Banking Crisis in Europe - roundtable
European Parliament, Brussels
A key feature of the economic and financial crisis which has enveloped the European Union and its Member States has been the widespread concern regarding the resilience and stability of the European banking system. The ‘troika’ of European-wide institutions – the European Commission, European Central Bank (ECB) and International Monetary Fund (IMF) – have pursed a variety of measures to respond to the banking crisis and wider economic and financial crisis. This roundtable seminar sponsored by the School and the European Commission, and organised in association with the Learned Society of Wales, brought together high profile speakers from across the UK and Europe to discuss, under Chatham House Rule, the banking crisis, its consequences for different Europe States and the potential options for the European Union institutions and UK government in responding to these issues. A range of themes were highlighted by the speakers in their contributions and the question and answer session which followed.
Restructuring the Regulatory Landscape: Basel III and CRD IV
A key theme within the speaker contributions and wider discussion was the development and design of the Basel III international regulatory framework by the Basel Committee on Banking Supervision (BCBS) and its translation into European Union law via the Capital Requirements Directive IV (CRD IV). The Basel III Accord set-out the global regulatory standard in a range of areas centred on the level and quality of capital which banks are required to hold. The process of developing Basel III was characterised as advancing rapidly in comparison to its predecessors but negotiations remained difficult. For example, there were disagreements within the BCBS around regulatory standards - the UK, US and Switzerland arguing for tougher requirements. These debates were characterised as reflecting the specific ‘national banking systems’ which shaped the interests and concerns of states. The discussions centred on the divergent contexts in France, Germany and the UK. It was argued that French and German banks faced a range of challenges in meeting the Basel III targets including the double counting of insurance subsidiaries in France and the vulnerable position of Landesbanken. In contrast, the UK was seen as best placed to meet the Basel III rules primarily because of the rapid deleveraging of banks since 2008 and the huge injection of capital provided by the UK Government’s bailout. These contrasting positions raised question marks regarding the implementation of the Basel III rules in the European context via CRD IV. There was disagreement across the panel as to whether the EU could be seen as implementing a ‘soft’ or ‘watered down’ version of Basel III. Furthermore questions were raised in the audience discussion regarding the extent to which the reform agenda had challenged the influential position of the banking industry – the panel were divided regarding the relative strength and effectiveness of lobbying by banks.
The Role of the European Institutions
The discussion of the Basel III Accord and CRD IV was framed within the wider context of Europe’s response to the financial and banking crisis. All of the participants emphasised that the CRD IV represented a single but significant element of a much wider agenda being pursued across the European institutions. The primary focus of the European Commission’s response to the banking crisis was characterised as being central to its wider strategy of breaking the ‘negative feedback loop’ which linked financial stability, sovereign debt and economic growth. This strategy encompassed a range of key measures, such as the strengthening of regulatory and supervisory arrangements via the creation of European System of Financial Supervisors (ESFS) and the introduction of economic and fiscal surveillance measures in the ‘Six-Pack’. It was noted that the nature of the co-decision process within the EU meant that European Parliament and EU Council of Ministers have been actively engaged in the decision-making process around the CRD IV and similar measures. The intense period of legislative activity in response to the financial crisis has placed increased pressure on the limited capacity and resources of the European Parliament and notably the Parliament’s Economic and Monetary Affairs Committee. The Parliament was characterised as being highly reliant upon the expertise and guidance of officials within the European Commission and European Central Bank (ECB). The potential for the ECB to perform the function of a lender of last resort for the Eurozone, similar to the US Federal Reserve or Bank of England, was also discussed. It was argued that the character of the agreements which underpinned European Economic and Monetary Union (EMU) prevented the ECB from ‘bailing out’ states and therefore any ‘backstop’ function would fundamentally undermine the wider process. However, the ECB was able to provide loans to banks in response to liquidity issues and curb the risk of a credit crunch within the Eurozone – a role highlighted most recently via the LTRO.
LTRO: Big Bazooka or Short-term Stop-gap?
The debate regarding the role of the European institutions was tied into a more focused discussion of the specific measures that had been introduced in response to the banking crisis. There was a consensus within the panel that the two rounds of LTROs introduced by the ECB in December 2011 and February 2012 were crucial to providing ‘breathing space’ for European leaders in responding to the crisis. One speaker noted that the net effect of the LTROs had been similar to the Bank of England’s approach to ‘quantitative easing’ but that it did not provide a long term solution and its effects had yet to be fully realised in the ‘real economy.’ It was argued that the LTRO had made a substantial impact in lowering benchmark bond yields and averting the deepening of the crisis in potentially vulnerable States, such as Italy and Spain. However, the situation in Greece was cast as qualitatively different and a major programme of modernisation was underway including changes to minimum wage levels, opening up the closed professions and privatising state assets. In order for these reforms to be successful it was emphasised that there needed to be clear ownership within Greece and that this was being sort via bi-partisan agreement and constitutional reform. A key theme of the audience question and answer session was the extent to which the reform agenda being pursed within Greece was reflected elsewhere within Europe.
The Future of Europe
The final theme highlighted by the roundtable discussions focused the future trajectory of the European Union and the continued role and influence of the banking industry. One speaker noted that the response to the financial crisis had driven a previously ‘unthinkable’ transfer of sovereignty to European level and that it was becoming increasingly clear that monetary union necessitates financial union. The position adopted by the UK within this process was perceived as being potentially problematic. The UK Government was described at different points in the discussions as being ‘reluctant participants’ and pursuing ‘industry protectionism’ by lobbying for unanimity in the December 2011 negotiations. The UK’s decision to opt out of the ‘Fiscal Compact’ signed by 25 Member States was characterised as leaving it on the fringe of Europe.