International Financial Stability: Thought leadership and best practice in addressing European banking regulation
30 August 2013, Berlin
On 30 August, the first SAFE Summer Academy, titled “International financial stability: Thought leadership and best practice in addressing European banking regulation”, was held in Berlin, at the representation of the State of Hessen. Günter Beck, the academic director of the Summer Academy, welcomed the more than 30 participants from several European countries, representing many of the institutions involved in the legislation and implementation of financial markets regulation: the European Parliament, national parliaments, European ministries of finance, the European Commission, the European Central Bank and national central banks.
The SAFE Summer Academy is designed as a one-day training seminar for European policymakers dealing with financial market regulation. The topics covered in this year’s program ranged from a broader assessment of the characteristics of an efficient and stable financial market infrastructure to a particular focus on the recent and upcoming reform proposals of the European Commission, summarized under the term “banking union”.
Peter Praet, member of the Executive Board of the European Central Bank, opened the day with a keynote-address on the role of the ECB in the handling of the financial crisis. Praet asked the question whether central banks have gained too much power. He argued that in the creation of the European Monetary Union, a strong institutional design for monetary policy was a paramount objective. In his view, the ECB’s high credibility as an independent institution was a strong force leading to its current important role in crisis resolution. Praet contended that the European Commission’s reform proposals for a single supervisory mechanism and single resolution mechanism are also about making up for omissions in the creation of strong institutions in the area of financial policy.
In the first topical session of the day, on “International Banking and Financial Markets”, Patrick McGuire, Senior Economist at the Monetary and Economics Department at the Bank for International Settlements discussed recent academic insights and empirical evidence on how financial market regulations impact the activities of financial intermediaries and capital markets. He focused on answering the question of which measures improve the ability of financial markets to more efficiently channel funds to the real economy and thereby enhance financial stability. The discussion in this session showed that policymakers are concerned with the fact that interbank credit in Europe is still contracting, showing the continuing lack of trust in the system. This observation, combined with the fact that the non-bank supply of credit is large and growing in many countries, leads policymakers to worry that banking regulation is shifting operations into the non-bank sector and that unintended consequences of regulation are not sufficiently recognized.
In the second session, Professor Dirk Schoenmaker, Dean of the Duisenberg School of Finance, engaged participants in a discussion on “Open issues in financial market stability and efficiency”. Schoenmaker discussed the challenges the internationalization of the banking sector poses for (inter-) national regulators and supervisory agencies and what measures might be taken to deal with these challenges. The observed re-nationalization of banking markets begs the question, what the future of international banking will bring and whether the integrated banking model can persist. Schoenmaker argued that if cross-border banking is to remain an attractive business, then a strong supra-national regulatory framework is necessary to guarantee the stability of financial markets and, for this, European member states must give up on national financial policies.
The first afternoon session was led by Giovanni Dell’Ariccia, Head of the Macro-Financial Linkages Unit in the Research Department of the International Monetary Fund. Dell’Ariccia delivered the rationale for the elements that must be part of a European banking union. He argued that the vicious circle between bank risk and sovereign risk can be weakened only by a common safety net for the financial system. Because of moral hazard concerns, a common safety net needs to be strengthened by a common supervisory framework. Lastly, because banking supervision is only effective if combined with resolution powers, a single supervisory mechanism must be enhanced by resolution powers.
In the second afternoon session, open questions with respect to implementation of the banking union were looked into from a legal perspective. Tobias Tröger, Professor of Private Law, Trade and Business Law, Jurisprudence at Goethe-University Frankfurt, focused on issues resulting from the fact that not all European member states are part of the Eurosystem and therefore not automatically part of the common supervisory framework (SSM). While the European Commission has a proposal for member states to join the SSM on a voluntary basis, Tröger argued that the current institutional design for supervisory decision-making makes this unattractive. With no representation in the ultimate decision taken in the General Council, the “outs” will not want to give up national financial policies. Tröger views this as problematic, given that the issues with cross-border banking, commonly used as justification for the banking union, do not stop at the borders of the Euro Area. He predicts that the implementation of the banking union will be an ongoing process and will, in the medium-term, also require a treaty change.
The day closed with a panel discussion on the topic: “What kind of European banking union?” with John Berrigan, Director for Financial Stability, Economic and Financial Affairs, in the Directorate General for Economic and Financial Affairs at the European Commission, Helmut Siekmann, Endowed Chair of Money, Currency and Central Bank Law at Goethe-University Frankfurt, and Ashoka Mody, Charles and Marie Robertson Visiting Professor in International Economic Policy at Princeton University. The panelists discussed controversially the question of whether the theoretical design of a European banking union, including a common supervisory framework and a single bank resolution fund, with clear burden sharing for a loss-absorbency fiscal back-stop, has the chance of practical implementation.
The consensus reached throughout the day, that the best insurance for financial stability is given by an independent, best-practice supra-national supervisor, was challenged by the view that the political consensus to subscribe to the necessary common resolution fund will not be reached in all member states. The panelists agreed that the next steps depend on the ability of governments to convince their electorates that the banking union is a net-positive for their nation. In this context, the open question of how to deal with legacy assets in the banking system will be decisive. A clear answer as to how losses will be allocated is needed. Much hope is therefore placed in the ECB communication on the upcoming asset quality review, that is expected in the early fall of this year.