Banks and Markets in Europe's Financial Architecture
22 and 23 September 2015, Brussels
On the 22nd and 23rd of September, the SAFE Policy Center held its 3rd SAFE Summer Academy, entitled “Banks and markets in Europe’s financial architecture”, in Brussels. Jan Pieter Krahnen, Program Director of the SAFE Policy Center, welcomed more than 50 participants and speakers from sixteen different European member states, representing many of the institutions involved in the legislation and implementation of financial markets regulation: the European Commission, the European Parliament, the Council of the EU, European regulatory and supervisory institutions, national ministries of finance and economics as well as the European Central Bank (ECB) and national central banks.
The topic of the first day was “Banking risk and resolution”. In her opening keynote speech, Elke König, Chair of the Single Resolution Board (SRB), delivered an assessment of the implementation status of the Single Resolution Mechanism (SRM). She discussed the next steps in BRRD implementation in national member states and the need for development of co-operations between all supervisors and authorities involved in resolution decisions.
The following first panel session was devoted to “SSM & SRM – Implementation Challenges”. Eleni Angelopoulou (ECB), Samy Harraz (SRB) and Sabino Fornies Martinez (DG FISMA, European Commission) discussed the challenges of the coming months, from the viewpoint of their respective institutions, key players in implementing bank resolution in Europe. Agreement was quickly reached on the necessity of devising methods for cooperation and information sharing. The shortage of competent personnel is a key issue especially for the SSM and the SRM. Tobias Tröger (SAFE and Goethe University) cautioned that supervisors need to be keenly aware that regulation always calls for regulatory arbitrage behavior and to expect that risks may have migrated to other parts of the financial system.
In the following academic session, Rainer Haselmann (SAFE and Goethe University) presented joint research with Markus Behn and Vikrant Vig: “On risk weights: The limits of model-based regulation”. In their analysis, the authors argue that through the introduction of model-based capital regulation, Basel II regulations have increased the incentive for banks to under-evaluate risks. The paper was discussed by Adonis Antoniades (Bank of International Settlement).
Sovereign debt & risk contagion
A second academic session followed, in which Sascha Steffen (ESMT) discussed research on “Sovereign debt & risk contagion in banks”. His analysis, co-authored by Viral Acharya, shows that carry trade behavior was pervasive among European banks during 2007-2013. With access to short-term unsecured funding in wholesale markets, banks undertook long peripheral sovereign bond positions, explaining the large exposures to riskier government bonds in the crisis. Sylvain Broyer (Natixis) acted as discussant and highlighted the regulatory incentives for banks to hold sovereign bonds. The day closed with a dinner speech by John Berrigan (DG FISMA, European Commission) on particular challenges to reconcile macro-prudential and micro-prudential regulation.
The second day was devoted to the topic of “Financial system: banks & markets”. The question underlying the day’s presentations and discussions was how the European capital markets union (CMU) agenda can be reconciled with the objectives of the banking union. Whether “Europe is over-banked?” was discussed by Thorsten Beck (Cass Business School), André Sapir (Université Libre de Bruxelles) and Jan Pieter Krahnen (SAFE and Goethe University). Empirical evidence shows that Europe’s financial architecture was heavily bank-based before the crisis and the three discussed historical and demand-driven reasons for this structure. It was argued that since market-based financing is beneficial to foster growth in developed economies, regulation should get rid of distortions which bias the financial system. The discussion, however, showed that the reforms in banking supervision, undertaken as part of the banking union project, are important and need to stay on course, independent of any CMU initiatives.
Capital market union: a roll-back of the banking union?
The need to balance the CMU agenda with the banking union objectives was then discussed by a panel composed of industry representatives and policy institutions. Steffen Kern (European Securities and Markets Authority), Anna Jarosz-Friis (DG Competition, European Commission), Andreas Billmeier (Stone Milliner Asset Management), and Sylvie Mathérat (Deutsche Bank AG) contributed their perspectives.
Thomas Wieser, President of the Economic and Financial Committee of the European Union, closed the Summer Academy with a keynote speech on “The CMU agenda: a roll-back of the banking union project?” His answer was that CMU is complementary to the banking union, as banking union was about de-risking the financial sector and one of the main goals of the CMU is now to spread risks.