Regulation in EU and US

Question 1

The Dutch financial regulation architecture

Answer 1

• For prudence type regulation: De Nederlandsche
Bank (DNB)
• For Business Conduct regulation: Authoriteit
Financiële Markten (AFM)

Question 2

Cost of the Fin Crisis 2008

Answer 2

• Between 2008 and 2012, European governments
provided state aid totalling EUR 1.5 trillion to
prevent the collapse of the financial system (i.e.
more than 12 % of 2012 EU GDP)
• The EU unemployment rate increased from a precrisis low of 7.2 % in 2007 to 10.8 % in 2013, with
unemployment rising to more than 25 % in Greece
and Spain.
• More than 60 % of EU citizens surveyed in 2013
stated that they had lost confidence in the financial
sector (as well as in the relevant authorities) as a
consequence of the crisis. Trust can be quickly lost
but is slow and difficult to restore.

Question 3

ECB

Answer 3

• Officially only has a single
objective: maintaining price
stability by conducting
appropriate monetary policy.
• However with recent
interventions on the bond
market, has also taken on responsibility of bailing
out euro members if need be.
• In 2010 the European Financial Stabilization
Mechanism (EFSM) started buying up debt from the
PIIGS countries.
• Organizes the European payment system
(TARGET2)
• Now also co-supervisor of the largest approx. 120
European banks through the Single Supervisory
Mechanism (SSM)

Question 4

What happens if the ECB increase IRs

Answer 4

bonds (safe) will be more attractive than stocks; also harder for firms to borrow money from banks, and could lead to less profits; also state debt will increase which could lead to tax increase

Question 5

Single Supervisory Mechanism SSM

Answer 5

• Part of the new European Banking Union. All
Eurozone members participate, non-members can
join if they want
• ”Significant” banks are directly supervised by the
ECB (together with national regulator, but ECB has
final say)
• Smaller banks are supervised by national regulators
(usually central banks), but ECB can step up and take
over whenever they want
• ECB runs stress tests, can set minimal capital standards,
order risk limits, force out key officers

Question 6

Bank is significant if

Answer 6

1. Bank has assets above €30 billion
2. Bank has assets above €5 billion and above 20% of
   national GDP
3. Bank is among 3 biggest bank of a country
4. Bank has large cross border activities ( because banks lend each other a lot of money so if are interconnected with lot of banks in other countries and this bank fails it may have a contiguous effect on the other country)
5. Bank has received bailout funds

Question 7

European Single Resolution Mechanism SRM

Answer 7

• A lot of banks have become too large for their country
to bail out (especially in smaller countries), and tax
payers are not that eager to do it again.
So now a European Solution instead:
• The Single Resolution Mechanism (SRM)
• Started January 1st, 2016
• Fund will be filled with cash by participating
banks over 8 year period
• Idea is that it will no longer fall on taxpayers to
bail out banks

Question 8

European Supervisory Authorities (ESAs)

Answer 8

Job is to coordinate and unify 
the different national 
regulators. (Micro-prudential):
1. European Banking 
Authority (EBA)
2. European Insurance and 
Occupational Pensions 
Authority (EIOPA)
3. European Securities and
Markets Authority (ESMA)

Macro prudential: European Systematic Risk Board ESRB

Question 9

European Systematic Risk Board ESRB

Answer 9

Established in 2010 as a response to the 2007
financial crisis. Advises EU, national regulators and
European agencies on matter of financial stability
and macro prudential policy.
Tries to stay on top of new developments in the financial
system, and warn about new risky interlinkages ahead of
time.

Question 10

EBA - European Banking Authority

Answer 10

specialized agency of the EU
Tasks:
• Oversees and coordinates prudential banking
regulation
• Is allowed to overrule national regulators to prevent
regulatory arbitrage
• Issues Binding Technical Standards (BTS)
and guidelines aimed at a single European
Single Rulebook in banking.
• In charge of implementing the Capital Requirement
Directive IV (Basel III)
• Issues the Common Reporting (COREP)
standardized reporting framework for bank
risk
• Assess risks in EU banking sector (stress tests - testing of the resilience of banks in case of plausible financial crisis scenarios at a given time and the identification of structural weaknesses in the EU banking sector).
• Investigate application of EU law by national authorities,
• take decisions in emergency situations,
• mediating role,
• independent advisor to the EU Parliament and the Commission
• promotes transparency, simplicity and fairness for consumers of financial products and services.

• Due to Brexit relocated from London to Paris

Question 11

EIOPA - European Insurance and Occupational Pensions Authority

Answer 11

An independent advisory body to the European Union that helps shape informed policies and laws at the EU and national level.

• Supervision of pensions and insurances on an EU level.
• Advisor to the EU bodies (Commission and Parliament).
• Mission is to improve consumer protection & rebuild trust in fin system.
• Promote and ensures a harmonized and consistent regulation taking account of interest of member states
• Drafts regulatory technical
standards
• Issues guidelines and
recommendations to national
regulators
• Coordinates national regulators and can overrule them

Question 12

ESMA - European Securities and Markets Authority

Answer 12

An independent European Union (EU) Authority. 
Has 3 objectives:
1. Investor protection
2. Orderly markets 
3. Financial stability

Tasks:
• assessing risks to investors markets and financial stability,
• completing a single rulebook for EU financial markets,
• promote standardization,
• directly supervise financial bodies (CRAs, Trade repositories, and Securitization repositories).
• Coordinates national agencies that regulate securities (so the
AFM in the Netherlands)
• Issues guidelines and recommendations to national
regulators

Question 13

Most important EU Directives / Regulations

Answer 13

• EU Regulation applies directly to each member 
state
• EU Directive first needs to be implemented into 
national law by each national parliament, allowing 
for differences in implementation.
Important Directives/Regulations:
• MiFID/MiFID II
• MAD/MAD II/MAR
• TfLCD
• UCITS
• AIFMD
• CRD IV

Question 14

MiFID (Market in Financial Instruments Directive) 2004

Answer 14

• Passporting: financial firms licensed in one EU country,
should be able to operate in other countries as well.
• Icesave ’abused’ this (even though Iceland is only
EEA)
• Obligations for financial firms:
• Client categorization: firms have to divide
customers in ”eligible counter parties”, professional
clients and retail clients, and advise appropriately.
• Client order handling: firms are obliged to obtain
certain information from clients in order to work in
their best interests.
• Best execution: firms have to take all reasonable
steps to
ensure best execution of an order for a client

Question 15

MiFID ||

Answer 15

• Regulates High Frequency Trading (HFT)
• Limits variable remuneration (commissions and
bonuses) that incentivize against the best interests of
their clients
• Provides more details on what is considered ”Best
execution”.
After some postponement came into effect in January
2018

Question 16

dark pools

Answer 16

otc trading organized in dark pools which are dark you dont see whats happening - if you have mutual fund and you want to sel 1000 shared of X company, in a normal market you will get a lower price. in the dark pool you find other people to take this shares from you for a fixed price.

Question 17

Market Abuse Directive MAD 2003

Answer 17

Prohibits insider trading and market manipulation
Member states have to appoint a single
regulator to implement the directive
The Directive prohibits any person possessing inside
information from:
• Disclosing privileged information to any other
person outside the scope of the exercise of their
employment;
• Recommending any other person to acquire or
dispose of financial instruments to which that
information relates;
• Engaging in market manipulation.
• disseminating false or misleading information

Question 18

Market Abuse is defined unreasonably disadvantaging,

directly or indirectly, others by:

Answer 18

• using information which is not publicly
available (insider dealing);
• distorting the price-setting mechanism of
financial instruments;
• disseminating false or misleading information

Question 19

MAD ||/ MAR

Answer 19

• Market Abuse Regulation applies directly
• Also prohibits abuse of electronic trading
platforms, high frequency trading, or
manipulation of benchmarks (think of
LIBOR scandal)
• Applies to commodity and derivative markets
as well
• MAD II:
• Introduces common definitions of insider
trading + minimum sanctions

Question 20

Transparency for Listed Companies Directive TfLCD 2004

Answer 20

• Issuers have to make all information available that
is necessary for shareholders to implement their
shareholder rights.
• Obliges public firms to publish yearly and halfyearly reports
• Major holdings need to be reported (when
trespassing thresholds of 5%, 10%, 15%, 20%,
25%, 30%, 50% and 75% respectively)
• Issuers have to inform all shareholders equally

Question 21

Undertakings for Collective Investment in Transferable Securities Directive UCITS 2001

Answer 21

regulates investment funds in the EU.
• A UCITS is basically a typical investment
fund/mutual fund
• Allows for passporting across the EU (Being
registered in one country allows you to market in
all others)
• Minimum capital is €125,000

Question 22

UCITS can mainly invest in:

Answer 22

• transferable securities and money market
instruments admitted to or dealt on a regulated
market
• units of authorised UCITS or other
collective investment undertakings
• deposits with credit institutions
• some financial derivative instruments
• Also: UCITS may not acquire precious metals.
• Must issue prospectus, half yearly reports, and a
”key investor information” document ( KIID)

Question 23

Alternative Investment Fund Managers Directive AIFMD 2011

Answer 23

• Aims to regulate, or at least get some information
on Hedge Funds, Private Equity funds, etc.
• If a fund is large enough (€100m if using
leverage, €500m if not), have to register with
national regulator, and file regular reports.
• Includes financial statements, activities,
systemic risk profiles and information about
the total amount of remuneration paid by the
AIFM to its staff

Question 24

CRD 2006

Answer 24

• Capital Requirements Directive 2006/48/EG
Implements Basel II
• Increased capital ratios
• Increased liquidity ratios
• Increased leverage ratios
• CRD IV is the latest version (2013/36/EU), and
implements Basel III, agreed upon after the crisis
(to be implemented
in 2022).

Question 25

Payment Services Directive 2007 / PSD2 2015

Answer 25

• Laid down the legal basis for the creation of SEPA (or
the Single Euro Payments Area) IBAN etc.
• Promises European transfers within a day
• Lowers interchange fees (e.g., creditcard fees are capped at
0.3%, debit card fees at 0.2%)

PSD 2
• Entered into force January 2018
• Helps the ongoing digital disruption of payment services
• requires banks and payment providers, or any
company that holds data about client accounts, to
grant third-party providers (TPPs) unrestricted access
to the payment accounts of their clients.
• Travel firms will not be able to charge fees to clients
for using credit cards and other payment methods,
including Apple Pay and Paypal (if they do not find
loopholes)

Question 26

Mortgage Credit Directive MCD 2014

Answer 26

• MCD aims to harmonize European rules on
mortgage issuing.
• Includes:
• Consumer information requirements, conduct
of business obligations, competence and
knowledge requirements for staff, a consumer
creditworthiness assessment obligation,
provisions on early repayment, provisions on
foreign currency loans, provisions on tying
practices, some high-level principles (e.g., those
covering financial education, property valuation
and arrears and foreclosures) and a passport
for credit intermediaries who meet the
admission requirements in their home Member
State.
• Goal is to have a single European market for
mortgage credit.

Question 27

How many US districts have federal reserves?

Answer 27

12
The FED = the ECB
and the reginal FEDs = national central banks

Question 28

Major US financial regulators and organizations

Answer 28

1. Prudential Bank Regulators
2. Securities and Derivatives Regulators
3. Other Regulators
4. Coordinating Forum

Question 29

Prudential Bank Regulators in the US

Answer 29

1. Office of Comptroller of the Currency (OCC)
2. Federal Deposit Insurance Corporation (FDIC)
3. National Credit Union Administration (NCUA)
4. Federal Reserve Board (the Fed/FRB)

Question 30

Securities and Derivatives Regulators in the US

Answer 30

1. Securities and Exchange Commission (SEC)
2. Commodities Futures Trading Commission (CFTC)
3. Financial Industry Regulatory Authority (FINRA)

Question 31

Other Regulators in the US

Answer 31

1. Federal Housing Finance Agency (FHFA)
2. Consumer Financial Protection Bureau (CFPB)
3. Financial Crimes Enforcement Network (FINCEN) (Department of the US Treasury)

Question 32

Coordinating Forum in the US

Answer 32

1. Financial Stability Oversight Council (FSOC)
2. Federal Financial Institutions Examination Council (FFIEC)
3. President’s Working Group on Capital Markets (PWG)

Question 33

The US system of fin regulation is

Answer 33

Highly fragmented and overlapping

Question 34

The FED

Answer 34

The Fed still organized as a
national/local hybrid:
• 12 district banks, each acting
as a central bank for their regions
(FRBNY, FRBSF, etc.)
• Allowed to engage in discount lending and
open market operations independently. • But could only extend loans over ’eligible
commercial paper’
• So only lending with good collateral, cannot
pump unlimited liquidity into the economy.
• Federal Reserve Board (FRB) coordinating in
Washington, but not in charge.
• Only in 1936 was open market policy centralized in
the Federal Open Market Committee (FOMC), a
subcommittee of the FRB

Question 35

Office of Comptroller of the Currency (OCC)

Answer 35

• The OCC is the original federal regulator in the US
• Founded in 1863 to regulate all nationally chartered
banks (state-chartered banks were regulated locally,
later by the FDIC)
• The OCC however lacked the ability to provide liquidity
or bail out failing banks

Question 36

When did the FED start to directly supervise banks

Answer 36

since the
2008 crisis (and the Dodd-Frank act), the Fed now
directly supervises ”systemically important banks”
as determined by the Federal Stability Oversight
Commission (FSOC).
• Also, now the principal regulator for systemically
important financial-market utilities (mostly
clearing houses and exchanges)

Question 37

Glass-Steagal Act

Answer 37

• Passed in 1933, successor to the Banking Act of
1932 (Sponsored by Senators Glass and Steagal)
• Established nationwide deposit insurance, creating
the Federal Deposit Insurance Corporation (FDIC) • Separated Commercial from Investment Banking
•  Firms selling securities were forbidden from
taking deposits (This was repealed in the late
’90s!)
• Forbid directors from taking loans from their own
institutions.
• Increased minimum capital requirements
• Act also created the Federal Open Market
Committee (FOMC) and introduced Regulation Q:
• Prohibited interest payment on demand
deposits (encouraging the use of savings
accounts) (effectively repealed by the DoddFrank Act)

Question 38

Federal Deposit Insurance Commission (FDIC)

Answer 38

• Regulates state-chartered banks
• Nationally chartered banks are regulated by the OCC
(s.a.).
• Administers the Deposit Insurance Fund (DIF).
• Initially pretty generous: Covered 100% of the first
$10.000, 75% of the next $40.000 and 50% of all
deposits above $50.000.
• Later reduced to only 100% of the first $5.000
• Then over time increased to $100.000
• After the financial crisis $250.000, now indexed to
inflation

Question 39

In the case of a bank failure the FDIC either engineers a

Answer 39

• ”Payoff”: simply liquidating the bank’s assets and
using the proceeds the pay off the depositors.
• “Purchase and Assumption” (P&A): The FDIC will
engineer a ’good bank’ with healthy assets and
merge this with another bank. The remaining ’bad
bank’ assets are liquidated

Question 40

Security and Exchange Commission (SEC)

Answer 40

• Security and Exchange Act (1934) establishes the
SEC that regulates the sale of equity and debt
instruments.
• Regulates corporations that sell securities to the
public and brokers/dealers and other
intermediaries.
• SEC in theory also has a prudential mandate,
but mostly focuses on conduct of business
regulation.
• Thus, a focus on transparency and disclosure
rather than prudence (SEC most comparable to
our AFM)
• SEC approval of an asset does not mean it is a
safe or sound investment, only that the risks
have been properly disclosed.

Question 41

SEC pt 2

Answer 41

• Actors that have to register with the SEC:
• Stock exchanges, brokers, mutual funds,
auditors, investment advisors (since 2010 also
hedge fund managers)
• The Securities Investor Protection Corporation
(SIPC) protects investors against brokerage firm
failure, stipulates minimum capital
requirements for brokers.
• Although the SEC has the authority to regulate
all public companies, in practice much relies on
self-regulation.
• The Financial Accounting Standards Board
(FASB) determines the Generally Accepted
Accounting Principles (GAAP). Stock exchanges
set a lot of their own rules, etc.

Question 42

Commodities and Futures Trading Commission (CFTC)

Answer 42

• In 1974 the Grain Futures Administration (GFA) is
replaced by the Commodities and Futures Trading
Commission (CFTC)
• Futures and options had begun expanding
beyond its traditional agricultural commodities
into contracts based on financial variables,
such as interest rates and stock indexes.
• Oversees the exchanges and requires
participants to register with the CFTC.

Question 43

Federal Housing Finance Agency (FHFA)

Answer 43

• Created in 2008 to oversee the
Government Sponsored Enterprises (GSEs):
Fannie Mae, Freddie Mac and the Federal Home Loan
Banks.
• Fannie Mae (Federal National Mortgage Association)
and Freddie Mac (Federal Home Loan Mortgage
Corporation) created in 1938 to buy up and insure
mortgages originated by banks as part of government
policy to increase house ownership.
• These were privately owned (publicly traded
since 1968) and profit seeking but government
guaranteed. The excessive risk-taking due to
moral hazard resulted into both being
nationalized during the financial crisis.

Question 44

Dodd-Frank Wall Street Reform and Consumer Protection Act

Answer 44

• The Wall Street Reform and Consumer Protection
Act (a.k.a. Dodd-Frank, 2010) was passed in
response to the financial crisis.
• Extremely broad (16 titles), changing almost every
single facet of US financial regulation.
• Written in fairly general terms, leaving regulatory
agencies with quite a lot of flexibility in
implementing actual rules.
• Significant compliance costs: Haldane (2012)
• Partially taken back under the Trump
administration (bank stocks were already up
significantly directly after the election of Trump)

Question 45

Purpose of Dodd-Frank

Answer 45

To promote the financial stability of the United
States by improving accountability and
transparency in the financial system, to end ”too
big to fail”, to protect the American taxpayer by
ending bailouts, to protect consumers from
abusive financial services practices, and for other
purposes.

Question 46

Overview of changes after Dodd-Frank

Answer 46

1. More stringent regulatory capital requirements
2. Stricter consumer protection when accessing credit
3. A new office to monitor and address risks to financial
   stability
4. A new resolution process for troubled financial firms
   whose collapse might cause widespread damage
5. The prohibition of proprietary trading by deposit taking
   banks (”Volcker Rule”)
6. The provision for shareholders of a non-binding vote
   on executive compensation
7. More regulatory enforcement power over credit
   ratings agencies
8. ”Skin in the game” required for originators of assets
   backing securities
9. Greater transparency for derivative instruments
10. And to prevent moral hazard: Limits on the Federal
    Reserve’s emergency lending authority

Question 47

Changes of the Dodd-Frank

Answer 47

On May 22, 2018 U.S. House of Representatives voted 258-159 in
favor of a bill that will significantly rollback provisions of the DoddFrank Act. The bipartisan legislation called the Economic Growth,
Regulatory Relief, and Consumer Protection Act will now be sent to
the President for his signature. H

Question 48

Changes of the Dodd-Frank on small and regional banks

Answer 48

The new bill eases Dodd-Frank regulations
for small and regional banks by increasing the asset threshold for
application of prudential standards, stress test requirements and
mandatory risk committees.

Question 49

Changes of the Dodd-Frank on Large Custodial Banks:

Answer 49

For institutions that had have custody of clients’
assets but do not function as lenders or traditional bankers, the new bill
proposes lower capital requirements and leverage ratios.

Question 50

Changes of the Dodd-Frank on Mortgage Credit:

Answer 50

The new bill exempts escrow requirements for
residential mortgage loans held by a depository or credit union under
certain conditions. The bill also directs the Federal Housing Finance
Agency to set up standards for Freddie Mac and Fannie Mae to consider
alternate credit scoring methods

Question 51

Changes of the Dodd-Frank on Small Lenders:

Answer 51

The bill exempts lenders with assets less than $10
billion from requirements of the Volcker rule and proposes less stringent
reporting and capital norms for small lenders

Question 52

Changes of the Dodd-Frank on Credit Bureaus:

Answer 52

The bill proposes free credit security freezes for

customers of credit bureaus like Equifax.

Question 53

A. What are the main authorities overseeing banks and fin markets in EU; and what is their purpose?

Answer 53

• EBA,
• EIOPA,
• ESMA

Their purpose is to oversee and coordinate financial regulation.

Question 54

Summary of MiFID

Answer 54

conduct of business and organizational requirements for investment firms, authorization requirements for regulated markets, regulatory reporting to avoid market abuse, trade transparency obligation for shares, and rules on the admission of financial instruments to trading. It focused too narrowly on stocks (ignoring fixed-income vehicles, derivatives, currencies, and other assets) and did not address dealings with firms or products outside the EU, leaving the rules about those to be decided by individual members.

Question 55

MiFID ||

Answer 55

In effect since Jan 2018, strengthen investor protection and improve the functioning of financial markets making them more efficient, resilient and transparent. Extension of MIFID (in effect since Nov 2007).
Added more transparency, new reporting requirements, reduces dark pool OTC trading, strict set of organizational requirements on investment firms for high-frequency trading. MiFID II extends the scope of requirements under MiFID to more financial instruments. Equities, commodities, debt instruments, futures and options, exchange-traded funds, and currencies all fall under its purview.

Question 56

PSD 2 summary

Answer 56

In force since September 2019 – Sought to contribute to the development of a single payment market in the European Union. Supposed to make payments more secure, boost innovation and help banking services to adapt new technologies. In a nutshell: It allows 3rd parties to access individual’s banking information. Additionally, new and stronger security requirements are enforced (eg for online payments).

Question 57

Fed summary

Answer 57

The Federal Reserve is the central bank of the US.
Role: It performs five general functions:
• conducts the nation’s monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy;
• promotes the stability of the financial system and seeks to minimize and contain systemic risks through active monitoring and engagement in the U.S. and abroad;
• promotes the safety and soundness of individual financial institutions and monitors their impact on the financial system as a whole;
• fosters payment and settlement system safety and efficiency through services to the banking industry and the U.S. government that facilitate U.S.-dollar transactions and payments; and
• promotes consumer protection and community development

Regulations: Has the mandate to implement regulations.
Exercises and oversees financial institutions. For example banking reg: Requiring a deposit insurance and overseeing it is a form of reg by the FED; can also perform Stress tests.

Question 58

Adverse selection + example

Answer 58

One party has more information than the other such that a party may selectively participate in transactions which benefit her most. This benefit comes at the expense of the other party. Adverse selection is a result of asymmetric information.

Example: Insurance markets. Low risk and high risk – high
risk pushing low risk out of the market. Insurance company policyholder and infection with a disease.

Question 59

Moral hazard + example

Answer 59

Post-contractual action (risky) of one party (the agent) for which he/she does not bear the full cost (of that risk). Moral hazard is a result of asymmetric information. Usually the agent has more information about his/her type and options to engage in moral hazard than the principal.

Example: excessive risk taking with client ́s money.
Bondholders and Stockholders: Riskiness of corporate projects.
Post-contractual hidden knowledge: Manager changes from different industry figures out that he could do better, poor performance.
Shareholder and company president and outcome of investment decision.

Question 60

Signaling

Answer 60

Signaling ability by having a university degree. Showing

new clients past performance records. Investor stock issuer stock value and percentage raised.

Question 61

Screening

Answer 61

Employers require certain level of education/knowledge.

Workers get this in order to get the job. Investor stock issuer stock value and percentage raised.

Question 62

Paper by Glazer et al. translated to ESG

Answer 62

The paper discusses how consumer pressure can lead firms to engage in CSR without any regulatory force. This could be transferred to ESG. Without regulation ESG can arise as a prisoner ́s dilemma where each (investment) firm may make lower profits (e.g., because of higher administrative cost of ESG) compared with the case where no ESG is offered by any firm.
But if there is a substantial number of clients who demand ESG such a PD will be the result. The reason is that if a firm offers ESG and the other does not, then all ESG clients will go to this firm. If both firms don’t then the profits are higher (but if you are the only firm offering
ESG and the other not you get the total market share). Consumers (and pressure exerted by them) can thus also have a regulatory influence forcing firms to forgo profits because they would make more if neither firm offers ESG and just share the market of clients.