decision-making for EDIS into the decision-making entity for the SRF, namely the existing Single Resolution Board (SRB). This makes sense if one views resolution and deposit insurance as two highly interlinked dimensions of dealing with banks in trouble. In this view the two dimensions should be bundled into one institution – and one suspects that over time the two funds (the SRF and the DIF) could be merged into one. This Policy Brief argues that re-insurance should not be considered as a transitory phase, but could also provide a solution for the long run. ‘Experience rating’ could be used to ensure a proper pricing of risk and to protect the interests of the depositors in countries with safer banking systems. Moreover, EDIS should have a decision-making structure separate from and independent of the SRM, since it has mainly a macroeconomic function.

Economic Policy Coordination in the Euro Area under the European Semester. CEPS Special Report No. 123, December 2015

The implementation record of the Country Specific Recommendations (CSRs) has declined over time, as financial turbulence lessened and the economic outlook started to improve. Urgency for reforms seemingly receded to leave room to request member states to move towards more accommodative stances. It is mainly the small countries that implement, at least partially, the recommendations addressed to them. Unfortunately, there is little that the EU can do to change the status quo. Yet, the President of the Eurogroup could be held accountable for the implementation of the recommendations addressed to the euro area. The creation of National Competitiveness Boards risks making the European Semester even more complex and likely to have little impact in the countries that need them most, namely large countries and those with poor governance. To make it effective, a procedure would be needed to make national wage norms consistent at the euro-area level, which may be a very difficult objective to achieve.

European Bank Resolution: Making it work! Interim report of the CEPS Task Force on Implementing Financial Sector Resolution. CEPS Task Force Report, January 2016

From the start of 2016, new rules for bank resolution are in place – as spelled out in the Bank Recovery and Resolution Directive (BRRD) – across the EU, and a new authority (the Single Resolution Board, or SRB) is fully operational for resolving all banks in the eurozone. The implementation issues of the new regime are enormous. Banks need to develop recovery plans, and authorities need to create resolution plans as well as set the minimum required amount of own funds and eligible liabilities (MREL) for each bank. But given the diversity in bank structures and instruments at EU and global level, this will be a formidable challenge, above all with respect to internationally active banks. In order to explore ways in which the authorities and banks can meet this challenge, CEPS formed a Task Force composed of senior experts on banking sector reform and chaired by Thomas Huertas, Partner and Chair, EY Global Regulatory Network. This report contains its policy recommendations.

Europe’s Untapped Capital Market: Rethinking integration after the great financial crisis. Final report of the European Capital Markets Expert Group. Task Force Report, February 2016

In December 2014, ECMI and CEPS formed the European Capital Markets Expert Group (ECMEG) with the aim of providing a long-term contribution to the debate on the Capital Markets Union (CMU) project, proposed by the European Commission. After an intensive, year-long research effort and in-depth discussions with ECMEG members, this final report aims to rethink financial integration policies in the European Union and to devise an EU-wide plan to remove the barriers to greater capital markets integration. It offers a methodology to identify and prioritise cross-border barriers to capital markets integration and provides a set of policy recommendations to improve its key components: price discovery, execution and enforcement of capital markets transactions.

State Transformation and the European Integration Project. Lessons from the financial crisis and the Greek paradigm. CEPS Special Report No. 130/February 2016

The financial crisis that erupted in the eurozone not only affected the EU’s financial governance mechanisms, but also the very nature of state sovereignty and balances in the relations of member states; thus, the actual inequalities between the member states hidden behind their institutional equality have deteriorated. This transformation is recorded in the case law of the Court of Justice of the European Union and the member states’ constitutional courts, particularly in those at the heart of the crisis, with Greece as the most prominent example. It is the issue of public debt (sovereign debt) of the EU member states that particularly reflects the influence of the crisis on state sovereignty as well as the intensely transnational (intergovernmental) character of European integration, which under these circumstances takes the form of a continuous, tough negotiation. The historical connection between public debt (sovereign debt) and state sovereignty has re-emerged because of the financial crisis. This development has affected not only the European institutions, but also, at the member state level, the actual institutional content of the rule of law (especially judicial review) and the welfare state in its essence, as the great social and political acquis of 20th century Europe. From this perspective, the way that the Greek courts have dealt with the gradual waves of fiscal austerity measures and structural reforms from 2010 to 2015 is characteristic. The effect of the financial crisis on the sovereignty of the member states and on the pace of European integration also has an impact on European foreign and security policy, and the correlations between the political forces at both the national and European level, thus producing even more intense pressures on European social democracy. In light of the experience of the financial crisis, the final question is whether the nation state (given the large real inequalities among the EU member states) currently functions as a brake or as an engine for future European integration.

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.

The European Central Bank’s quantitative easing programme: limits and risks. Bruegel Policy Contribution Issue 2016/04, February 2016

The European Central Bank (ECB) has made a number of significant changes to the original guidelines of its quantitative easing (QE) programme since the programme started in January 2015. These changes are welcome because the original guidelines would have rapidly constrained the programme’s implementation. The changes announced expand the universe of purchasable assets and give some flexibility to the ECB in the execution of its programme. However, this might not be enough to sustain QE throughout 2017, or if the ECB wishes to increase the monthly amount of purchases in order to provide the necessary monetary stimulus to the euro area to bring inflation back to 2 percent. To increase the programme’s flexibility, the ECB could further alter the composition of its purchases. The extension of the QE programme also raises some legitimate questions about its potential adverse consequences. However, the benefits of this policy still outweigh its possible negative implications for financial stability or for inequality. The fear that the ECB’s credibility will be undermined because of its QE programme also seems to be largely unfounded. On the contrary, the primary risk to the ECB’s credibility is the risk of not reaching its 2 percent inflation target, which could lead to expectations becoming disanchored.

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.