The European Banking Regulatory Architecture

Question 1

When and How did Europe first start Harmonizing banking regulation?

Answer 1

In 1973, with the First Banking Directive.

Question 2

What did the First Banking Directive 1973 provide for?

Answer 2

• Banks’ right and freedom of establishment across the Union.
• Banks’ right to provide cross-border banking services.
• Regulatory criteria for domestic and cross-border incorporation.
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Question 3

How did the Second Banking Directive of 1989 iterate upon its predecessor?

Answer 3

It administered a minimally-harmonized set of regulations for bank supervision and authorization (onus on home States), thus furthering mutual recognition of cross-border banking institutions.

Question 4

What was the Second Banking Directive’s (and later the Capital Requirements Directve 2006) Effect and Signficance of harmonizing bank authorization and supervision?

Answer 4

The creation of a European banking licence, bolstering mutual recognition and greatly increasing the rate at which domestic banks conducted cross-border business.

Question 5

Under the Second Banking Directive, were Foreign Banks subject to Host Country Regulations?

Answer 5

Yes, but only insofar as they constitued General Good Exceptions, i.e. existed to protect consumers, confidence, and market reputation.

Alpine Investments BV v Minister van Financiën (1995) C-384/93.

Question 6

What ultimate goal were the First and Second Banking Directives trying to achieve?

Answer 6

The creation of a Single Market for Banking Services.

Question 7

Where else can this Minimum Harmonization approach in furtherance of a Banking Single Market be seen?

Answer 7

Legislative examples include, to name a few, the:

• Despoit Guarantee Directives 1987;
• Solvency Ratio Directive 1989;
• Own Funds Directive 1989;
• Large Exposures Directive 1992; and
• Capital Adequacy Directive 1993.

Question 8

What is the Chief Difficulty with Cross-Border Banking Regulation?

Answer 8

Ensuring adequate bank supervision by both Home and Host countries.

Question 9

Why is Cross-Border Banking Regulation so difficult?

Answer 9

Arbitrage. Cross-Border Regulators may differ in their regulatory styles and architectures, and may struggle to communicate promtply and usefully or coordinate effectively, especially given politics.

Question 10

What were the Natural Results of the difficulty of Cross-Border Banking Supervision?

Answer 10

Home authorities, lacking motiviation and resources, laxly overseeing foreign branches, with Host authorities misplacing reliance on Home authorities’ assumed regulatory efficacy. I.e. a lack of coordination.

Eva Lomnicka, The Home Country Control Principle in the Financial Services Directives and Case Law (2000) 11 European Business Law Review 324.

Question 11

In light of the Global Financial Crisis, what weaknesses in the Financial Regulatory Infrastructure were identified by de Larosière? (LC-HHR)

Answer 11

De Larosière identified the following attributes as insufficiently strong:

• Legal harmonization;
• Crisis management;
• Home-Host regulator coordination; and
• Regulatory scope.

Question 12

Following the Global Financial Crisis, how did Europe reform of its Financial Regulatory Infrastructure à la de Larosière?

Answer 12

By creating the European System of Financial Supervision (ESFS).

Question 13

Following the Global Financial Crisis, what is the Hierarchy of Regulatory Rules in the Union?

Answer 13

1. Primary Legislation.
2. Commission Legislation.
3. Implementation of Technical Standards.
4. Non-binding Guidelines.

Question 14

How is the European System of Financial Supervision structured?

Answer 14

The Top Rung are:

• The Joint Committee; and
• The European Systemic Risk Board (ESRB).

Comprising the Joint Committee, and the Second Rung are:

• The European Banking Authority (EBA);
• The European Securities and Markets Authority (ESMA); and
• The European Insurance and Occupational Pensions Authority (EIOPA).

The Third Rung is comprised of National Regulators, all of which answer to the Second Rung authorities.

Question 15

What is the Scope of the First and Second Rungs’ Powers?

Answer 15

Supervision and Rule-Making. At the First Rung, this entails cross-sectoral oversight of:

• Consumer protection;
• Financial crime; and
• Systemic risk.

At the Second Rung, this entails pan-European oversight of National Regulators.

Question 16

What is the Role of the EBA?

Answer 16

Direct oversight of National Regulators’ transposition of EU banking regulation and their supervision of the regulated banking sector.

Statutory Source of Power: Regulation (EU) No. 1093/2010.

Question 17

What are the Responsibilities of the EBA?

Answer 17

• Aid with law-making in pursuit of legal harmonization.
• Foster supervisory coordination amongst National Regulators.
• Trailblaze policy-setting in areas of its jurisdiction.
• Monitor risk levels in the financial system and Assit the ESRB in macroprudential oversight.

Question 18

What is the Purpose of the EBA’s Single Rulebook?

Answer 18

To harmonize, providing, “a single set of harmonised prudential rules which institutions throughout the EU [should] respect.”

EBA Website.

Question 19

The EBA’s Single Rulebook is a Level 4 Legislation. Can it produce more Powerful rules?

Answer 19

The EBA may draft technical standards to be considered by the Commission. It may also introduce technical standards in support of Level 2 Legislations, as endorsed by the Commission.

Question 20

Why is Supervisory Convergence between Regulators important for the EBA?

Answer 20

To minimize regulatory arbitrage and bolster inter-regulator coordination, thus increasing the efficacy of legal harmonization.

Question 21

How does the EBA go about fostering Supervisory Convergance?

Answer 21

• Guidelines and recommendations (comply-or explain).
• Organization and supervision of Colleges, i.e. networks of joint supervisors of cross-border establishments.
• Proflieration of a common supervisory culture.
• Conciliation of disagreements between national regulators.

Question 22

How does the EBA go about fulfilling its Systemic Risk function?

Answer 22

• Annual publication of the Risk Dashboard.
• Biennial

Question 23

What is the Role of the ESRB?

Answer 23

To oversee macroprudential regulation in the Union, namely both its application by national regulators and systemic risk itself.

Question 24

How does the ESRB go about Monitoring the Application of the Macroprudential Policy by National Regulators?

Answer 24

By issuing guidelines on the use of macroprudential tools, e.g. capital buffers, and annually surveying their use by national regulators.

Question 25

How does the ESRB go about Monitoring Systemic Risk?

Answer 25

Through the collection and analysis of data to identify markers of systemic risk in the Union, and the making of recommendations and warnings thereupon.

Question 26

Is Contravention of the ESRB’s warnings or recommendations illegal?

Answer 26

No. They are soft law, enforced under comply-or-explain, until the Commission or Parliament say otherwise.

Question 27

Pursuant to its Role, how has the ESRB been empowered?

Answer 27

It may demand information from the Second Rung and National Central Banks and Regulators. It may also consult the private sector.

Question 28

Does the existence of the ESRB absolve Member States from conducting Macroprudential Regulation?

Answer 28

No. Au contraire, they are encouraged to designate national macroprudential regulators.

Question 29

Where does the ECB fall within the ESFS?

Answer 29

It is a member of the EBA, at least in principle. In reality, it and the SSM are rather independent functionaries.

Question 30

What is the Banking Union?

Answer 30

A supervisory architecture for Euro Banks, headed by the ECB.

Question 31

What is the Purpose of the Banking Union?

Answer 31

To collectively strengthen Euro Banks and implement a European crisis management structure.

Question 32

What are the Two Pillars of the Banking Union?

Answer 32

The Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM).

Question 33

What is the Single Supervisory Mechanism?

Answer 33

The ECB’s microprudential regulatory prerogative over significant Euro Banks.

Statutory Source of Power: Regulation (EU) No. 1024/2013.

Question 34

Does the SSM supersede National Regulators’ authority?

Answer 34

With respect to the relevant Euro Banks, yes.

Question 35

What are the ECB’s responsabilities pursuant to its SSM Function?

Answer 35

• Authorization of banks.
• Ensuring compliance with microprudential regulation.
• Stress-testing and supervisory review.
• Preemptive intervention.
• Oversight of recovery plans.

Question 36

How many banks fall under the Remit of the SSM?

Answer 36

Currently, 113.

Question 37

How does the SSM affect those banks ungoverned by the ECB?

Answer 37

Acting as its Delegates, National Regulators administer the ECB’s authority on banks, subject to their reporting duty.

Question 38

What is the Single Resolution Mechanism?

Answer 38

The ECB’s determinative prerogative regarding how Euro Banks subject to the SSM are to be resolved, as administered by the Single Resolution Board (SRB).

Question 39

What does ‘Resolution’ refer to in this context?

Answer 39

Bank failure.

Question 40

What is the main Underlying Tension between the SSM and SRM?

Answer 40

Differentiating between crisis management and resolution proper.