6 ECB & banking union

ECB  &  Banking  Union   Prof  P.  Nicolaides  

The  course  road  map  

Evolu9on  of  EMU   &  ra9onale  

Treaty  provisions  on   EMU  &  capital  

Crisis:   State  aid  

Recent   case  law   Banking  Union:   SSM  &  SRM  

Crisis:   New  rules   &  ins9tu9ons  

Themes   §  Tasks  of  the  ECB   §  Why  price  stability?   §  Independence  &  accountability  of  the  ECB     §  Decision-­‐making   §  How  the  ECB  operates     §  Banking  union   §  Annexes  

Tasks  of  ECB  [Arts  127  &  128]   §  Define  &  implement  monetary  policy   •  Price  stability  =  inflaJon  below  but  close  to  2%   §  Issue  euros   §  Conduct  foreign  exchange  operaJons   §  Hold  &  manage  official  reserves   §  Operate  payment  systems   §  Collect  staJsJcs  

Infla9on  

Source:  ECB  

Why  price  stability?   §  PoliJcs:  Without  it,  DE  would  never  have  consented  to  MU   §  Economics:   •  Monetary  expansion  has  no  long-­‐term  effect  on  real   economy   •  InflaJon  is  costly  

Independence  in  determining  monetary  policy  

§  Central  Banks  have  been  given  independence  to  insulate   them  from  poliJcal  interference   §  Why?   §  Because  poliJcians  are  “Jme  inconsistent”:  InflaJng  economy   today  gets  you  elected.  Future  inflaJon  will  be  somebody   else’s  problem  

Central  bank  independence  and  infla9on  

Source:  ECB  

Aspects  of  ECB  independence   [to  protect  price  stability]  

§  Decision-­‐making  independence:   •  Art  129/282:  ECSB  governed  by  ECB  governing  bodies  =>   can  decide  independently  &  no  need  for  authorisaJon   •  Art  130/282:  ESCB  &  ECB  are  insulated  from  poliJcal   interference   §  Personal  independence:  Art  130   §  FuncJonal  independence:   •  ECB  has  at  its  disposal  all  necessary  policy  instruments   •  Art  123  =>  ECB  not  constrained  by  MS  policies   §  Financial  independence:  ECB  has  own  budget  &  capital  [so   does  the  SRM]   §  Very  difficult  to  change  its  statutes  

However,  ECB  independence  is  not  unlimited   [independence  in  performing  its  tasks]  

§  C-­‐11/00,  Commission  v  ECB   §  Concerns  refusal  of  ECB  to  be  subject  to  OLAF  invesJgaJons,   ciJng  its  independence   §  ECJ:   •  Influences  from  which  ECB  is  shielded  are  those  likely  to   interfere  with  performance  of  its  tasks     •  Being  subject  to  measures  in  area  of  fraud  prevenJon  does   undermine  ECB’s  ability  to  perform  independently  the   specific  tasks  conferred  on  it  by  Treaty   •  OLAF  is  not  per  se  capable  of  undermining  ECB's   independence  

And,  ECB  is  independent  where  it  is  empowered  to  act   §  T-­‐496/11,  UK  v  ECB   §  GC  annuls  provision  of  ECB’s  Eurosystem  Oversight  Policy   Framework,  which  required  parJes  in  clearing  of  securiJes  to   be  located  within  Eurozone   §  GC  made  a  disJncJon  between  payment  and  clearing  systems   and  concluded  that  ECB  had  no  powers  with  respect  to   clearing  of  securiJes  and  therefore  overstepped  its   competences  in  violaJon  of  Art  13(2)  TEU   §  GC  also  noted  that  “implicit  powers”  only  excepJonally   recognised  by  case  law  –  ECB  could  have  asked  for  its  statutes   to  be  amended  

But  is  ECB  accountable?   §  Montagu  Norman,  Governor,  Bank  of  England,  1920s-­‐1940s:   “A  CB  must  never  excuse  &  never  explain”  

§  An  independent  insJtuJon  is  not  necessarily  accountable   §  An  accountable  insJtuJon  is  necessarily  independent   §  Why  accountability?   §  Because  accountability  ensures  policy  effecJveness  

Aspects  of  ECB’s  accountability   §  Mario  Draghi:  Accounts  &  Accountability,  31  March  2015   •  Transparency  &  explanaJon  so  that  markets  understand   and  monetary  policy  works  beser   §  Transparency:   •  Clearly  defined  mandate   •  PublicaJon  of  regular  [quarterly  &  annual]  reports   •  PublicaJon  of  account  of  meeJng  [1st  Jme  in  January  2015]   §  ExplanaJon:   •  In  publicaJons   •  In  quarterly  [used  to  be  monthly]  press  conferences   •  In  reports  to  EP,  Council  &  Commission   •  In  speeches  of  ECB  President  to  EP   §  SancJons?  

Monetary  policy  making   ESCB   ECB  

28  NCB   Governing  Council  of  ECB  &  ESCB    (6+19)   Execu9ve  Board  (6)   Decision-­‐making  bodies  of  ECB   19  NCB  of  euro  countries   General  Council  of  ECB  &  ESCB  (2+28)   President  &   Vice-­‐president  ECB  

28  NCB  

Decision  making:   Rota9on  of  vo9ng  rights  in  Governing  Council   §  Past  system:  one  member  =  one  vote   §  Present  system:  rotaJon  of  voJng  rights   §  25  members  but  only  21  votes   •  ExecuJve  Board  =  6  votes   •  MS  =  15  votes   §  MS  divided  into  groups  according  to  size  of  economy  &   financial  sectors   §  Countries  ranked  1st  to  5th  [DE,  FR,  IT,  ES,  NL]  =  4  votes   §  All  others  [14]  =  11  votes   §  Governors  take  turns  using  voJng  rights  on  monthly  rotaJon   §  But  all  members  of  Governing  Council  asend  &  speak  

How  the  ECB  operates:  Two-­‐pillar  strategy   Eurozone  economy   Input:  sta9s9cs  

Monetary  variables  

Economic  variables  

analysis  

Governing  Council   Output:  decision  

Monetary  policy  aiming   at  price  stability  

Monetary  policy  instruments   §  ECB  Guideline  2015/510  on  monetary  policy  instruments   [ hsp://eur-­‐lex.europa.eu/legal-­‐content/EN/TXT/?uri=uriserv:OJ.L_. 2015.091.01.0003.01.ENG]  OJ  L91,  2/4/2015  

§  Open  market  operaJons   •  Short-­‐term  [weekly]  liquidity  to  financial  sector  [purchase   or  sale  of  AAA-­‐rated  bonds  &  securiJes]   §  Standing  faciliJes  at  interest  rates  determined  by  ECB   •  Overnight  facility:  Deposit  &  Lending   §  Minimum  reserve  requirements  for  credit  insJtuJons   §  Non-­‐convenJonal  asset  purchase  programmes  

“Whatever  it  takes”   §  Mario  Draghi,  London,  July  2012:  The  ECB  will  do  “whatever  it   takes”  to  save  the  euro   §  OMT:  Purchasing  of  govt  bonds  on  secondary  market   §  Claimed  to  be  in  compliance  with  Art  123:   •  Secondary  not  primary  market   •  Under  strict  condiJonality   We  will  examine  later  OMT  reference  for   preliminary  ruling  by  German  Cons9tu9onal  Court  

Financial  crisis  =>  Non-­‐conven9onal  instruments   §  Financial  transacJons  that  support  real  economy  depend  on   conJnuous  financial  flows  between  banks   §  Crisis  1  =>  bank  failure  =>  freezing  of  credit  markets  =>   reliance  on  CB  faciliJes   §  Crisis  2  =>  hampers  monetary  policy  transmission  mechanism   =>  non-­‐convenJonal  instruments   §  Non-­‐convenJonal  instruments   •  Purchasing  govt  bonds  on  secondary  markets   •  Emergency  Liquidity  Assistance  [ELA]  to  banks  [which   provide  govt  bonds  as  collateral]   •  Outright  Monetary  TransacJons  [OMT]:  Purchasing  of  govt   bonds  [on  secondary  market]  on  strict  condiJonality  

Emergency  Liquidity  Assistance   §  ELA  =  provision  by  a  Eurosystem  naJonal  central  bank  [NCB]   of:   1.  central  bank  money  and/or   2.  any  other  assistance  to  a  solvent  financial  insJtuJon  that   is  facing  temporary  liquidity  problems   §  Responsibility  for  the  provision  of  ELA  lies  with  the  NCB   concerned.  This  means  that  any  costs  &  risks  of  provision  of   ELA  are  incurred  by  NCB   §  However,  ECB  Governing  Council  approves  or  terminates  ELA  

Jus9fica9on  [by  ECB]   §  ECB  pursues  symmetric  definiJon  of  price  stability  [inflaJon   not  just  below  2%,  but  close  to  2%]   §  Interest  rates  alone  not  sufficient  to  steer  inflaJon  closer  to  2%   §  Asset  purchasing  does  not  moneJse  govt  debt  

“Pillars”  of  banking  union  

EU  banking  union  

Common   regulator   [SSM]  

Common  rules   [single   rulebook]  

Common  crisis   management:   -­‐  resolu9on   [SRM]   [-­‐  deposit   insurance]  

Banking  union  &  the  new  framework  of  financial  regula9on   Macro-­‐pruden9al   supervision   Principles   Crisis  preven9on   Crisis  management   Crisis  resolu9on   Micro-­‐pruden9al   supervision  

European  Systemic  Risk  Board   (ECB,  Commission,  NCBs,   MS  regulators)   European  Systemic  Risk  Board  [ESRB]   has  no  budget  of  its  own.   ECB  is  its  secretariat  and  ECB  finances   ESRB  acJviJes  

ECOFIN   Early  risk   warning  to   MS  

European  System  of  Financial  Supervisors   European   European   European   Banking   Insurance  &   Securi9es   Authority   Occupa9onal   Authority   Pensions   Authority   SSM  /  ECB  

Banking  union  for  …  regulatory  improvement   §  Achieve  coherent,  consistent  &  seamless  applicaJons  of   banking  rules  across  EU  [instead  of  28,  naJonally  focused,   regulators]  –  mere  coordinaJon  is  not  enough   §  Financial  stability  is  a  public  good  [for  funcJoning  of  both   banking  &  monetary  policy]  –  beser  provided  centrally  

Banking  union  for  …  crisis  management  improvement   §  Break  habit  of  naJonal  aid  to  ailing  banks   §  De-­‐link  size  of  banks  from  size  of  home  countries  [banks   should  not  be  “too  big  to  fail”]   §  Make  it  more  difficult  for  banks  to  lobby  regulators   §  In  the  event  of  bailout,   •  Priority  for  resoluJon  rather  than  simple  rescue   •  Costs  to  be  borne  by  shareholders  &  creditors  rather  than   tax  payers  [state  aid  to  banks  ≈  EUR  6  trillion!!]   •  Consistent  applicaJon  of  rules  

Banking  union  for  …  monetary  policy  improvement   §  FragmentaJon  of  financial  markets  impedes  transmission  of   monetary  policy   §  De-­‐couple  banking  debt  from  sovereign  debt,  so  that  fiscal   policy  instruments  become  less  constrained  and  monetary   policy  more  effecJve  

SSM  [Reg  1024/2013]   §  ECB  supervises  directly  “significant”  banks   •  Significant:  Assets  >  EUR  30  bn  or  20%  of  MS  GDP   §  ECB  supervises  indirectly  remaining  banks  through  NCB  on   condiJons  specified  by  ECB   §  EBA  to  conJnue  developing  single  rule  book   §  First  report:  31  March  2015   §  Finds  problems  with  11  banks     [hsps://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssmar2014.en.pdf]  

Banking  union  architecture   1.  Supervisory  Mechanism   2.  Resolu9on  Mechanism/Fund   (3.  Deposit  Guarantee  Fund)  

EBA  

Banking                                                            ECB   supervision   ECB  to  supervise  directly  largest   banks  and  indirectly  remaining   banks,  by  delegaJng  tasks  to   MS  regulators  

Na9onal  supervisors/ regulators  

SSM  &  sharing  of  tasks   SSM  Supervisory  Board   Chair  &  Vice-­‐Chair   4  ECB  representa9ves   MS  representa9ves  

SSM  countries     MS   ECB     SSM  Supervisory  Board   supervisors       6000     Systemic   Other   Other   banks   banks   ins9tu9ons      

About  130  banks  represen9ng  85%   of  total  eurozone  banking  assets  

Non-­‐SSM   countries  

Single  supervisor  &  accountability   §  PotenJal  problem:   •  Possible  conflict  between  monetary  policy  &  supervision   •  Several  supervisors  may  be  beser  than  single  supervisor   §  SoluJons:  Division  of  tasks  &  accountability   §  “Chinese”  walls  between  banking  supervision  &  monetary   policy  &  staff   §  Supervisory  Board  decides  but  ECB  Governing  Council  has   final  word   §  SSM  accountability:   •  Chair  &  Vice-­‐chair  confirmed  by  EP   •  Submits  reports  to  EP  &  Council  &  Chair  briefs  EP   •  Publishes  reports  

SRM  [Reg  806/2014]  [+  BRRD  2014/59]   §  “Being  European  in  life,  but  naJonal  in  death”  will  no  longer  be   possible   §  SRM  =  SR  Board  [under  ECB  supervision]  &  SR  Fund   §  SRF  =  1%  of  covered  deposits  [=  EUR  55  bn  in  2023]   §  SRM/BRRD:   •  Lay  down  obligaJon  for  restructuring/recovery/closure   •  Define  resoluJon  tools,  procedures  &  prioriJes  

BRRD:  Main  provisions   §  Banks  and  authoriJes  make  adequate  preparaJon  for  crises   §  NaJonal  authoriJes  have  necessary  tools  to  intervene  in  a   troubled  insJtuJon   §  NaJonal  authoriJes  have  harmonised  resoluJon  tools  and   powers  to  take  rapid  and  effecJve  acJon   §  AuthoriJes  cooperate  effecJvely  when  dealing  with  the   failure  of  a  cross-­‐border  bank   §  Banks  contribute  to  resoluJon  financing  arrangements  to   support  the  costs  of  restructuring  

Cont.   §  ResoluJon  tools:   •  Sale  of  the  insJtuJon   •  Transfer  assets  to  bridge  insJtuJon   •  Asset  separaJon   •  Bail-­‐in   §  Principles:   •  No  creditor  worse  off  than  in  liquidaJon   •  Bail-­‐in  becomes  the  rule  and  bail-­‐out  the  excepJon  =>   creditors  will  bear  cost  of  restructuring   •  First  8%  of  liabiliJes  covered  by  shareholders  &   creditors   •  The  next  5%  of  liabiliJes  covered  by  SRF/NRF   •  Then  external  funding  may  be  sought  

Resolu9on  at  EU  level   SR  Board  manages   resolu9on  

Bail-­‐in   order  

ECB  determines   whether  bank  is  failing  

SRF  

[about  EUR  55  bn  to  be  reached  over  8  years]   Contribu9ons   [i.e.  gradual  mutualisa9on]  

Owners  &   Creditors   1  

2  

3  

Failing  bank  

MS  

Banks  

[collects  and  transfers   contribu9ons]  

What  else?  

SSM  

SRM  

Reinforce  each  other  

Deposit   insurance?  

SRM  accountability   §  SRB  to  replace  Euro  MS  resoluJon  authoriJes  set  up  by  Dir   2014/59   §  ArJcle  45:  Accountability   1.  SRB  accountable  to  EP,  Council  &  Commission   2.  SRB  submits  AR  to  EP,  MS  parliaments,  Council,  Commission  &   ECA   3.  Chair  presents  AR  to  EP  &  Council  &  parJcipates  in  EP  hearings   4.  SRB  replies  to  quesJons  by  EP  or  Council     FT,  4/1/16:  SRB  expected  to  resolve  10  banks  in  next  4  years  

Agreement  between  the  EP  and  Single  Resolu9on  Board  on   accountability  and  oversight  [24  Dec  2015]   §  “Any  conferral  of  resoluJon  powers  to  the  Union  level  should   be  balanced  by  appropriate  accountability  requirements”   1.  InformaJon  and  reports:  What  informaJon  to  be  provided  in   AR  and  obligaJon  to  parJcipate  in  EP  hearings  &  meeJngs   2.  SelecJon  procedures:  How  to  select  officials   3.  InvesJgaJons:  ParJcipaJon  in  inquiries   4.  Code  of  conduct  by  the  Board:  Self-­‐statement  by  SRB   5.  AdopJon  of  acts  by  the  Board:  ConsultaJon  of  EP  

Annual  Report   §  AR  shall  include  detailed  explanaJon  of  following:   1.  2.  3.  4.  5.  6.  7.  8.  9. 

execuJon  of  tasks  conferred  on  Board  by  SRM  RegulaJon   sharing  of  tasks  with  naJonal  resoluJon  authoriJes   cooperaJon  with  other  naJonal  or  Union  authoriJes   cooperaJon  with  third  countries   evoluJon  of  Board's  structure  and  staffing   implementaJon  of  Code  of  Conduct   amounts  of  administraJve  contribuJons   implementaJon  of  the  budget  for  resoluJon  tasks   applicaJon  of  the  SRM  RegulaJon  provisions  regarding  the   Fund  [e.g.  investment  strategy]  

Conclusions   §  ECB  is  very  independent  and  accountable   §  ECB  acted  quickly  to  remedy  crisis   §  Its  unconvenJonal  instruments  are  controversial  but  effecJve   §  Crisis  has  revealed  that  financial  markets  are  fragmented  along   naJonal  lines  by  divergent  laws  &  regulaJons     §  Banking  Union  [SSM,  SRM]  should  prevent  banking  failures,   should  strengthen  market  confidence  and  should  de-­‐link   banking  crisis  from  sovereign  crisis  

Annex  I:  Money  &  monetary  transmission  mechanism  

What  is  money?   §  Money  has  three  funcJons:   •  Store  of  value   •  Unit  of  account   •  Medium  of  exchange   §  Types  of  money:   •  Commodity  [e.g.  gold,  sea  shells,  cigareses]   •  Fiat  [created  by  decree,  intrinsically  useless]  

Quan9ty  of  money   §  Measures  of  quanJty  of  money:   •  Currency   •  M1  [currency  +  current  accounts]   •  M2  [M1  +  savings]   §  Bank  deposits  make  up  about  95%  of  all  money   §  Myth  1:  Central  bank  prints  money  [true,  but  this  is  very   small].  Central  bank  determines  “price”  of  money   §  Myth  2:  Banks  are  intermediaries  &  quanJty  of  money   depends  on  amount  of  savings  [not  true:  money  saved  =   money  not  spent  =  money  not  earned  by  companies]  

Money  crea9on   §  Money  is  created  primarily  through:   •  Lending  by  commercial  banks   They  grant  loans  by  crediJng  accounts  of  borrowers     •  Open-­‐market  operaJons  of  central  banks:     Central  banks  sell/buy  bonds.  They  buy  bonds  from,  say,  a   company  by  crediJng  the  account  of  a  bank  at  the  CB,   which  in  turn  credits  the  account  of  the  company  

Money  crea9on  through  lending   When  a  bank  makes  a  loan,  it  creates  an  account  which  it  credits  

Before  the  loan  

Assets  

Liabili9es  

Reserves   Currency  

Deposits  

Aqer  the  loan   Assets  

Liabili9es  

New  loan  

New  deposits  

Reserves  

Deposits  

Currency  

But,  there  are  limits  on  how  much  money  banks  can  create:   e.g.  risk  of  borrowers,  liquidity  requirements    

Money  

Money  crea9on  through  open-­‐market  opera9ons     Before  asset  purchase  

Aqer  asset  purchase  

Central  bank   Assets  

Assets  

Liabili9es  

Reserves  

Assets  

Liabili9es  

Corp  bonds   Assets  

Reserves  

Commercial  bank   Assets  

Reserves  

Assets  

Liabili9es  

Reserves  

Deposits  

Liabili9es  

Deposits  

Money  

Monetary  policy  transmission  mechanism  

Annex  II:  Regulatory  weaknesses  before  banking  union  

Lessons:  Bias  of  na9onal  regulators  spreads  risk   §  S.  Agarwal,  D.  Lucca,  A.  Seru,  F.  Trebbi,  Inconsistent  Regulators:  Evidence   From  Banking,  NBER  Working  Paper  No.  17736,  January  2012  

  Findings:   §  Federal  regulators  are  significantly  less  lenient,  downgrading   raJngs  about  twice  as  frequently  as  state  supervisors.  Under   federal  regulators,  banks  report  higher  non-­‐performing  loans,   more  delinquent  loans,  higher  regulatory  capital  raJos   §  There  is  higher  frequency  of  bank  failures  in  states  with  more   lenient  supervision  relaJve  to  the  federal  benchmark  

Ten  regulatory  weakness  in  EU   1.  No  single  rule  book   2.  No  single  definiJon  of  credit  insJtuJons   3.  JurisdicJonal  delimitaJon   4.  Divergent  supervisory  regimes   5.  Differing  resoluJon  regimes   6.  DuplicaJve  reporJng  regimes   7.  No  uniform  exchange  of  informaJon   8.  Incomplete  cooperaJon  between  home  &  host  supervisors   9.  ConfidenJality  in  exchange  of  informaJon   10. Inconsistency  between  private  &  supervisory  law     Source:  R.  Smits,  Ten  regulatory  gaps,  Central  Banking,  2010,  vol.20  

Annex  III:  Future  membership  of  SSM  

Poten9al  benefits  for  non-­‐euro  countries  from  joining  SSM   §  Increased  stability  [bigger  resoluJon  fund]   §  Increase  in  quality  of  supervision  and  harmonizaJon  of   supervisory  pracJces  that  would  counter  naJonal  bias   §  Improved  home-­‐host  relaJons   §  Access  to  parent  bank  supervisory  data   §  Improved  poliJcal  posiJon  on  the  EU  fora   §  For  banks  in  opt-­‐in  countries:  Harmonized  reporJng  and   lower  compliance  costs   §  Beser  coordinaJon  and  burden-­‐sharing  related  to  cross-­‐ border  resoluJon  

Poten9al  costs  from  joining  SSM   §  Limited  influence  within  the  SSM,  as  Supervisory  Board  drazs   decisions  ulJmately  taken  by  Governing  Council  in  which  opt-­‐ ins  do  not  parJcipate   §  Insufficient  “added  value”  of  the  SSM  over  naJonal   supervisory  framework,  as  SSM  creates  another,  centralized   supervisory  layer  with  increased  administraJve  burden   §  Complicated  and  Jme-­‐consuming  decision-­‐making  process  of   SRM  that  involves  too  many  parJes  to  ensure  Jmely  “over-­‐ the-­‐weekend”  resoluJon   §  Lack  of  access  to  liquidity  facility  at  the  ECB  and  to  ESM   §  TransiJonal  problem:  SRF  not  having  a  sufficient  size   §  Lack  of  single  deposit  guarantee  scheme  

Annex  IV:  CMU  

Capital  markets  union  [CMU]   §  Commission,  Green  Paper  on  Building  a  Capital  Markets   Union,  18/2/2015   §  CMU  is  different  from  BU,  but  supports  BU   §  Aims  of  CMU  [reducJon  of  risk  &  more  capital  for  growth]:   •  Improving  access  to  finance  [lower  cost  &  more  capital]   •  Diversifying  sources  of  finance  [less  risk]   •  Cross-­‐border   •  Less  dependency  on  banks  &  debt  instruments  [more   equity  =>  more  risk  sharing]   §  Means:   •  Harmonising  legal  [e.g.  insolvency]  &  tax  differences  

Equity  &  debt  markets  as  %  of  GDP  

Source:  ECB  

Cont.  

Fragmenta9on  of  financial  markets  

[share  of  financial  instruments  by  non-­‐residents]  

Source:  CEPS,  2014