Capital Markets Union from the perspective of the banking industry and prudential supervision

Abstract

This article analyses some of the issues related to the financial stability risks associated with the European Commission's Green Paper on Capital Markets Union (CMU). The CMU proposal offers the potential for a more balanced and efficient provision of credit in EU capital markets through non-bank financial intermediaries that should enhance economic growth in Europe. Nonetheless, it introduces certain macroprudential regulatory risks that raise serious challenges for how EU policymakers plan to regulate the wholesale capital markets and particularly the shadow banking sector, which if not adequately addressed could substantially limit the effectiveness of the CMU project. The article suggests that the Commission has further work to do to ensure that the CMU addresses the macroprudential financial risks posed by bank disintermediation and the related systemic risks in the wholesale capital markets.

Notes

1 European Commission, Green Paper: Building a Capital Market Union, COM(2015) 63 final (Brussels, 2015).

2 See J Canals, Universal Banking (Oxford University Press, 1997), at 6–11. A recognised version of the universal banking model in continental Europe is bancassurance, in which the banking corporation is permitted to take deposits, make loans and provide payment services, while also providing insurance services and products. In addition, the bancassurance model allows the bank to engage in other financial service activities such as securities and derivatives trading and underwriting.

3 Ibid.

4 “Consolidation and Diversification in the Euro Area Banking Sector”, ECB Monthly Bulletin, May 2005, 79–87.

5 The recent trend in Europe, however, is for companies to source more and more of their funding in capital markets. See European Commission, Communication from the Commission to the European Parliament and the Council on long-term financing of the European economy, COM(2014) 168 final (Brussels, 27 March 2014), at 10–12. The Commission aims to propose legislation to enhance long-term financing of the European economy by: (i) mobilising private sources of long-term financing; (ii) making better use of public finance; (iii) developing capital markets; (iv) improving SMEs’ access to financing; (v) attracting private finance to infrastructure; and (vi) enhancing the overall environment for sustainable finance.

6 See the report of the Tripartite Group of Bank, Securities, Insurance Regulators, The Supervision of Financial Conglomerates (Basel, BIS, July 1995), at 1 (defining a “financial conglomerate” as any corporate group under common control whose exclusive or predominant activities consist of providing a significant level of services in at least two of the financial sectors of banking, securities and insurance). See also, V Menoud, Financial Conglomerates (Zurich, Schulthesis, 2010).

7 GJ Bentson, “Universal Banking” (1994) 8(3) Journal of Economic Perspectives 121.

8 As the Financial Times reported: “Universal banking for now is an unbeatable model. Globally, the banks that are winning are those that lend, issue cards, provide custody services, issue guarantees and arrange bond placements. We have one client, one relationship, one person answers for them – and there are many products and the synergies are enormous”: Financial Times, 2 August 2010, 3.

9 According to IMF estimates, between 2007 and 2010 EU banks incurred crisis-related losses of between €1 trillion or 8% of EU GDP, and, moreover, the European Commission approved €4.5 trillion (equivalent to 37% of EU GDP) of state aid measures to EU financial institutions. International Monetary Fund (IMF), Global Financial Stability Report: Sovereigns, Funding, and Systemic Liquidity (October 2010), http://www.imf.org/external/pubs/ft/gfsr/2010/02/pdf/text.pdf, accessed on 15 April 2014.

10 Commission, supra n 1, at 2.

11 Ibid, 4.

12 Council, Conclusions, 29 June 2012, EUCO 76/12, p 3.

13 Commission, Proposal for a Council Regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions, COM(2012) 511 final (Brussels, 12 September 2012).

14 Commission, Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 1093/2010 establishing a European Supervisory Authority (European Banking Authority), COM(2012) 512 final (Brussels, 12 September 2012).

15 Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions; Regulation (EU) No 1022/2013 of the European Parliament and of the Council of 22 October 2013 amending Regulation (EU) No 1093/2010 establishing a European Supervisory Authority (European Banking Authority) as regards the conferral of specific tasks on the European Central Bank pursuant to Council Regulation (EU) No 1024/2013.

16 Regulation (EU) No 1024/2013, Art 4(1)(b), (d)–(i) and Art 6(4)–(6) e contrario.

17 Regulation (EU) No 1024/2013, Art 4(1)(i).

18 Directive 2013/36/EU [2013] OJEU L 176/338, Regulation (EU) No 1024/2013, Art 97(1)(b), discussing the review of systemic risks affecting the Member State's financial system, and Arts 104–105, and the subsequent imposition of specific capital, liquidity, operational or governance requirements addressing those risks.

19 Regulation (EU) No 1024/2013, Art 6(4)–(6).

20 Regulation (EU) No 1024/2013, Art 5.

21 Regulation (EU) No 1024/2013, Art 5(1).

22 Regulation (EU) No 1024/2013, Art 5(2).

23 Regulation (EU) No 1024/2013, Art 5(5).

24 Regulation (EU) No 1024/2013, Art 5(4).

25 Commission Proposal of 10 July 2013 for a Regulation of the European Parliament and of the Council establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Bank Resolution Fund and amending Regulation (EU) No 1093/2010 of the European Parliament and of the Council, COM(2013) 520 final, Art 8(1).

26 Commission Proposal of 10 July 2013 for a Regulation of the European Parliament and of the Council establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Bank Resolution Fund and amending Regulation (EU) No 1093/2010 of the European Parliament and of the Council, COM(2013) 520 final, Art 16(1), 1–111.

27 See Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (2013) OJEU L176/1, Art 4.1(1).

28 Regulation (EU) No 1024/2013, Art 5.

29 P Halstrick, “Tighter Bank Rules Give Fillip to Shadow Banks”, Reuters, 20 December 2011, http://www.reuters.com/article/2011/12/20/uk-regulation-shadow-banking-idUSLNE7BJ00T20111220 accessed on 10 June 2013. See also Financial Stability Board, Global Shadow Banking Monitoring Report (2012), http://www.financialstabilityboard.org/publications/r_121118c.pdf, accessed on 19 July 2014 (estimating shadow banking's worldwide assets as $67 trillion in 2011).

30 Indeed, Anabtawi and Schwarcz observed that shadow banking “is widely believed to have contributed to the buildup of risks in the financial system in the period leading up to” the global financial crisis. See I Anabtawi and SL Schwarcz, “Regulating Ex Post: How Law Can Address the Inevitability of Financial Failure” (2013) 92 Texas Law Review 75, 85. See also BS Bernanke, Chairman, speech at the Russell Sage Foundation and the Century Foundation Conference on Rethinking Finance, 13 April 2012, http://www.federalreserve.gov/newsevents/speech/bernanke20120413a.htm, accessed on 17 June 2013 (arguing that mortgage lending through shadow banking firms encouraged risky lending practices that contributed to the financial crisis).

31 European Systemic Risk Board, Flagship Report on Macroprudential Policy in the Banking Sector (2014), 8f www.esrb.europa.eu/pub/pdf/other/140303_flagship_report.pdf?d0f12e526e9b00e7c4a137f97776b96c accessed on 22 July 2014.

32 Ibid, 8–10.

33 See Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (2013) OJEU L176/1, Art 4.1(1).

Additional information

Kern Alexander, University of Zurich.