Aspects of the Political Economy of the European Banking Union
By Lena Tonzer | Posted on 6 September 2021
Post type: Opinion
The regulatory architecture of the financial system has significantly changed after the global financial crisis of 2008/09. In Europe, the introduction of the Single Rulebook has been a major change and provides the legal foundation for the European Banking Union (EBU). The Single Rulebook consists of a regulation, the Capital Requirements Regulation (CRR), and three main directives targeting capital regulation and compensation of managers, harmonization of deposit insurance schemes, as well as resolution and restructuring rules (Capital Requirements Directive (CRD IV), Deposit Guarantee Schemes Directive (DGSD), Bank Recovery and Resolution Directive (BRRD)).
Two specific aspects of this institutional architecture affect the success and effectiveness of the new scheme. First, while the Single Rulebook applies to all member states of the European Union, the additional institutional setting of the EBU is only obligatory for euro area members. Therefore, this approach to harmonize the European banking system has scope for regulatory arbitrage. Second, except for the CRR, all measures are implemented by means of directives, which implies some room for discretion how governments transpose them exactly into national legislation.
In a project on the “Political Economy of the European Banking Union” funded by the European Commission’s European Social Fund, we investigated in a first step discrepancies in implementation timing of these directives across member states. Whereas the European Commission stipulates a transposition deadline, many member states delay the implementation of the directives. Such transposition delays are not specific to directives related to banking regulation. First results using notification dates to the European Commission suggested that there is no obvious evidence for strategic delays. Especially the previous stance of a country’s regulatory setting matters for implementation speed (Koetter, Krause, Tonzer 2019). However, already in the drafting process of these directives member states might intervene to promote their particular interests. The scope for discretion and lobbying surrounding the implementation of EBU directives provides avenues for future research to assess the effectiveness of the new European financial system architecture.
A second study focuses on one of the most significant changes in the new regulatory setting: bank resolution rules. The option for regulators to intervene and to resolve a bank as well as the possibility of a bail-in of banks’ investors is in stark contrast to the bailouts of banks by governments as observed during the global financial crisis. The room for discretion when implementing directives raises the question whether this new setting alters also the risk premia and funding costs of banks. Reduced bailout expectations should, if credible, matter for risk premia. We provide evidence that European banks’ weighted average costs of capital increase with the staggered implementation of the BRRD, while some heterogeneities persist across member states (Koetter, Krause, Sfrappini, Tonzer 2021).
Co-Author(s): Michael Koetter, Thomas Krause, Eleonora Sfrappini