Before the financial crisis, European member states had different regulatory systems for the financial sector, based largely on national rules and national rescue measures, with limited European minimum rules and coordination mechanisms. Such a framework was not capable of responding to financial crisis and no tools were available at the European level to address the crisis of cross-border banks (or to support member states in addressing the crisis of large, predominantly national banks. The financial crisis has highlighted the need for better regulation and supervision of the financial sector and the Eurozone crisis has highlighted the need for tools to intervene in the case of a bank’s liquidity or solvency crisis to prevent further contagion and avoid a vicious circle between bank crisis and government debt crisis.
Federalists have been supportive of the measures taken by the European Union since 2008 to create, albeit piece-by-piece, a more robust and effective financial sector by better regulation and supervision of banks, financial products and markets at European level, to the benefit the economy at large. Federalists have welcomed the improvements in the supervision of the financial sector at European Union level by the establishment of the:
• European Banking Authority, which deals with bank supervision,
• European Securities and Markets Authority, which deals with the supervision of capital markets, credit rating agencies and trade repositories
• European Insurance and Occupational Pensions Authority, which deals with insurance supervision
Federalists have also been supportive of the process started by the European Council in 2009 to establish a single European financial “rulebook”, a corpus of legislative acts covering all financial actors and products in the single market, which by now includes as its main chapters the new rules on increased capital requirements and stricter governance arrangements for banks, stricter rules on hedge funds, short selling and credit default swaps, a comprehensive set of rule for derivatives, and new rules for credit rating agencies. Federalists believe that the European Union should proceed expeditiously in implementing the remaining chapters of the single European rulebook, completing and enacting as soon as possible the remaining legislation currently under discussion in relation to the audit sector, market abuse, the rules on markets in financial instruments, shadow banking and market benchmarks.
The European Union has also already recognized that the establishment of such a framework of supervision and regulation is not sufficient and must be complemented with a system to address the stability of the banking system in case of liquidity or solvency crisis. Recognizing that uncoordinated national responses to the failure of banks have reinforced the connection between banks’ crisis and government debt crisis, leading also to a fragmentation of the single market, the European Union has started a roadmap to a fully-fledged banking union, which federalists support.
Federalists have been supportive of the establishment of a Single Supervisory Mechanism (SSM) in the euro area, which will become fully operational in November 2014, conferring new supervision powers on the European Central Bank for the banks of the euro area, including supervision of the consistent application of the single financial rulebook in the euro area and the direct supervision of significant banks as well as the monitoring of the supervision by national supervisors on less significant banks The European Central Bank is currently carrying out a comprehensive assessment of the balance sheets of all banks which will be under its direct supervision. Federalists believe that such assessment should be carried out expeditiously and without influence from national governments. If capital shortfalls are identified for banks of the banking union, as already discussed by the European Council in November 2013, banks should be forced to raise capital in the market and, should this not be sufficient, public money could be engaged at national level and ultimately if national backstops are not sufficient, instruments at the European level should be used, including the European Stability Mechanism (ESM). In this respect, federalists support the agreement reached in the Eurogroup, in June 2013, on the use of the ESM for direct bank recapitalization, but are concerned that that such agreement is not yet fully operational, that any such recapitalization will be subject to unanimous agreement and that the agreed maximum exposure of the ESM (€60 billion) would be an impediment in case of banks of systemic importance. In general, federalists would welcome the integration of the ESM into the European Union treaties.
Federalists strongly support the creation of a Single Resolution Mechanism (SRM) to ensure that, if a bank subject to the Single Supervisory Mechanism faces serious difficulties, its resolution can be managed efficiently, particularly in the case of cross-border failures where more uncoordinated national resolution may be involved. Federalists support the agreement recently reached by the Council, the European Commission and the European Parliament on the establishment, characteristics and operations of the SRM as important step to render the SRM operational as soon as possible. However, Federalists maintain concerns on some of its features, such as the jurisdiction over only ‘systemic’ and ‘cross-border’ banks and not all banks operating within the EU (as it was originally planned), the limited size of the fund (which is too small to face a major bank restructuring), the time frame for its creation, the structuring in national funds only gradually pooled into the single European fund, the extremely complex decision making and resolution procedures, the use of an intergovernmental agreement to regulate the use of the funds. Federalists would favor the European Stability Mechanism or the European Central Bank acting as ultimate financial backstop for the SRM,
Furthermore, federalists would welcome the establishment of a European guarantee on deposits, backed by the SRM,as an important piece of to complete the European banking union.