The financial crisis of 2008 and the sovereign debt crisis of 2010 and 2011 have strongly influenced the face of European financial markets. Against this background, numerous institutional reforms have been implemented in recent years, which have led to the formation of the European Banking Union. The sixth Frankfurt Conference on Financial Market Policy of the Research Center SAFE focused on a review of the reforms implemented so far in the banking sector, which researchers, practitioners, and supervisory experts discussed at Goethe University Frankfurt in mid-December.
For Luis de Guindos, Vice President of the European Central Bank (ECB), it is beyond question that the Banking Union needs to evolve: "We need to shore up the banking sector further by thoroughly completing the reform agenda that emerged in response to the crisis." From the point of view of de Guindos, the implemented reforms have already several effects in the euro area. "Substantial risk reduction has been achieved, is ongoing and should continue," said de Guindos. Banks today have more and qualitative better capital than in the past, they have also improved their liquidity and debt levels. Nevertheless, the reform of the European financial architecture is not completed. De Guindos welcomed the decision on the Common Backstop of the Single Resolution Fund (SRF) and the debate on the third pillar of the Banking Union, the European Deposit Insurance System (EDIS). Both would help to create equal conditions for all players in the banking market. This could improve private risk sharing and protect regions from a local credit crunch.
At the same time, de Guindos recommended expediating the Capital Markets Union and focusing on the growing non-banking sector. "As the global crisis has shown, we must remain vigilant to possible new risks that might emerge in the financial system," said de Guindos. It is necessary to improve the sector's resilience to systemic shocks. De Guindos, for example, advocated more regulation of investment funds. This may require "new tools" to achieve such goals as limited liquidity and debt risks or mandatory minimum liquidity buffers. The regulation of investment funds should happen at a European level, as the consequences of possible problems in this sector would affect the whole EU.
Preserving the competitiveness of the EU
The participants in the following panel, which was moderated by Rainer Haselmann (SAFE and Goethe University Frankfurt), discussed the reforms of the past years in the euro area and came up with partly different results. Thomas Book, Board Member of Deutsche Börse AG and responsible for Trading & Clearing, praised what has been achieved: "We are in a much better position than before the reforms." For the future it would be important to preserve both political cooperation on an international level and the competitiveness of the EU. Sabine Lautenschläger, Board Member of the ECB, recalled the goals of the reforms after the financial crisis: Firstly, it was about solving specific problems that the crisis had revealed. Nevertheless, it is clear that no crisis is the same. "The second step was to enhance the general resilience of banks, to make them strong enough to withstand any type of storm,” said Lautenschläger. This idea would stand behind the three aspects that the reforms aimed at, namely capital, liquidity, and corporate governance.
Much has already been achieved in these areas, whereas the progress in corporate governance and risk management received relatively little attention. "But they are just as important as capital and liquidity – if not more important," Lautenschläger said. Finally, good governance and risk management would prevent banks from getting into trouble at all. Lautenschläger also spoke in favor of the full implementation of the agreed reforms. Otherwise competitive conditions would be distorted and regulatory arbitrage would be possible. In order to meet the 19 different jurisdictions of the members and the specific business models of the banks, supervision rules should be principle-based and at the same time give supervisors the necessary discretionary leeway for specific business models, according to Lautenschläger.
Dirk Schoenmaker, Professor of Banking and Finance at Erasmus University Rotterdam, also highlighted the progress of the Banking Union, but also looked on other aspects. In his view, Europe is "overbanked" and companies in the real economy are still too dependent on credit institutions for financing. For example, in the US corporate bonds are a more stable source of funding. Further, Schoenmaker recalled that the financial system had no right to exist by itself. Its purpose is rather to serve the economy in a sustainable way.
Daniela Weber-Rey, Member of the Management Board of HSBC Trinkaus & Burkhardt AG, said after a decade of intensive reforms that she would prefer a break: "We should analyze the effects of the reforms carefully, rather than thinking about new ones," said Weber-Rey. She critically assessed the developments in the German banking market: Specifically, the German institutions have lost competitiveness and trust in recent years. However, especially Germany would need strong domestic banks because of its industry. In Weber-Rey´s view, there should be less discussions about regulations and more about the question of how to improve and restore trust in financial institutions.
A project for the future: An European fiscal mechanism
Jan Krahnen, Director of the Research Center SAFE, emphasized the importance of market discipline in the banking market in the second panel moderated by Jürgen Schaaf (ECB). It must be ensured that the creditors of the banks would participate in its losses in the case of restructuring or resolution in the event of imminent insolvency. Putting this into practice is not so easy, he said. Rolf Strauch, Chief Economist of the European Stability Mechanism (ESM), drew attention to the next steps towards completing the Banking Union. The common backstop will be available by 2024 at the latest. If its resources were insufficient, the ESM could step in, according to Strauch. A joint deposit guarantee would principally also make sense, even if many banks would have to clean up their balance sheets from inherited burdens. A project for the more distant future could be a European fiscal mechanism. On this topic, already many ideas are discussed. "What is important to note is that all proposals under discussion can be constructed without causing permanent transfers," said Strauch.
Dorothea Schäfer from the German Institute for Economic Research (DIW) spoke in favor of preserving the diversity of the European banking market. On the other hand, the too big to fail problem of large banks is still unsolved. National and European champions on the banking market would not be reasonable, she said. Boštjan Jazbec of the Single Resolution Board (SRB) was instead in favor of European bank champions who could support the European economy. It would make sense to further standardize the regulatory provisions in the EU.
Same rules for all
In the closing panel, moderated by Hans-Helmut Kotz (SAFE and Harvard University), former Finnish Central Bank Governor Erkki Liikanen (IFRS Foundation and Helsinki Graduate School for Economics) said that pan-European banks could be useful to decrease the problem of the state-banks nexus. He sees the fragmentation of the financial markets in Europe as problematic. Regulation should be about finding a balance between banks and other actors. Financial institutions would have to be able to stand up for themselves in an emergency and not rely on the taxpayer's money, Liikanen said.
Katja Langenbucher, Professor of Civil Law, Business Law and Banking Law at the Goethe University Frankfurt, looked at financial and banking regulation in the euro area from a juridical perspective. There is still a great deal of variation in regulation and differences in implementation in the member states, she said. The European Securities and Markets Authority (ESMA) would need more resources to fulfill its task of enforcing the rules.
The perspective of the banks brought Karl-Peter Schackmann-Fallis from the German Savings Banks and Association (DSGV) into the panel. Specifically, the German banking system would benefit from its diversity and is efficient with low prices and low margins for the banks, he said. Moreover, the proximity to the customers would favor the risk assessment. The task of regulation must be to ensure the same rules apply in the euro area.
Cornelia Woll, Professor of political science at Sciences Po, spoke about the sanctioning of corporate misconduct by governments. The number of penalties would have increased significantly after the financial crisis. The fact that economic relations and the pursuit of corporate misconduct can also have a political component Woll made clear by the example of the United States: in the US, foreign companies account for about 16 percent of the cases but pay for almost 60 percent of the penalties.