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2017 | Book

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Financial Regulation in the EU

From Resilience to Growth

Editors: Prof. Raphaël Douady, Clément Goulet, Prof. Pierre-Charles Pradier

Publisher: Springer International Publishing

Part of: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

Table of Contents

About this book

Financial regulation has dramatically evolved and strengthened since the crisis on both sides of the Atlantic, with enhanced international coordination through the G-20 and the Financial Stability Board and, at the regional level, a definite contribution from the European Union. However the new regulatory environment has its critics, with many divergent voices arguing that over-regulation has become a root cause of our current economic stagnation.

This book provides a bigger picture view of the impact and future of financial regulation in the EU, exploring the relationship between microeconomic incentives and macroeconomic growth, regulation and financial integration, and the changes required in economic policy to further European integration. Bringing together contributions from law, economics and management science, it offers readers an accessible but rigorous understanding of the current state of play of the regulatory environment, and on the future challenges.

Coverage will include:

• A review of the recent regulatory changes from a legal and economic perspective

• Analysis of how the economic model of financial institutions and entities is impacted by the new frameworks

• How to improve securitization and new instruments under MIFID II

• Issues in the enhanced supervision under delegated acts for AIFMD, CRR-CRD IV and Solvency II

• How long term funding can be supplied in lieu of the non-conventional monetary policies

• A new architecture for a safer and more efficient European financial system

Financial Regulation in the EU provides much needed clarity on the impact of new financial regulation and the future of the economy, and will prove a must have reference for all those working in, researching and affected by these changes.

Frontmatter

1. Introduction

Abstract

This chapter introduces the premise and structure of the book, which developed from three workshops organized at the European Parliament in Strasbourg. The first section covers the supervision of member states’ budgets. The second section aims to explain how the new regulatory framework impacted the economic models of financial institutions and entities. The final section is forward-looking, as the European agen is full of promising challenges: better securitization and new instruments (under MIFID II), fine-tuning of supervision under delegated acts and regulatory technical standards for AIFMD, CRR-CRD IV and Solvency II will supply long-term funding in lieu of non-conventional monetary policies.

Raphaël Douady, Clément Goulet, Pierre-Charles Pradier

Supervision of Member States’ Budgets

Frontmatter

2. Political Economy of the European Monetary Institutions and Reform Proposals

Abstract

This chapter provides an overview of the different fiscal reforms and monetary policies undertaken in the period since the creation of the European Monetary Union. This overview is followed by a review of some of the proposals for fiscal and monetary reform that have been made by different economists since the beginning of the financial and economic crisis. The objective of this chapter is to better understand which economic reforms have led to the current state of the Economic Union as well as the debates about fiscal and monetary policies.

Jose-Maria Martin-Flores

3. Fiscal Sustainability and Fiscal Rules in a Monetary Union: Theory and Practice in Europe

Abstract

Over the last three decades, both macroeconomists and policymakers involved in fiscal policy have mainly focused on long-run issues. The consensus was government should adopt rules ensuring the long-run sustainability of public finance, and let an independent central bank take charge of controlling inflation and stabilizing GDP growth and unemployment. To a large extent, the Great Recession has challenged this view, and (partially) restored fiscal policy as a powerful macroeconomic stabilization instrument, while insisting on long-run fiscal sustainability requirements. First, this chapter reviews the literature on fiscal sustainability analysis and monetary-fiscal interactions; in particular, the author argues that long-run fiscal sustainability requirements and countercyclical fiscal policy should not be seen as necessarily antagonistic. Second, he proposes a critical appraisal, based on theoretical and empirical research, of the European fiscal framework and argues why it might be both too tight and too loose.

Pierre Aldama

4. The Composition Effect of New Fiscal Rules in the Euro Area

Abstract

An intense debate has been raging about the recent reforms in the euro area to enhance fiscal surveillance and to ensure the sustainability of budget deficits of its members, their consequences on governments’ fiscal positions and the macroeconomic outcomes (in chronological order the six-pack, the Fiscal Compact and the two-pack). This chapter focuses on the spending side of governments’ budgets and studies how expenditures evolved in the wake of the global financial crisis and in response to new regulations in the euro area. The authors wonder whether abiding by fiscal rules has changed the composition of public spending at the expense of public investment. Then they review the arguments on the possible impact of public investment (or capital) on economic growth (or GDP), including a discussion about the so-called Juncker’s Investment Plan, before making a few recommendations for increasing “safe assets.”

Jérôme Creel, Francesco Molteni

5. The Banking Union Revisited

Abstract

This chapter gives an account of the implementation of banking union in Europe. The expected benefits from a banking union are reviewed. Then the author analyses and discusses its components with a special focus on the supervision and resolution of banks. The challenges are both functional and institutional, involving micro- and macroprudential considerations. As regards the European Central Bank (ECB), will there be possible conflicts of objectives when it cumulates its monetary policy function with its new supervisory role? For banking supervision, how can the division of labour between the ECB and the national competent authorities (NCAs) be combined with the necessary coordination between them? The same kind of challenge applies to resolution and deposit insurance. The chapter also relates the launching of the banking union to other structural issues, such as the separation of bank activities and the financing of the real economy (investment and growth) in the new regulatory framework. At the end it touches upon the Capital Markets Union (CMU) project.

Christian de Boissieu

Supervision of Financial Entities

Frontmatter

6. Regulatory Capture in Financial Supervision

Abstract

Regulatory capture occurs when an industry has an excessive influence over the regulatory or supervisory processes. In the wake of the financial crisis of 2007-08, officials and academics could only observe that the prudential oversight of the financial industry has failed. This failure was soon attributed to regulatory capture and brought academics and officials to consider other channels of influence than traditional lobbying or corruption. With both theoretical and practical approaches, this chapter attempts to define regulatory capture, its normalization among the regulatory and supervisory framework and finally provides examples of the existing means regulators have to prevent it.

Mathilde Poulain

7. The Challenges of Regulation of Derivatives

Abstract

Derivatives are the functional form that speculative capital assumes in markets. The notional amount of derivatives in 2015, as reported by the Bank for International Settlement, was $550 trillion. That number does not include the synthetic derivatives, so it grossly – by a factor of many multiples – underestimates the size of capital earmarked for derivatives-type trading. Speculative capital operating as derivatives is the glue that holds the financial markets together. This chapter explains the nature of that mechanism. We offer no policy recommendations, only a description of the conditions that prevail in the markets and the potential effects of disturbing them through regulation.

Nasser Saber

8. The challenges and implications of the Markets in Financial Instruments Directive (MiFID) and of its revision (MiFID II, MiFIR) on the efficiency of financial markets

Abstract

This chapter will focus on the investigation of challenges underlined by the Markets in Financial Instruments Directive (MiFID) in view of the financial market efficiency. This chapter provides a reporting and an assessment of implications of this directive on the financial market efficiency through the selection of major academic work achieved on this subject. Its revision through MiFID II and MiFIR will also be taken into account given that it constitutes a key directive and a key regulation for the future organization and functioning of European financial markets. In conclusion, the remaining challenges towards the original objectives of MiFID will be underlined to determine what remains to be achieved to benefit from more integrated and efficient European financial markets in order to reduce the cost of capital, to generate growth and to reinforce the international competitiveness of the European Union without neglecting the rights and duties of its citizens and investors.

Roland Gillet, Stéphanie Ligot, Hassan Omidi Firouzi

9. The Evolution of Insurance Regulation in the EU Since 2005

Abstract

The Solvency 2 package, which came into force on 1 January 2016, has had strong implications for insurance companies’ market conduct, consumer relation and solvency. An ongoing process with the Financial Stability Board and the International Association of Insurance Supervisors addressing systemic risk is also impacting systemic insurers. These milestones of insurance regulation are aimed at solving the social cost of the failure of financial institutions, in order to prevent future crisis. This chapter reviews the detail of these considerable reforms and shows the consistency of the whole: prevention of systemic and microeconomic risk is first seen as the prevention of regulatory arbitrage with the banking sector. This thorough legal package has a cost not only for every firm (cost of implementation of reforms, recurring cost of compliance including direct cost of funding supervisory authorities, indirect administrative costs and cost of regulatory capital) but also for the sector as a whole. We show that most of these costs have been played down so far, since the crisis prompted the authorities to appear tough on finance and set an example. Unfortunately, costs lead to market concentration and uniformization, which have significant systemic implications. To address this issue, finance future growth, advance market integration and development, we offer some insights into simplification and focusing of insurance regulation.

Pierre-Charles Pradier, Arnaud Chneiweiss

10. The Impact of Basel III on the Operations of Retail Banks

Abstract

The aim of this chapter is to review and assess the two dimensions of the consequences induced by the European Capital Requirements Directive (CRD 4). It seeks to see what is truly new and how financial institutions will adapt—more or less easily—to the new conditions for exercising their trade. It first explores how Basel III envisages improving banks’ solvency, mainly in their retail activities. The aim is to assess the improvement in institutions’ financial stability. Subsequently, the chapter will review the principles put forward to improve banks’ control by focusing on the organization of internal control, the resolution mechanisms and the role played by governance bodies which have a special place in Basel III.

Eric Lamarque

11. The Knowns and the Known Unknowns of Capital Requirements for Market Risks

Abstract

This chapter contextualizes the Fundamental Review of the Trading Book (FRTB) in the vast movement that has reinforced regulatory and prudential requirements. The author emphasizes the uncertainties linked to the final calibration of the new framework and the implications for economic banking models and market intermediation. Lastly, the chapter stresses operational issues linked to piloting this transformation process for regulated banks, which are facing a lot of uncertainty.

Jean-Paul Laurent

12. Reforming Rating Agencies

Abstract

Rating agencies have been under the spotlight since the beginning of the century. Financial disasters and the subprime crisis of 2008 brought about the birth of such preoccupations as many investors and regulators became sceptical about their activities. In this chapter, the authors highlight the main characteristics of this activity, sum up the criticisms they had to face, analyse the usefulness of the agencies for investors and the financial market as a whole, and present some possible paths for reforming rating agencies.

Philippe Raimbourg, Federica Salvadè

13. The Regulation of Alternative Investment Funds in Europe: The Alternative Investment Fund Managers Directive

Abstract

This chapter provides an analysis of the Alternative Investment Fund Manager Directive (AIFMD), which had a strong impact on alternative investment funds, as well as on alternative investment fund managers. The analysis of the AIFMD mainly focuses on the difficulties, especially political challenges, of approving this text. It also tackles the issue of the definition of alternative funds in the context of the AIFMD and its practical consequences, as well as the main provision implementing a direct regulatory approach for alternative investment fund managers in Europe (authorization, information and transparency, organization requirements, leverage). The chapter provides some critical considerations of these aspects adopting an international perspective.

Marco Dell’Erba

14. The Regulation of CCPs in Europe: The European Market Infrastructure Regulation (EMIR)

Abstract

This chapter provides some background information on the regulation of clearing houses, that emerged as a topical issue in the aftermath of the financial crisis of 2008. After a brief introduction, the chapter elaborates on the definition of market infrastructure, clearing houses, and clearing, while taking into consideration their pros and cons from different perspectives. It also provides an analysis of the general framework of the European Market Infrastructure Regulation (EMIR). Focusing on its main provisions applicable to clearing houses, it emphasizes those related to their authorization, corporate governance, and prudential requirements. The chapter provides some critical considerations of these aspects from an international perspective.

Marco Dell’Erba

Funding Innovation, Financing Growth

Frontmatter

15. The Impact of Regulatory Capital Regulation on Balance Sheet Structure, Intermediation Cost and Growth

Abstract

This chapter addresses how new Basel III metrics change the Basel II-adjusted risk/return filtering, transforming the asset-side structure of banks’ balance sheets. The authors examine this complex problem by disentangling the effect of every set of causes, taking into account expected future rules. The authors first recall the main novelties of the Basel III package as implemented in the European Union before they turn to impact assessments, trying to answer the question of what definite constraint is binding at the moment, and finally offering some remediation before concluding.

Hamza El Khalloufi, Pierre-Charles Pradier

16. Higher Quality Securitization

Abstract

What is securitization? What is its role in the economy? Why have regulators been ambivalent about restricting its use and promoting its growth? This chapter will go over the basics of securitization, discuss the merits and flaws of current regulation and outline future challenges on the path to the European Capital Markets Union.

Daphné Héant, Sophie Vermeille, Yann Coatanlem

17. Essay on the State of Research and Innovation in France and the European Union

Abstract

The aim of this chapter, written by an applied mathematics expert working in finance, is not to provide an exhaustive view of all the mechanisms in France and in Europe that seek to foster innovation in the economy and to offer solutions for removing all the roadblocks that still hinder innovation. Rather, the author seeks to draw a panorama of what is working and what needs to perfected as far as innovation is concerned in France and Europe, then, secondly, to offer some solutions and personal thoughts to boost innovation. Those solutions will mostly be articulated through the development of business and research clusters such as Finance Innovation or Cap Digital that provide a favourable setting in which start-up companies in a particular sector of activity can emerge and prosper, as well as through some European institutions such as the European Investment Bank.

Antoine Kornprobst, Raphael Douady

Backmatter

Title: Financial Regulation in the EU
Editors: Prof. Raphaël Douady
Clément Goulet
Prof. Pierre-Charles Pradier
Publisher: Springer International Publishing
Electronic ISBN: 978-3-319-44287-7
Print ISBN: 978-3-319-44286-0
DOI: https://doi.org/10.1007/978-3-319-44287-7