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2023 | Buch

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Digitalisation, Sustainability, and the Banking and Capital Markets Union

Thoughts on Current Issues of EU Financial Regulation

herausgegeben von: Lukas Böffel, Jonas Schürger

Verlag: Springer International Publishing

Buchreihe : EBI Studies in Banking and Capital Markets Law

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Technik" , Springer Professional "Wirtschaft"

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Über dieses Buch

This book covers three topics that have dominated financial market regulation and supervision debates: digital finance, sustainable finance, and the Banking and Capital Markets Union. Within the first part, seven chapters will tackle specific questions arising in digital finance, including but not limited to artificial intelligence, tokenisation, and international regulatory cooperation in digital financial services. The second part addresses one of humanity’s most pressing issues today: the climate crisis. The quest for sustainable finance is driven by political actors and a common understanding that climate change is a severe threat. As financial institutions are a cornerstone of human interaction, they are in the regulatory spotlight. The chapters explore sustainability in EU banking and insurance regulation, the interrelationship between systemic risk and sustainability, and the ‘greening’ of EU monetary policy. The third part analyses two projects that have led to huge structural changes in the European financial market architecture over the last decade: the European Banking Union and Capital Markets Union. This transformation has raised numerous legal questions that can only gradually be answered in all their intricacies. In four chapters, this book examines composite procedures, property rights of depositors in banking resolution, preemptive financing arrangements and the phenomenon of subsidiarisation in the context of Brexit. Of interest to academics, policymakers, practitioners, and students in the field of EU financial regulation, banking law, securities law, and regulatory law, this book offers a compilation of analyses on pressing banking and capital markets law problems.

Inhaltsverzeichnis

Frontmatter

Digital Finance

Frontmatter

Chapter 1. Too Tech to Fail?

Abstract

Do the biggest tech companies have a bond funding edge? Are they the new “Too-Big-to-Fail” (TBTF)? TBTF represents, among other things, the idea that the biggest firms (usually banks) receive an unfair funding advantage over smaller ones in the bond market. By investigating the tech financial world, our empirical work reveals two important findings. First, within the universe of bond-issuing US firms, the largest tech companies did experience a funding advantage—of about 30bps. on average—from 2014 to 2021. Our estimates suggest that the (implicit) subsidy is in the range of 1 to 2 USD billion per year and that this has been steadily rising over the last years, especially during the COVID-19 period. Second, using a unique dataset of security-level portfolio holdings by sector in each euro area country, we investigate portfolio choices during times of financial distress, uneven playing field.

Nordine Abidi, Ixart Miquel-Flores

Chapter 2. The Algorithmic Future of EU Market Conduct Supervision: A Preliminary Check

Abstract

Technological innovation, such as advancements in Artificial Intelligence (AI) within the ramification of algorithmic trading, has been shaping the organisation and operation of global capital markets. Whereas AI can contribute to more efficient markets, concerns are growing about its potential to undermine fair and orderly trading. Specifically, powered by Machine Learning (ML), increasingly autonomous, capable and sometimes black-box trading systems can expose markets to unprecedented risks of rampant and subtle forms of market manipulation that are difficult to detect and prosecute. By contrast, technological innovation can also assist financial regulators in mitigating some of these risks. In particular, market conduct supervisors can benefit from an incremental use of supervisory technology (SupTech), such as AI-based surveillance systems and tools, to enhance their ability to cope with algorithmic market manipulation. Therefore, in envisioning a paradigm shift in market conduct supervision towards an increased reliance on AI/ML methods and techniques, this chapter examines ongoing technological trends and addresses some of the legal and institutional challenges that EU policymakers and regulators will have to face to safeguard public confidence in the integrity of EU capital markets.

Alessio Azzutti

Chapter 3. Supervisory Oversight of the Use of AI and ML by Financial Market Participants

Abstract

One of the key challenges for firms intending to use AI and ML is to ensure an appropriate level of transparency towards supervisory authorities about the use of such models, which has recently been emphasised by the global securities markets standard setter IOSCO. Against this background, this contribution seeks to explore the legal and regulatory status quo around AI/ML disclosure and reporting by financial market participants in the EU. Three (potential) AI use cases that are among the most discussed in the financial sector are reviewed: robo-advice, hedge funds and algorithmic trading. After a brief outline of the transparency rationale with respect to the use of AI systems vis-à-vis supervisors, the chapter assesses the main legal requirements set out in the applicable pieces of EU legislation, i.e., MiFID II and AIFMD. It is analysed what kind of information is required and whether existing reporting rules limit the (potential) use of strong AI, as argued in the literature.

Patrick Raschner

Chapter 4. Tokenised Crowdfunding: What Regulatory Forecast?

Abstract

Decentralised finance (DeFi) is the latest offspring of the ever-increasing digitisation of society and the economy. It leverages on technological advances such as the blockchain and distributed ledger technologies (DLTs) to revolutionise financial products and services. New business models and financing channels emerge at a very fast pace and transform the landscape of financial intermediation. Among the many disruptive innovations, online crowdfunding platforms increasingly adopt DLT systems to enable project owners to issue and offer tokens to the public for fundraising purposes. By mixing a crowdfunding-type intermediation service with crypto-assets, such platforms raise important regulatory challenges for market stability and investors protection. On the backdrop of the ongoing process of tokenisation of the economy, this contribution thus aims to map the main legal risks and asperities resulting from the process of tokenisation of crowdfunding services in order to analyse and highlight some regulatory issues.

Emeric Prévost

Chapter 5. Regulatory Coordination and Diffusion in Digital Financial Services and Sustainable Finance

Abstract

This chapter analyses some of the emerging trends when it comes to coordination and diffusion of regulation in digital financial services and sustainable finance. To accomplish that, it examines the emergence of domestic-led networks: the Global Financial Innovation Network and the Network for Greening the Financial System. The comparison focuses on their creation, expansion, linkages, mandates, and outputs, while also placing them on the broader discussions regarding market fragmentation. The chapter builds on previous concepts advanced by international financial regulation scholars: the “sidestepping” of standard-setting bodies and international organisations, the importance of “sequencing”, and the use of “institutional bypasses” to avoid clogged pathways. Finally, the chapter argues that these new domestic-led networks can increase the flexibility that jurisdictions have to find competing versions of regulation in a more organised manner, acting as an instance of mediation; can facilitate the creation of models for regional cooperation; and can enable a quicker development of outputs and creation of linkages with the other nodes in the international financial architecture, all suggesting the scope for a complementary role for these novel domestic-led structures.

Pedro Schilling de Carvalho

Chapter 6. Open Banking, Access to Account Rule and (Free) Marketability of Banking Data

Abstract

The paper is aimed at scrutinizing the fundamental rules applicable to the open banking ecosystem and the provisions on innovative payment services (account information service and payment initiation service), with specific reference to the access to account rule, as outlined by Directive 2366/2015 (PSD II).

In this context, it will be assessed whether the principle of proportionality is respected with reference to the requirements imposed to the Third-party providers (TPP) in the licensing process (provided that some of them do not handle money at any stage of their operation). In fact, the assumption is that they need a specific type of regulation since they are technological players, very different than banks.

The paper will also examine the main technical solutions adopted in the context of the regulatory technical standards in order to guarantee effective access to payment account data to third parties and, in conclusion, the possibility of considering payment accounts data as digital commodities.

Daniel Foà

Chapter 7. Management of ICT Third Party Risk Under the Digital Operational Resilience Act

Abstract

Almost a decade ago, the Great Recession revealed that financial institutions behaved in matters that the public authorities were not able to regulate or supervise. Nowadays, the unprecedented technological advancement, the impact of SARS-COV II that forced a lot of activities to be delivered digitally, the social movement of platform economy and other reasons lead financial institutions to swift their modus operandi and turn to third parties, mostly those third parties being tech companies. Outsourcing and strategic alliances between FI and companies are not something new for regulators and supervisors. Even in terms of financial technology outsourcing, there are examples of ad hoc regulatory frameworks, e.g., European Supervisory Agencies outsourcing guidelines of 2019, the Directive on Security of Network and Information Systems, the General Data Protection Regulation, etc. Yet the objects of these new alliances, e.g., blockchain-based services, AI etc., are new entries for regulators and supervisors. With new opportunities come new risks. In the EU and under the agenda of the Digital Finance Package, for the first time, the legislator is trying to create a path to regulating and supervising information and communications technology risks (ICT risks) created by third parties. The present article provides a first take of the under-construction framework Digital Operational Resilience Act (DORA) for the management of ICT third-party risk and provides possible recommendations according to EU law key principles, e.g., proportionality and to the Scopes of DORA.

Stavros Kourmpetis

Sustainable Finance

Frontmatter

Chapter 8. Sustainability: A Current Driver in EU Banking and Insurance Regulation

Abstract

It is not surprising that the topic of sustainability has reached the center of discussions in EU financial regulation. However, sustainability-related regulatory requirements for banks and insurance companies are still in their infancy. In the banking sector, the ECB and EBA published guidelines and reports specifying the ways in which banks must comply with sustainability requirements at the microprudential level, and the Commission has proposed far-reaching reforms as part of the Banking Package 2021. Similarly, EIOPA demanded the inclusion of climate change risk scenarios in the own risk and solvency assessment (ORSA) from the National Competent Authorities. However, the regulatory and supervisory framework for these regulated entities remains rather opaque. Banks and insurance companies face various sustainability-related regulations, such as disclosure, capital, business model and governance-related requirements. Against this background, this chapter first aims to consolidate, sort, and present the microprudential measures adopted by the EU in the area of sustainability for banks and insurance companies. In a second step, the banking and insurance regimes will be compared and evaluated. From this comparison, finally, cross-sectoral conclusions will be derived, inconsistencies disclosed, and proposals for improvement presented de lege ferenda. All of this serves to create a coherent system of EU sustainability supervision.

Lukas Böffel, Jonas Schürger

Chapter 9. Sustainability and Systemic Risk in EU Banking Regulation

Abstract

Sustainable finance has well and truly entered the world of banking regulation – a field of law that above all aims to keep the financial system stable. In this book chapter, I first analyse concepts of systemic risk, both in scholarship and in EU financial regulation. Specifically, the question to what extent our understanding of systemic risk needs to be altered by environmental, social and governance (“ESG”) concerns is addressed. I then take a brief look at current and future sustainable microprudential supervision and regulation in the banking sector. I discuss (i) capital requirements linked to sustainable assets, (ii) supervisory action, and (iii) disclosure requirements and market discipline. These two parts are drawn together in a critical appraisal of EU policymakers’ current approach, in which I question whether current rules and initiatives can help in dampening systemic risk and whether microprudential regulation as we know it today can cope with the uncertainty caused by climate change in particular. I conclude by summarising my findings as well as calling for further research on the nexus between sustainable finance and financial stability.

Joeri De Smet

Chapter 10. Green Monetary Policy in the EMU and Its Primary Law Limits

Abstract

The issue of sustainability has hardly left any sector or area untouched. This also applies to financial markets: the EU Member States are trying to transform their economies into net-zero carbon ones, the Commission has presented a comprehensive action plan on sustainable finance, and the ECB and ESAs are increasingly focusing on ESG risks in their supervision. This wave has also reached the field of monetary policy. The ECB has explicitly declared its intention to green monetary policy. This chapter aims to contribute to the ongoing debate on European green monetary policy by addressing its primary legal framework. In a first step, the chapter describes the main instruments envisaged by the ECB to green the Union’s monetary policy. In a second step, the conformity of these measures with EU primary law is assessed. It will be examined whether the ECB has the necessary competences and whether other legal principles prevent the transformation to a green monetary policy. As a result, concrete primary law limits for a green monetary policy are derived from the analysis.

Matthias Mayer, Jonas Schürger

Banking and Capital Markets Union

Frontmatter

Chapter 11. Duty of Care as a Judicial Review Tool for SSM Composite Procedures

Abstract

In the Single Supervisory Mechanism (SSM), decisions to grant or oppose an acquisition of a qualifying holding in a bank are adopted in a so-called composite procedure. First, the national competent authority (NCA) assesses the proposed acquisition based on five criteria enshrined in Art. 23(1) of the Capital Requirements Directive IV (CRD IV) and implemented into national law. Then, it forwards a proposal for a decision to the European Central Bank (ECB). The ECB adopts the final decision. One of the criteria requires an assessment of whether, in connection with the proposed acquisition, there are reasonable grounds to suspect (potential) breaches of rules on the prevention of money laundering (AML) or financing of terrorism (CFT). While the NCAs have the competence to assess such (potential) breaches, the SSM Regulation did not confer AML and CFT-related supervisory tasks on the ECB. The ECB must thus to a certain extent rely on the national AML/CFT assessment. The question is how to reconcile the ECB’s lacking AML/CFT competence with its sole responsibility and legal accountability for the final decision on a proposed acquisition. This contribution suggests that the general principle of duty of care can be calibrated to allow the ECB to review the AML/CFT assessments made by the NCA without exceeding the limits of its competence and ensure a judicial review by the EU courts.

Barbora Budinská, Jouke Tegelaar

Chapter 12. Game of Thrones—The Clash Between Public Interest and Property Rights in Banking Resolution

Abstract

The acute Global Financial Crisis of 2007–2008 triggered a series of reforms at the EU level, which included the adoption of the Bank Recovery and Resolution Directive, establishing a dedicated, pan-European recovery and resolution framework for credit institutions. While that framework provides for several recovery and resolution instruments, it is the bail-in tool that holds the most prominent and, no less importantly, the most controversial role in banking resolution, as it is apt to interfere with the qualified right to property protected under the European Convention of Human Rights and the Charter of Fundamental Rights of the European Union. The controversy surrounding the bail-in tool is attributable to the tension that its application creates between public and private interests. The aim of this chapter is to shed some light on the property right-related legal challenges surrounding the application of the bail-in tool, in light of the relevant case-law of the Court of Justice European Union and the European Court of Human Rights, and to examine de lege ferenda the scope for enhanced protection of property rights under the EU resolution framework.

Elli Anastopoulou

Chapter 13. Preemptive Financing Arrangements Within Cross-Border Banking Groups: Between Flexibility and Legal Certainty

Abstract

The Global Financial Crisis has demonstrated that intra-group financing is an important source of capital and liquidity within banking groups. Yet to maintain financial stability and to protect national interests, many countries adopted ring-fencing measures, limiting the ability of banks to re-allocate funds between different group entities. Certain restrictions on such re-allocation can be found in national and European legislation, which is designed to avert deterioration of banks’ financial conditions, mitigate the risks of cross-border contagion, reduce intra-group exposures and protect creditors and other stakeholders.

This chapter discusses various rules and arrangements relevant to intra-group financing, which have emerged or have become prevalent after the Global Financial Crisis. They include (i) BRRD’s Group Financial Support Agreements, (ii) pre-positioning of resources within banking groups and (iii) structural and contractual arrangements related to intra-group support. I argue that these rules and legal regimes seek to find a balance between two (at times) conflicting interests. One of them is the interest of integrated management of capital and liquidity inside the banking group—the interest of flexibility and efficiency. The other interest reflects stability and risk exposure concerns of host states—the interest of legal certainty and predictability. I conclude that to achieve the objectives of the European Banking Union, including deeper integration of the banking sector, underpinned by flexible and efficient management of resources within banking groups, a harmonised, predictable, cost-efficient and legally binding mechanism addressing intra-group financing needs to be created.

Ilya Kokorin

Chapter 14. From Branches to Subsidiaries: Post-brexit Enforcement of Subsidiarisation in the European Union

Abstract

In light of the principle of passporting in the European Union (EU), a third-country financial institution is allowed to provide services throughout the EU provided that it has obtained authorisation from the competent authority of the EU Member State (MS) in which it applies for its licence. Under this principle, foreign banks with such licenses are increasingly taking advantage of it to provide financial services throughout the EU using branches, which require lower operating costs and that are subject to lighter prudential control. In a recent report, the European Banking Authority (EBA), flagging the above issue, advised introducing a mechanism of subsidiarisation aimed at preventing risk. Likewise, in the current post-Brexit scenario, we are experiencing an increase in the restructuring of banking services, circumventing the consolidated supervision via the use of branches. This chapter aims to address the deficiencies of the current regime through a critical analysis of the recent European Commission’s (EC) proposal, which plans to enable EU National Competent Authorities (NCAs) to “force” foreign banks to turn their larger and riskier branches into subsidiaries.

Pier Mario Lupinu

Backmatter

Titel: Digitalisation, Sustainability, and the Banking and Capital Markets Union
herausgegeben von: Lukas Böffel
Jonas Schürger
Verlag: Springer International Publishing
Electronic ISBN: 978-3-031-17077-5
Print ISBN: 978-3-031-17076-8
DOI: https://doi.org/10.1007/978-3-031-17077-5