European Banking Market
1. The internal market as the driving force
The European banking market is the basis and at the same time part of the goal of the European internal market under Art 3 TFEU/3 EU. It directly affects the establishment of credit institutions. In broad terms, the European banking market therefore also impacts the integrated securities market. However, a distinction has to be made between banking and capital markets because the capital market centres allocate capital, while it is the competition between the intermediaries of this allocation process that is at issue in the banking market (capital markets law; free movement of capital and payments). As a result, the European banking market aims to develop a Europe-wide branch network on the basis of branch offices as well as subsidiaries, representative offices and agents.
Its development has in large part been stimulated by the cross-border provision of financial services, by their provision in foreign financial markets and by financial transactions between banking institutions with cross-border default risks. At the beginning of the 1970s, the idea was to facilitate the establishment and the operation of cross-border branch offices in order to meet these growing challenges. However, as a result of taxation impediments, the increasing implementation of the European internal market and the issue of a European banking market as well as its transferability to financial products have only been pursued since 1985 on the basis of the Commission’s White Paper and the Single European Act of 1986. In addition to these steps towards integration and the Basel regulatory capital standards, another decisive factor has to be mentioned, namely, the monetary union. By unifying instruments and policies at the European Central Bank, the euro has been a catalyst for a new phase of European integration.
2. Cornerstones of integration
From the end of the 1960s until today, the coordination of banking laws in the European Community has led to a far-reaching harmonization of the banking supervision laws in the European banking market. Thanks to the European passport it has been possible to implement these developments and at the same time maintain and recognize the power of authorities without the establishment of a European financial supervisory authority. In the course of these developments, admission procedures for banks and other financial service providers have been harmonized under the primary authority of the country of origin. In light of the breakdown of the Bank of Credit and Commerce International (BCCI) Group, these measures were extended to a regulation of the business activities of the banks in the 1990s. This regulation included questions of deposit insurance, the monitoring of large loans as well as the treatment of problems in the system of solvency supervision. It has been complemented by provisions for financial restructuring and liquidation.
Limits of the country of origin principle have become evident during the 2008/09 financial crisis and a supervisory structure has been developed and implemented to the effect that competences have been transferred—to a limited extent—to the Community (EU) level. The European Systemic Risk Board (ESRB) was established on 1 January 2011 as a new authority with responsibility for the macro-prudential oversight of the European financial system (ERSB Regulation 1092/2010). As a further part of a new regulatory architecture within the EU, three new European supervisory authorities (ESA) were created in January 2011: the European Banking Authority (EBA) (Regulation 1093/2010), superseding the Committee of Banking Supervisors; the European Securities and Markets Authority (ESMA) (Regulation 1095/2010), superseding the Committee of European Securities Regulators; and the European Insurance and Occupational Pensions Authority (EIOPA) (Regulation 1094/ 2010), superseding the Committee of European Insurance and Occupational Pension Supervisors. The key functions and powers of these authorities in relation to their respective sectors extend to rulemaking, supervision of individual financial institutions in the case of breach or non-application of EU law by a national regulator or disagreement between national regulators, coordination of national regulators in the case of their disagreement on issues concerning the interpretation of EU law, and investigation with regard to information at the micro-prudential level.
European regulation in private banking law so far has not been as far-reaching as that of supervisory law. Only a number of distinct areas, especially money transfers, have been regulated in several directives, thereby being harmonized under the legislation of the Member States with a view to guaranteeing an integrated European banking market. In addition, questions of consumer protection have been on the agenda of the European legislators’ regulatory activities in the field of Private European banking law with increased intensity since 2002.
Another determining factor for the recent development in the European banking market is the increase in financial conglomerates, whose activities span various sectors of the industry. Their all-finance concepts require a homogenous general supervision, if only for the purpose of an appropriate risk assessment. This has become particularly apparent during the 2008/09 financial crisis. Finally, there are current regulatory initiatives to fight terrorism, which are particularly directed against money laundering and the financing of terrorism.
3. Regulatory steps towards integration
The integration of the European banking market is based first and foremost on the fundamental freedoms (fundamental freedoms (general principles)), such as the freedom of establishment and the free movement of services, as well as the free movement of capital and payments according to Art 49 TFEU/43 EC, Art 56 TFEU/49 EC and Art 63 TFEU/56 EC. The subject matter of these freedoms covers the expansion of a Europe-wide network of branch offices and the cross-border provision of financial services to individuals at home and abroad. The fundamental freedoms and the idea of the European internal market as basic points of departure have led to a country of origin control mechanism (country of origin principle) and the principle of mutual recognition of supervision measures. This principle is an essential component of a decentralized supervision accomplished by way of Member States’ implementation of directives, even though it has been modified in response to the 2008/09 financial crisis as indicated above.
Directives play an important role in the integration of the European banking market, so that the coordination in the European banking market takes place in the ordinary legislative procedure according to Art 294 TFEU/251 EC which requires a cooperation of the Council of Ministers and the Parliament. The continuation and furtherance of integration in view of a European banking market has been carried out on the basis of the so-called ‘Financial Services Action Plan’. As a programmatic document and in light of its strategic objective, this plan was supposed to guarantee a consistent business customer market, ensure open and secure retail markets and modernize supervisory regulation and oversight. In view of the flaws of the ordinary legislative procedure, the Council appointed the Committee of the Wise Men under the chairmanship of Baron Lamfalussy, which proposed a four-step committee procedure. This procedure is also applicable by analogy in the area of banking and insurance, with the committee structures successively changing until 2005.
With the action plan now having been carried out to a large extent, the Commission presented a green paper on financial services policy (2005–2010) for discussion and consultation in 2005, which was followed by a White Paper on financial services policy for the years 2005–2010 issued as early as the same year.
4. Directives on the integration of the European banking market
The directives in the field of banking law have considerably promoted the coordination of the Member States in the banking sector and thereby greatly contributed to the integration of the European banking market. Several areas of regulation can be distinguished.
The First Council Directive on the coordination of banking law of 1977 (Dir 1977/780) and the Second Council Directive of 1989 (Dir 1989/ 646) have decisively shaped the beginning of the integration process. These two directives harmonize the possibilities of admitting and supervising credit institutions operating throughout the whole of Europe. The former directive defines the term ‘credit institution’ as well as the requirements to set up and operate its business. The Second Council Directive brought about a certain breakthrough for the implementation of a European banking market. In addition to the Commission’s White Paper for the Completion of the Single Market of 1985, it has considerably facilitated cross-border banking business by way of introducing a country of origin control. In this way, the admission in the country of origin amounts to a European passport. The Second Council Directive is supplemented by the Own Funds Directive (Dir 89/299) as well as the Solvency Directive (Dir 1989/647), which for banking operations in the Member States requires certain financial resources or, alternatively, a predetermined ratio between assets and off-balance sheet activities.
After the breakthrough in the question of admission, the legislator subsequently focused on deposit insurance (Deposit Guarantee Schemes Directive (Dir 94/19)). Under this directive, the Member States have the obligation to have in place a guarantee scheme covering the aggregate deposits of each depositor up to €20,000. This system aims to protect bank customers’ deposits and to ensure the trust of the public in the stability of the financial system. Especially in view of several banking crises and breakdowns (BCCI, Herstatt), Dir 92/121 supplements the Solvency Directive with better supervision of large loans. It does so by providing for a notification requirement for large loans which amount to 10 percent or more of the equity capital in Art 3(1) and by fixing 25 percent of the capital resources as the upper limit for large loans according to Art 4(1). As a result of the 2008/09 financial crisis, these rules have been tightened. Directive 2009/14 amending the Deposit Guarantee Schemes Directive now provides for a higher minimum guarantee level of €50,000, whilst committing itself to increasing the coverage level to €100,000.
An additional precautionary measure to be mentioned is the Capital Adequacy Directive of 1993 (Dir 93/6), which is primarily aimed at investment firms but which is also applicable to credit institutions whose securities business exceeds 5 percent of their entire transaction volume. The Directive centres on the specification of unified capital requirements for security-specific risks. In the aftermath of the collapse of the Barings Bank and as a result of further sophistication and partial tightening of banking supervision, the First Council Directive on the Coordination of Banking law, the Solvency Directive and the Capital Adequacy Directive were amended in 1998. Simultaneously, to accommodate the Basel capital regulations and especially the new Basel II Regulation, internal risk management systems of companies (so-called ‘value at risk models’) were admitted for the calculation of the capital requirements in accordance with the Capital Adequacy Directive. The implementation of these new regulatory systems as well as the pertinent amendment of the Capital Adequacy Directive (Dir 2006/49) were supposed to ensure the application of Basel II starting in 2007 on a European scale.
In the interest of better transparency, the above-mentioned supervisory directives, such as the Directive on the Coordination of Banking Legislation, the Capital Requirements, Solvency, Large Exposures and Deposit Insurance Directives as well as the amending directives following in the framework of the SLIM-Initiative (Simpler Legislation for the Internal Market), were consolidated by the Commission into a comprehensive Banking Directive 2000 (Dir 2000/12) without modification in terms of content. As a result of the 2008/09 financial crisis, the Directive of the European Parliament and of the Council amending Directives 2006/48, 2006/49 and 2007/ 64 regarding banks affiliated to central institutions, certain own funds items, large exposures, supervisory arrangements and crisis management was adopted in July 2009 in order to improve the supervision of cross-border financial groups, the quality of bank capital, liquidity risk management and risk management for structured products. Later, in September 2009 the Capital Requirements Directive II, covering amendments related to own funds, large exposures, supervisory arrangements, qualitative standards for liquidity risk management and securitization, was adopted. It entered into force on 31 December 2010 and consists of revision Directives 2009/27/EC, 2009/83/EC and 2009/111/ EC. A further revision of the capital requirements for banks was implemented by the Capital Requirements Directive III. It is designed to tighten up the way in which banks assess the risks connected with their trading book, impose higher capital requirements for re-securitizations, increase market confidence through stronger disclosure requirements for securitization exposures, and require banks to have sound remuneration practices that do not encourage or reward excessive risk-taking. Member States must implement the capital changes by 31 December 2011. Further changes to the Capital Requirements Directive are being undertaken in the future Capital Requirements Directive IV, translating into legislation global standards by covering the Basel III sections on the definition of capital, liquidity standards, leverage ratio, counterparty credit risk and counter-cyclical measures. The Capital Requirements Directive IV will be implemented at the end of 2012 at the earliest. Furthermore, the increasing threat to financial markets resulting from expanding financial conglomerates has led to the enactment of the Financial Conglomerates Directive of 2002 (Dir 2002/87) in the field of supervision law. It meets the particular dangers of a multiple gearing of capital (so-called double or excessive gearing) in a cross-sector financial group with measures for the calculation of solvency and risk assessment both specifically targeted at financial conglomerates. In light of the 2008/09 financial crisis, in 2010 an amendment to the Financial Conglomerates Directive was proposed by the European Commission addressing technical omissions of the Financial Conglomerates Directive of 2002 and supplementary supervision of interlinkages within financial groups and among financial institutions.
Finally, the First Anti-Money Laundering Directive (Dir 91/308), modified by Dir 2001/97, is aimed against money laundering and the later Directive (Dir 2005/60) against the use of the financial systems for the purpose of money laundering and the financing of terrorism.
Besides supervision law, the law of money transfers is of utmost importance for banking law relevant for the single market because unrestrained money transfers are key to the business of banks operating community-wide. The first directive was the one on Cross-border Credit Transfers (Credit Transfers Directive) of 1997 (Dir 97/5), which was amended by a mandatory regulation of the level of fees for payments within the internal market in Dir 2560/2001, which was later replaced by Regulation 924/2009. Likewise, Dir 2000/28, Dir 2000/46 (First Electronic Money Directive), and Dir 2009/110 (Second Electronic Money Directive) affect important questions of monetary transactions, touching on the issue of electronic money by credit institutions and non-credit institutions. Ultimately, the Single Euro Payments Area (SEPA), having started on 28 January 2008 and being part of a framework which has been worked on by the Commission since 2001, is of great significance for cross-border monetary transactions. Its legal basis now is the Payment Services Directive of 13 November 2007 (Dir 2007/64), which came into force on 1 November 2009. It provides for the adoption of modern and comprehensive regulations and applies to all payment services within the European Union. By these means, cross-border payments are to become as easy, efficient and secure as ‘national’ payments within a Member State, and an EU-wide single market for payments is to be created and opened for new entrants.
Despite these objectives primarily relating to competition, there are, in conclusion, further directives to be mentioned which regulate the European banking market and which can be categorized as consumer protection rules, an area of particular importance in the field of financial services. Therefore, it comes as no surprise that the directive on distance contracts of financial services (Dir 2002/65) as well as work on security in immovable property (euro-mortgage) are highly relevant in this field of consumer protection.
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