current developments in european banking law (with particular

92nd MoComILA meetingRiyah, Saudi Arabia

Current developments in European banking law (with Current developments in European banking law (with particular emphasis on the euro)particular emphasis on the euro)

Christos Christos VlVl. . GortsosGortsosAssociate Professor of International Economic LawAssociate Professor of International Economic Law, , Panteion Panteion

University of Athens, University of Athens, Visiting Professor, Visiting Professor, EuropaEuropa--InstitutInstitut, , UniversitUniversitäätt des des SaarlandesSaarlandes, ,

Secretary General, Hellenic Bank Association Secretary General, Hellenic Bank Association

January January 20120122

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Table of ContentsTable of Contents

Α. A general overview A general overview Β. AuthorisationAuthorisation of credit institutionsof credit institutionsC. MicroMicro--prudential regulation of credit institutionsprudential regulation of credit institutionsD. MicroD. Micro--prudential supervision of credit institutionsprudential supervision of credit institutionsE. MacroE. Macro--prudential regulation of credit institutionsprudential regulation of credit institutionsF. MacroF. Macro--prudential oversightprudential oversightG. Reorganization and winding up of credit institutionsH. Resolution of credit institutionsI. Deposit guarantee schemesDeposit guarantee schemesJ. Lender of last resortJ. Lender of last resortK. Concluding remarksK. Concluding remarks

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A. A general overviewA. A general overview

The collapse of financial markets in autumn 2008 and the credit crunch that followed can be attributed to multiple, often inter-related, factors at both macro- and micro-economic levels, as identified in the Report de Larosière published on 25 February 2009, and in particular to the accumulation of excessive risk inthe financial system.

The financial crisis prompted a broad EU and international effort to develop effective policies to tackle the underlying problems.

In fact, almost the entire existing banking regulation is being revised as a response to the recent financial crisis.

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Taking as a point of reference the European banking regulation currently in force, the following changes have already taken place or are under preparation: Directive 2006/48/EC relating to the taking up and pursuit of the business of credit institutions (known as CRD) has been amended by Directive 2009/111/EC (known as CRD II) and Directive 2010/76/EC (known as CRD III), while a proposal for a Directive and a proposal for a Regulation are under preparation in order to transpose in European law the Basel III package (these two proposals are known as CRDIV) Directive 94/19/EC on deposit-guarantee schemes has already been amended by Directive 2009/14/EC and will be amended by a proposal for a Directive, currently under preparation

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Taking as a point of reference the European banking regulation currently in force, the following changes have already taken place or are under preparation (cont.):

A new framework will be adopted with respect to bank crisis management (a proposal for a Directive or a Regulation are expected). The European Commission has already published Communications and working documents on the issue

The only area which remain the same in relation to the existing legislation is Directive 2001/24/EC on the reorganisation and winding up of credit institutions Last resort lending was widely used during the recent financial crisis, while new elements were introduced (such as ELA), remaining however without a legislative framework

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The presentation which follows examines all the changes taking place with respect to each element of the bank safety net as it is regulated at European level (through the European banking regulation). In this respect, the following areas are examined:

Authorisation of credit institutions (under B)Micro-prudential regulation of credit institutions (under C)Micro-prudential supervision of credit institutions (under D)Macro-prudential regulation of credit institutions (under E)Macro-prudential oversight of credit institutions (under F)Reorganisation and winding up of credit institutions (under G)Resolution of credit institutions (under H)Deposit-guarantee schemes (under I)Last resort lending (under J)

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B. B. AuthorisationAuthorisation of credit institutionsof credit institutions

Legislation in force: Legislation in force: Directive 2006/48/ECDirective 2006/48/EC Regulatory developments: Regulatory developments: Proposal for a Directive Proposal for a Directive ““CRD IVCRD IV””The basic rule remains the same: authorisation of credit institutions is

required by the competent authorities before commencing their activities. By the authorisation the right to carry on the business is granted.

However, a very wide delegation is given to the European BankingAuthority (EBA) to develop draft regulatory technical standards on a variety of issues (e.g. specifying the information to be provided to the competent authorities in the application for the authorisation of credit institutions or the requirements applicable to shareholders and members with qualifying holdings) by 31 December 2015.

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C. MicroC. Micro--prudential regulation of credit institutionsprudential regulation of credit institutions

Legislation in force: Legislation in force: Directive 2006/48/EC, Directive 2006/49/ECDirective 2006/48/EC, Directive 2006/49/EC Regulatory developments: Regulatory developments: Proposal for a Regulation Proposal for a Regulation ““CRD IVCRD IV””

In the proposal for a Regulation there are: provisions amending provisions of the existing regulatory

framework governing the capital adequacy of credit institutions (under a), and

provisions introducing “innovative” elements and additional rules on micro-prudential regulation (under b)

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(a) Amendments to the existing rules governing the capital adequacy of credit institutions(aa) Provisions on credit institutions' minimum regulatory capital During the recent financial crisis it was found that: the quality of capital instruments required to absorb unexpected losses from risks in the trading book and Tier 3 capital instruments were not of sufficiently high quality, and the harmonisation in the EU of the definition of capital was insufficient.The main objective of the proposal is to strengthen further the criteria for eligibility of capital instruments and to introduce harmonisation of the adjustments made to accounting equity in order to determine the regulatory capital that it is prudent to recognise for regulatory purposes. The new requirements would be implemented gradually between 2013and 2015

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(a) Amendments to the existing rules governing the capital adequacy of credit institutions (cont.)(ab) Provisions on cover against exposure to credit risk The crisis revealed a number of shortcomings in the current regulatory treatment of counterparty credit risk arising from derivatives, repo and securities financing activities Requirements for management and capitalisation of the counterparty credit risk will be strengthened. Risk weights on exposures to financial institutions relative to the non-financial corporate sector will be raised. The proposal for a Regulation would also enhance incentives for clearing over-the-counter instruments through central counterparties.

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(b) “Innovative” elements(ba) Leverage ratio In order to limit an excessive build-up of leverage on credit

institutions' and investment firms' balance sheets and thus helpcontaining the cyclicality of lending, the Commission proposes to introduce a non-risk based leverage ratio (namely, assets and off-balance sheet items of banks are not risk-weighted as in the case of capital adequacy requirements)

As agreed by BCBS, the leverage ratio will be introduced as an instrument for the supervisory review of institutions. The impacts of the ratio will be monitored with a view to migrating it to a binding pillar one measure in 2018, based on appropriate review and calibration, in line with international agreements.

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(b) “Innovative” elements(bb) Liquidity ratios Existing liquidity risk management practices were shown by the

crisis to be inadequate in fully grasping risks linked to originate-to-distribute securitization, use of complex financial instruments and reliance on wholesale funding with short term maturity instruments.

This contributed to a demise of several financial institutions and strongly undermined financial health of many others, threatening the financial stability and necessitating public support.

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(b) “Innovative” elements(bb) Liquidity ratios To improve short-term resilience of the liquidity risk profile of

financial institutions, a Liquidity Coverage Ratio (LCR) will be introduced after an observation and review period in 2015.

LCR would require institutions to match net liquidity outflows during a 30 day period with a buffer of 'high quality' liquid assets. The outflows covered (the denominator) would reflect both

institution-specific and systemic shocks built upon actual circumstances experienced in the global financial crisis.

The provisions on the list of high quality liquid assets (the numerator) to cover these outflows should ensure that these assets are of high credit and liquidity quality.

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(b) “Innovative” elements (bb) Liquidity ratios After an observation and review period in 2018, a Net Stable

Funding Ratio (NSFR) will also be introduced in order to address funding problems arising from asset-liability maturity mismatches.

The NSFR would require institutions to maintain a sound funding structure over one year in an extended firm-specific stress scenario such as a significant decline in its profitability or solvency.

To this end, assets currently funded and any contingent obligations to fund would have to be matched to a certain extent by sources of stable funding. This standard is defined as the ratio of: the available amount of stable funding, to the required amount of stable funding

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The role of the European Banking Authority (EBA) in more than 50 provisions of the proposal for a Regulation and in a significant number as well of provisions of the proposal for a Directive EBA is requested to submit regulatory and implementing technical standards to the Commission in order to specify the criteria set out in these provisions and in order to ensure its consistent application The Commission is empowered to adopt them as delegated and implementing acts. Although significant regulatory powers have been Although significant regulatory powers have been conferred to the EBA, the main corpus of the European banking laconferred to the EBA, the main corpus of the European banking law w and other branches of European financial law, still stems (basedand other branches of European financial law, still stems (based on the on the TFEU) from legislative acts of the European Parliament and the TFEU) from legislative acts of the European Parliament and the Council, and from the delegated acts and implementing acts of thCouncil, and from the delegated acts and implementing acts of the e Commission that are elaborated with significant contribution froCommission that are elaborated with significant contribution from the m the EBA (through the development of the relevant drafts) EBA (through the development of the relevant drafts)

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D. MicroD. Micro--prudential supervision of credit institutionsprudential supervision of credit institutions

Legislation in force: Legislation in force: Directive 2006/48/ECDirective 2006/48/EC Regulatory developments: Regulatory developments: Proposal for a Directive Proposal for a Directive ““CRD IVCRD IV””

The basic rule, i.e. the exercise of supervision by the competent national authorities remains the same as well as the coordination and the exchange of the necessary information between competent authorities of the Member States in case of cross-border activities of one credit institution.

The novum in this area is the establishment on 23 September 2009 of the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA), and the European Securities and Markets Authority (ESMA) as the successors of theLamfalussy Committees and the new powers and tasks conferred to them.

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The European Banking Authority (EBA) is a part of the newlyThe European Banking Authority (EBA) is a part of the newly--established European System of Financial Supervisors (ESFS), established European System of Financial Supervisors (ESFS), which started operating on January 1, 2011.which started operating on January 1, 2011.

The ESFS is the result of the legislative adoption of the proposThe ESFS is the result of the legislative adoption of the proposals of als of the the ““de Laroside Larosièère Reportre Report”” of February 2009 and its legal basis are 4 of February 2009 and its legal basis are 4 Regulations of the European Parliament and of the Council and onRegulations of the European Parliament and of the Council and one e Regulation of the Council.Regulation of the Council.

The EBA, being the successor of the CEBS and a component of the The EBA, being the successor of the CEBS and a component of the ESFS, has a clearly more important role in ensuring the stabilitESFS, has a clearly more important role in ensuring the stability of y of the European banking system than that of its the European banking system than that of its ““predecessorpredecessor””, the , the CEBS, extending beyond the area of microCEBS, extending beyond the area of micro--prudential supervision, prudential supervision, especially during crisis situations. It has been conferred with especially during crisis situations. It has been conferred with extensive tasks and broader powers. Meanwhile, the EBA (contraryextensive tasks and broader powers. Meanwhile, the EBA (contraryto the CEBS) has also been endowed with tasks and powers on the to the CEBS) has also been endowed with tasks and powers on the field of protecting financial services consumersfield of protecting financial services consumers

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The EBA has not become a, literally, European supervisory The EBA has not become a, literally, European supervisory authority of the banking system in the European Union, in authority of the banking system in the European Union, in accordance with the relevant proposal of the de Larosiaccordance with the relevant proposal of the de Larosièère Report re Report which was politically adopted. which was politically adopted.

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E. ME. Macroacro--prudentialprudential regulation of credit institutionsregulation of credit institutions

The term The term ““financial macrofinancial macro--prudential policiesprudential policies”” (of which macro(of which macro--prudential regulations are a part) refers: prudential regulations are a part) refers:

to the set of policies (mainly of a prudential nature) adopted to the set of policies (mainly of a prudential nature) adopted and and implemented to limit the financial system's exposure to the "sysimplemented to limit the financial system's exposure to the "systemic temic risk", risk", ensuing from factors that do not concern individual financial sensuing from factors that do not concern individual financial service ervice providers or individual markets and structures of the financial providers or individual markets and structures of the financial system, system, but are more general in character. but are more general in character.

A A ““systemic risksystemic risk”” is the risk of a malfunction in the supply of financial is the risk of a malfunction in the supply of financial services (and/or failure to supply), due to the weakening of a sservices (and/or failure to supply), due to the weakening of a sector or of ector or of the entire financial system, potentially leading to serious negathe entire financial system, potentially leading to serious negative tive consequences in the real sector of the economyconsequences in the real sector of the economy

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Macro-prudential policies seek to address the two dimensions of systemic risk:

a) The first is the “time-dimension”, namely the systemic risk's evolution through time. In this context, macro-prudential policies seek to strengthen the resilience of the financial system at times of economic recession by limiting procyclicality, which can increase the systemic risk because of the interactions developed either within the financial system, or between the financial system andthe real sector of the economy

b) The second dimension is the “cross-sectional dimension”, namely the distribution of risk in the financial system at any given point in time. In this case, macro-prudential policies aim at limiting systemic risk concentration, which could result either because of the concurrent exposure of multiple financial institutions to risks from similar exposures, or because of the interconnectedness of such institutions (and the contagion of problems amongst them), especially if they are systemically important

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“Innovative” elements in the proposal for a Directive (CRD IV)

The relevant rules of the proposal for a Directive, under preparation, are introduced for the first time and they are addressing exclusively the time dimension of systemic risk. In this context, credit institutions are called to: create a “capital conservation buffer” in times of economic growth (under a below), create a “countercyclical buffer” in times of excessive credit expansion (under b below),Capital conservation and countercyclical buffers are meant to attenuate the risk of pro-cyclicality and the risk of excessive leverage. build strong “forward-looking provisions”, and cover against excessive cyclicality of their minimum capital requirements.

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(a) Capital conservation buffer(a) Capital conservation bufferOn the basis of Basel III, according to the proposal for a Directive:

The Capital Conservation Buffer: amounts to 2,5% of risk weighted assets, applies at all times, and has to be met with capital of highest quality.It is aimed at ensuring institutions' capacity to absorb losses in stressed periods that may span a number of years. Credit institutions would be expected to build up such capital in good economic times.

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(b) Countercyclical conservation buffer(b) Countercyclical conservation bufferOn the basis of Basel III, according to the proposal for a Directive :

The Countercyclical Capital Buffer: is set by national authorities for loans provided to natural and legal persons within their Member State, it can be set between 0% and 2.5% of risk weighted assets, and has to be met by capital of highest quality likewise. If justified, authorities can even set a buffer beyond 2.5%. The Countercyclical Capital Buffer will be required during periods of excessive credit growth and released in a downturn.

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F. MF. Macroacro--prudentialprudential oversightoversight

establishment of the European Systemic Risk Board (ESRB) the ESRB is a part of the newlyis a part of the newly-- established European System of established European System of Financial Supervisors (ESFS), which started operating on JanuaryFinancial Supervisors (ESFS), which started operating on January 1, 20111, 2011 as already mentioned, the ESFS is the result of the legislativeas already mentioned, the ESFS is the result of the legislative adoption of adoption of the proposals of the the proposals of the ““de Laroside Larosièère Reportre Report”” of February 2009of February 2009 the ESRB is responsible for the macrothe ESRB is responsible for the macro--prudential oversight of the prudential oversight of the European financial system European financial system in order to contribute to the prevention or in order to contribute to the prevention or mitigation of systemic risks to financial stability in the Unionmitigation of systemic risks to financial stability in the Union that arise that arise from developments within the financial system and taking into acfrom developments within the financial system and taking into account count macromacro--economic developments, so as to avoid periods of widespread economic developments, so as to avoid periods of widespread financial distressfinancial distress

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F. MF. Macroacro--prudentialprudential oversightoversight

For this purpose, the ESRB shall carry out the following, inter For this purpose, the ESRB shall carry out the following, inter alia, tasks:alia, tasks: determining and/or collecting and analysing all the relevant andetermining and/or collecting and analysing all the relevant and d necessary information;necessary information; identifying and prioritising systemic risks;identifying and prioritising systemic risks; issuing warnings where such systemic risks are deemed to be sigissuing warnings where such systemic risks are deemed to be significant nificant and, where appropriate, make those warnings public;and, where appropriate, make those warnings public; issuing recommendations for remedial action in response to the issuing recommendations for remedial action in response to the risks risks identified and, where appropriate, making those recommendations identified and, where appropriate, making those recommendations public;public; cooperating closely with all the other parties to the ESFS; whecooperating closely with all the other parties to the ESFS; where re appropriate, providing the appropriate, providing the ESAsESAs with the information on systemic risks with the information on systemic risks required for the performance of their tasks; and, in particular,required for the performance of their tasks; and, in particular, in in collaboration with the collaboration with the ESAsESAs, developing a common set of quantitative and , developing a common set of quantitative and qualitative indicators (risk dashboard) to identify and measure qualitative indicators (risk dashboard) to identify and measure systemic systemic risk; andrisk; and coordinating its actions with those of international financial coordinating its actions with those of international financial organisations, particularly the International Monetary Fund (IMForganisations, particularly the International Monetary Fund (IMF) and the ) and the Financial Stability Board (FSB) as well as the relevant bodies iFinancial Stability Board (FSB) as well as the relevant bodies in third n third countries on matters related to macrocountries on matters related to macro--prudential oversight;prudential oversight;

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G. Reorganization and winding up of credit institutions

Legislation in force: Directive 2001/24/EC on the reorganisation and winding up of credit institutions

Regulatory developments: No current regulatory developmentsRegulatory developments: No current regulatory developments

The main objective of this Directive is to guarantee that the reorganisationmeasures adopted by the administrative or judicial authorities of the home Member State and the measures adopted by persons or bodies appointed by those authorities to administer those reorganisationmeasures, including measures involving the possibility of a suspension of payments, suspension of enforcement measures or reduction of claims and any other measure which could affect third parties' existing rights, are effective in all Member States

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H. Resolution of credit institutions

Legislation in force: not existent Regulatory developments:The basic reference at European level is -at the moment- the

Communication from the Commission on “an EU framework for Crisis Management in the Financial Sector” (October 2010)

The overriding objective of a “European financial crisis management framework” should be that failing financial institutions of any type and size, and in particular systemically important financial institutions (“SIFIs”), can be allowed to fail without risk to financial stability, whilst avoiding the imposition of cost to taxpayers.

As a first step towards that end, the Commission is developing alegislative proposal for a harmonized regime for crisis prevention and bank recovery, which includes a common set of resolution tools and reinforcement of cooperation between national authorities.

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The framework of the Commission shall comprise three (3) classes of measures: preparatory and preventative measures (under a below), early supervisory intervention (under b below), and resolution tools and powers (under c below)

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(a) Preparatory and preventative measures designed to increase the possibility that developing problems will be identified at an early stage: reinforced micro-prudential supervision by competent authorities, asset transferability: establish an enabling framework for intra-group liquidity management, which must include the safeguards necessary to preserve financial stability, conduct of recovery and resolution plans (“living wills”): those should set out the measures a credit institution or group would take under different scenarios to address liquidity problems, raise capital or reduce risk and be updated on regular basis, preventative powers of authorities: indicatively, changes to business operations and corporate structure.

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(b) Early supervisory intervention: measures designed to address developing problems at entity and group level at an early stage, prevent them from aggravating and secure recovery: expanded supervisory powers: indicatively, clear powers to prohibit the distribution of dividends or to require the replacement of managers or directors, implementation of recovery plans: in cases where an institution is failing to meet the solvency and liquidity requirements under the provisions of the European financial law in force (“CRD”), supervisory power to appoint a special manager: to take over the management, or assist the existing management of an institution that:

is failing to meet the requirements of the CRD, and either has not submitted a credible recovery plan, or fails to

implement that plan effectively. 30


(c) Resolution tools Adoption of appropriate financial insolvency laws in order to ensure that “failing” financial institutions can be resolved in a way that minimizes risk of contagion and ensures continuity of essential financial services. The “resolution tools” include:

a “sale of business tool”, which will enable authorities to effect a sale of the credit institution or parts of its business to one or more purchasers without the consent of shareholders,

a “bridge bank tool”, an “asset separation tool”, and a “debt-conversion” tool.

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I. Deposit guarantee schemesI. Deposit guarantee schemes

Legislation in force: Directive 94/19/EC as amended by Directive 2009/14/EC

Regulatory developments: Proposal for a Directive on Deposit Guarantee Schemes (recast)

The main changes to the existing framework are the following: Coverage leveloverage level of EUR 100,000 (Directive 2009/14/EC). According of EUR 100,000 (Directive 2009/14/EC). According

to the proposal Member States may decide to cover deposits arisito the proposal Member States may decide to cover deposits arising ng from real estate transactions and deposits relating to particulafrom real estate transactions and deposits relating to particular life r life events above the limit of EUR 100,000, provided that the coveragevents above the limit of EUR 100,000, provided that the coverage e is limited to 12 monthsis limited to 12 months

Payout: Payout: The DGS must act to repay depositors within one week The DGS must act to repay depositors within one week (proposal for a Directive) (from 20 working days according to (proposal for a Directive) (from 20 working days according to Directive 2009/14/EC). Depositors do not need to submit an Directive 2009/14/EC). Depositors do not need to submit an applicationapplication

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DGS financing and borrowing between DGS: DGS financing and borrowing between DGS: according to the according to the proposal for a Directive, proposal for a Directive, DGSsDGSs’’ available financial means should be available financial means should be proportionate to their potential liabilities. The financing of proportionate to their potential liabilities. The financing of DGSsDGSswill be based on will be based on the the followingfollowing subsequentsubsequent stepssteps:: FirstFirst, in order to ensure sufficient funding, , in order to ensure sufficient funding, DGSsDGSs must have must have

1.5% of eligible deposits on hand after a transition period of 11.5% of eligible deposits on hand after a transition period of 10 0 years (the years (the ‘‘target leveltarget level’’). ).

SecondSecond, credit institutions must pay extraordinary (, credit institutions must pay extraordinary (‘‘exex--postpost’’) ) contributions of up to 0.5% of eligible deposits if necessary (icontributions of up to 0.5% of eligible deposits if necessary (if f making this payment making this payment jeopardisesjeopardises a credit institution, it may be a credit institution, it may be exempted by the competent authorities on an individual basis.) exempted by the competent authorities on an individual basis.) Consequently, exConsequently, ex--ante funds will account for 75% of ante funds will account for 75% of DGSsDGSs’’financing and exfinancing and ex--post contributions post contributions 25%.25%.

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DGS financing and borrowing between DGS DGS financing and borrowing between DGS (cont.)(cont.):: ThirdThird, a mutual borrowing facility allows a DGS in need to borrow fro, a mutual borrowing facility allows a DGS in need to borrow from m

all other all other DGSsDGSs in the EU, which, altogether, must, if needed, lend to the in the EU, which, altogether, must, if needed, lend to the DGS a maximum of 0.5% of its eligible deposits in need on short DGS a maximum of 0.5% of its eligible deposits in need on short notice, proportionate to the amount of eligible deposits in eachnotice, proportionate to the amount of eligible deposits in each country. country.

As a As a fourth fourth and last line of and last line of defencedefence against taxpayersagainst taxpayers’’ involvement, involvement, DGSsDGSs must have in place alternative funding arrangements, recalling must have in place alternative funding arrangements, recalling that those arrangements must comply with the monetary financing that those arrangements must comply with the monetary financing prohibition laid down in article 123 TFEUprohibition laid down in article 123 TFEU..

RiskRisk--based contributions to based contributions to DGSsDGSs: : Contributions from credit Contributions from credit institutions to institutions to DGSsDGSs must be calculated according to their risk must be calculated according to their risk profiles in a profiles in a harmonisedharmonised way. The proposed indicators cover the key way. The proposed indicators cover the key risk classes commonly used to evaluate the financial soundness orisk classes commonly used to evaluate the financial soundness of f credit institutions (capital adequacy, asset quality, profitabilcredit institutions (capital adequacy, asset quality, profitability and ity and liquidity) liquidity)

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J. Last resort lendingJ. Last resort lending

1. There is no legislation on this issue-area (“constructive ambiguity)

2. The ECB and the national central banks – members of the Eurosystem provide Emergency Liquidity Assistance (the “ELA mechanism’)

3. This should be distinguished from “unconventional” monetary operations conducted by the ECB

4. Should and to what extent serve the ECB as a lender of last resort to sovereigns ?

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TABLE 1TABLE 1

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Proposal for a Directive (CRD IV) / EBA

Directive 2006/48/ECAuthorization of credit institutions

Regulatory developmentsLegislation in forceIssue area

ESRB-Macro-prudential oversight


-Macro-prudential regulation of credit institutions


Directive 2006/48/ECMicro-prudential supervision of credit institutions

Proposal for a Regulation (CRD IV) / EBA

Directive 2006/48/ECDirective 2006/49/ECDirective 2009/111/ECDirective 2010/76/EC

Micro-prudential regulation of credit institutions

TABLE 1 (cont.)TABLE 1 (cont.)

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--Last resort lending

Proposal for a DirectiveDirective 94/19/ECDirective 2009/14/EC

Deposit guarantee schemes

Communication of the European Commission

-Resolution of credit institutions

-Directive 2001/24/ECReorganisation and winding up of credit institutions

Regulatory developmentsLegislation in forceIssue area

(*) Reference to these "three levels" depicts the wording that was established (without any explicit legal basis) in the Lamfalussy Report(**) European Banking Committee, European Securities Committee, European Insurance and Occupational Pensions Committee(***) According to the comitology procedure (Regulation 182/2011)

ΕΒΑ/ΕSMA/EIOPA(elaborating draft technical standards)EBC/ESC/EIOPC (as Regulatorycommittees) (***)

ΕΒΑ/ΕSMA/EIOPA(elaborating draft technical standards

EBC/ESC/EIOPC (**) (as advisory committees)ΕΒΑ/ΕSMA/EIOPA (as opinion-giving bodies)

Assistance to the issuing of a legal act

ΕΒΑ/ΕSMA/EIOPA(according to thescope of action)

European Commission

European Commission

European Parliament and Council (with the ordinary legislative procedure)

Body issuing the legal act

guidelines and recommendations (Regulations establishing the Authorities)

implementing technical standards by means of implementing acts (TFEU, article 291)

regulatory technical standards by means of delegated acts (TFEU, article 290)

legislative acts falling within the Authorities' scope of action (TFEU, article 289)

Type of legal act

Level 3 (*): non-legally binding

acts (soft law)

Level 2 (*):legally binding acts

Level 1 (*):legally binding acts

TABLE 2The procedure for issuing legal acts constituting sources of European financial law after the

start of operation of the ESFS(*)

K. Concluding remarksK. Concluding remarks

According to the overview made above of the regulatory developmeAccording to the overview made above of the regulatory developments in nts in European banking law, the following conclusions could be drawn uEuropean banking law, the following conclusions could be drawn up:p:(1) Especially with respect to the CRD IV, the relevant provisio(1) Especially with respect to the CRD IV, the relevant provisions will be ns will be phasedphased--in from 2013 and with a sixin from 2013 and with a six--year horizon, while some provisions year horizon, while some provisions will most certainly be amended, during the supervisory monitorinwill most certainly be amended, during the supervisory monitoring g transitional periods that were introduced. This leads to two contransitional periods that were introduced. This leads to two conclusions; a clusions; a positive one and a negative onepositive one and a negative one The decision to introduce an adjustment period has been taken cThe decision to introduce an adjustment period has been taken correctly on orrectly on the consideration, among others, that if the new rules were to bthe consideration, among others, that if the new rules were to be fully and e fully and cumulatively implemented within a short period of time, the negacumulatively implemented within a short period of time, the negative tive repercussions on the operation of banks, due to the resulting corepercussions on the operation of banks, due to the resulting cost, would be st, would be significant. Capital requirements will increase substantially (esignificant. Capital requirements will increase substantially (especially in specially in times of economic growth and mainly for systemically important btimes of economic growth and mainly for systemically important banks), anks), while implementation of the provisions on liquidity ratios will,while implementation of the provisions on liquidity ratios will, in some in some cases, lead to a redefinition of bankscases, lead to a redefinition of banks’’ business modelsbusiness models On the contrary, the fact that some of the provisions will almoOn the contrary, the fact that some of the provisions will almost certainly st certainly be amended, creates a climate of ambiguity, which may lead to debe amended, creates a climate of ambiguity, which may lead to delays in lays in their implementationtheir implementation

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K. Concluding remarksK. Concluding remarks

(2) There is no doubt that the new regulatory framework will red(2) There is no doubt that the new regulatory framework will reduce banksuce banks’’profitability margins, as well as their return on equity (no matprofitability margins, as well as their return on equity (no matter the extent ter the extent to which they will be able to pass the cost over to their clientto which they will be able to pass the cost over to their clients, or the s, or the potential for costpotential for cost--cutting). However, this entails 2 (at least) risks, whose cutting). However, this entails 2 (at least) risks, whose importance should not be underestimated:importance should not be underestimated: First of all, implementation of the new rules can, at least in First of all, implementation of the new rules can, at least in certain cases, certain cases, lead to a reduction in the supply of borrowed funds by banks, wilead to a reduction in the supply of borrowed funds by banks, with negative th negative consequences on the real sector of the economy and on growthconsequences on the real sector of the economy and on growth Moreover, given that the banking system as a whole will be callMoreover, given that the banking system as a whole will be called to ed to raise considerable amounts of equity capital from the markets (araise considerable amounts of equity capital from the markets (albeit lbeit within a sixwithin a six--year horizon), primarily by issuing common shares, the year horizon), primarily by issuing common shares, the expected reduction in banksexpected reduction in banks’’ return on equity (ROE) will bring them in a return on equity (ROE) will bring them in a competitive disadvantage to enterprises in other sectors of the competitive disadvantage to enterprises in other sectors of the economy, economy, whose ROE will remain stable or even increasewhose ROE will remain stable or even increaseIt is noteworthy that systemically important financial institutiIt is noteworthy that systemically important financial institutions (and in ons (and in particular banks) may even be subject to an additional capital particular banks) may even be subject to an additional capital requirement, amounting to 2% of their risk weighted assets and orequirement, amounting to 2% of their risk weighted assets and offff--balance balance sheet items which, again, will have to be covered by common equisheet items which, again, will have to be covered by common equity Tier 1 ty Tier 1 capital. capital. 41

current developments in european banking law (with particular

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