Harmonizing national options and discretions in the EU banking regulation

Abstract

The European Central Bank strives to harmonize over 160 national options and discretions (O&Ds) that contribute to the fragmentation of banking union’s regulatory framework. National authorities seem prepared to accept it, despite previously insisting on the inclusion of all O&Ds into the EU legislation. We analyze a sample of O&D choices and their correspondence to cleavages pertinent to the political economy of EU banking. We find that the 11 post-communist member states use O&Ds more stringently to protect capital and liquidity in the local subsidiaries of foreign-own banks, which may complicate their potential opt-in to the banking union.

Keywords:

• EU
• banking union
• reforms

Acknowledgement

We thank Thomas Lehner for research assistance and three anonymous reviewers for helpful suggestions.

Notes

1. See Own Funds Directive (89/299/EEC), Solvency Ratio Directive (89/647/EEC), Large Exposures Directive (92/121/EEC) or Capital Adequacy Directive (93/6/EEC). These were 6, 8, 8 and 26 pages long, respectively, in the official Journal of the EU. They suffered from implementation problems documented in various reports of the Commission (e.g. COM/2000/0074 final).

2. See the most recent Capital Requirements Directive (2013/36/EU) that is 98 pages long in the Official Journal and the Capital Requirements Regulation (2013/575/EU) that is 337 pages long.

3. The SSM regulation provided the ECB with a mandate to “adopt regulations only to the extent necessary to organise or specify the arrangements for the carrying out of the tasks conferred on it” and made it the competent and designated authority in SSM participating countries. This, however, does not cover 45 O&Ds that remain under the purview of member states.

4. We refer collectively to national legislatures and national competent authorities as national authorities, unless we need to draw a distinction between them.

5. This approach is still in use today, as the current Basel III accord contains 97 options and discretions to be applied by national authorities. At the same time, 76 of these options are under review by the Basel Committee with a view of removing them from the Accord (Angeloni 2014).

6. Apart from O&Ds in CRD IV and CRR, the total count also includes 12 O&Ds from the Commission Delegated Regulation on the Liquidity Coverage Ratio (ECB 2016c:101).

7. See ECB Regulation 2016/445 on the Exercise of Options and Discretions Available in Union Law (ECB 2016a) and the ECB Guide on the Exercise of Options and Discretions Available in Union Law (ECB 2016b).

8. The EBA is former CEBS upgraded to the status of European Supervisory Authority by the 2009 reform.

9. The voice of Eurozone non-members is protected by the double majority principle of members and non-members in some regulatory decisions of EBA. However, the ECB can decide on O&Ds without EBA's involvement.

10. There is some evidence that O&D choices that increase stringency and risk sensitivity of capital requirements tend to increase bank solvency (Isabel Argimón and Ruiz-Valenzuela 2010).

11. The extension of the phase-in for the deduction of Deferred Tax Assets (DTAs) from 5 to 10 years distorts temporarily bank capital ratios, especially in Greece, Ireland, Portugal, Austria and to lesser extent in Germany, Belgium, Spain, Italy and Netherlands. Since the Basel Committee for Banking Supervision agreed on the 5-year phase-in, this O&D is one of the reasons for EU's non-compliance with the Basel III capital agreement adopted in 2009.

12. This exception is awarded by national authorities on a case-by-case basis and enhances the overall capital ratios of the EU's systemically important banks by 9.6 percent, i.e. by 1 percentage point (ECB 2016a: 10).

13. Given the difficulty of raising bank capital after the crisis, deducting capital of insurance subsidiaries could trigger restructuring of under-capitalized banks, including contribution from public bank-supporting scheme introduced by many member states in 2008/9.

14. An important aspect of O&Ds is that even if they are requested by a single member state, they are always available to all of them, if they get adopted in the legislation. This implies that member states make choices about O&Ds in two rounds. During the negotiations phase they put forward their preferred O&Ds that they would like to get included in the final legal text. In the implementation phase after the legislation is adopted, the member state authorities choose again from the full list of available O&Ds, which includes those put forward by all the other member states. Hence, in case of CRR/CRD legislation states had to make choices on all 150 O&Ds available, even if they initiated only a few of them.

15. A related approach to analyzing the political economy of EU banking is based on advocacy coalitions (Quaglia 2010). However, the “market-making” and “market-shaping” coalitions map very closely on the LME and CME distinction respectively, while lacking categorization for the member states that joined the EU in 2004 or later.

16. The binary coding is a simplification as some O&Ds provide national authorities with more granular choices. The precise coding rules are available in the online appendix of this article.

17. Some of the O&Ds in the CRR/CRD are based on options allowed for in Basel III package. However, the Basel Committee is currently reviewing all these options and some are likely to be removed (BIS (Bank for International Settlements) 2015). Consequently, the EU is likely to follow and remove such options from the CRR/CRD to ensure international compliance.

18. The difference between LME and DME is also statistically significant, but this only reinforces the EU11 and EU17 groups since all EU11 are classified as DMEs.

19. The precise status in Poland is not clear. Due to delayed implementation of the CRR/CRD IV the EBA data-set does not contain the final choices on some O&Ds.