European Banking Union: assessing its risks and resilience

On 4 November 2014 the EU’s ambitious Banking Union (BU) project reached a major milestone when the Single Supervisory Mechanism became operational. After difficult negotiations, the legal regime supporting the Single Resolution Mechanism is now in place; BU is becoming a reality. This article charts how the EU, long a regulator of the EU banking market, has grappled with the operational elements of banking system governance in constructing BU. It suggests that BU’s foundational regulatory technology is relatively robust, given the difficult political, institutional, and Treaty conditions which attended its construction; initial indications relating to the Single Supervisory Mechanism augur well. But the article also highlights the many uncertainties which attend BU, notably with respect to operational effectiveness, constitutional resilience, and the euro area/internal market asymmetry, and which may have far-reaching effects on EU banking market governance generally

Financial services, the EU, and Brexit: an uncertain future for the city?

The financial services industry is of central importance to the UK economy. It represents some 7% of GDP. It also generates major exports for the UK - in the region of one-third of UK financial services are exported to the EU. News reports in the immediate aftermath of the referendum result included the sharp drop in banking stocks; the overtures being made to attract UK financial business away from the City to other EU centres; and plans by leading financial institutions to move some operations away from the City. Vivid illustrations all of the importance of the Brexit vote for the City and the UK financial services industry. The financial services sector is one of the most heavily regulated sectors of the modern economy, reflecting the need to protect the public interest in a strong and stable financial sector. The EU has, up to now, provided the framework within which UK regulation of the financial sector has been designed, applied, and supervised. The nature of the UK’s relationship with the EU following its exit from the EU has yet to be determined. But the consequences of the extraction of the UK from EU financial governance are likely to be disruptive in nature and long term in duration. This short note highlights some of the many implications from a regulatory perspective

Institutional governance and capital markets union: incrementalism or a ‘big bang’?

This article considers the institutional governance issues raised by Capital Markets Union (CMU). It suggests that the preferences of administrative actors are likely to have a determinative influence on the evolution of institutional governance as the CMU agenda rolls out. Specifically, the incentives, powers, and preferences of ESMA (the European Securities and Markets Authority) are likely to have strong effects on how institutional governance for the EU capital market develops. Member States’ preferences will continue to have a strong influence but this is most likely with respect to whether further centralization of institutional governance in the euro area will occur. The article also considers the likely pace and nature of the evolution of institutional governance for the EU capital market in light of the CMU agenda. It draws on the insights of experimentalist governance and on empirical observation of ESMA’s recent activities to suggest that incremental change, rather than a ‘big bang’ is likely, and that a further but gradual centralization of regulatory and supervisory governance will follow. It remains to be seen whether the CMU agenda injects an accelerating factor into this evolutionary process or, conversely, and by distracting the EU from necessary institutional reforms, disrupts incremental developments

The 2013 Capital Requirements Directive IV and Capital Requirements Regulation: implications and institutional effects

Abstract This survey article considers the background to and major features of the behemoth 2013 CRD IV/CRR regime which governs the prudential regulation and supervision of banks and investment firms in the EU. The CRD IV/CRR regime is in its infancy. Initial empirical assessments suggest, however, that while it is likely to strengthen bank stability, it may also contribute to a contraction in the funding capacity of the EU financial system. While the ultimate effects of CRD IV/CRR are unclear, it can reasonably be speculated that unintended and potentially prejudicial effects may arise. This article suggests that the extent to which CRD IV/CRR can be applied flexibly, amplified and corrected reasonably easily, and supervised in a manner which supports consistency of application across the EU as well as an appropriate level of national supervisory discretion, will therefore have a significant influence on the ability of the EU to mitigate the risk of these effects arising. After reviewing the background to and major features of CRD IV/CRR, the article considers the extent to which the harmonization model deployed under CRD IV/CRR, the EU’s regulatory capacity to amplify and correct CRD IV/CRR, and the supervisory governance arrangements which support CRD IV/CRR are likely to mitigate the risks of unintended and prejudicial effects

The European Union in international financial governance

This article considers the role of the European Union in international financial governance after the institutional reforms it undertook in connection with the global financial crisis. It suggests that the new administrative actors that support the governance of the European Union's single financial market, notably the European Supervisory Authorities, have the potential to reshape how the European Union engages with international financial governance. It finds that the European Union’s effectiveness in influencing international financial governance—and the effectiveness of international financial governance more generally—is likely to strengthen as a result

International financial governance, the EU, and Brexit: the ‘agencification’ of EU financial governance and the implications

This article argues that the forces which shape how the EU engages with international financial governance are changing and that the implications for the EU’s ability to impose its preferences internationally are significant. It suggests that this change is being driven by two related factors. First, the European Supervisory Authorities (ESAs), with their distinct incentives, preferences, and powers, have recently come to prominence in international financial governance. Second, as international financial governance pivots from being preoccupied with standard-setting to becoming concerned with operational matters there is greater potential for influence to be exerted by administrative actors such as the ESAs. This article uses the European Securities and Markets Authority – which is the most active ESA internationally – as a case study for examining the implications of the availability of a technocratic administrative channel through which the EU can engage with international financial governance. It also offers some predictions as to the implications of the Brexit decision for the ESAs as international actors and for the UK’s interaction with international financial governance

Reflections on the EU third country regime for capital markets in the shadow of Brexit

This article considers the recent evolution of the EU's third country regime for capital market access in light of Brexit, the important series of legislative reforms adopted in March 2019 as the 2014-2019 European Parliament/Commission term closed, and the emergence of the European Securities and Markets Authority (ESMA) as a material technocratic influence. The article suggests that while the capital market third country regime is changing (with Brexit a key but not exclusive driver of change), it is not being radically recast, although it is tightening. The regime remains broadly based on the more-or-less liberal 'deference' model which has long characterised EU third-country financial services policy. But it is becoming increasingly 'on-shored' by means of the direct application of EU rules and by ESMA's oversight/supervision of certain third country actors. The significantly more restrictive approach being taken to third country central clearing counterparties is a marked development, but here the political and economic context is distinct. The implications of the overall shift towards a more 'on-shore', centralised, and potentially restrictive access regime are considered, and a modest reform prescription is offered

Brexit, the EU and its investment banker: rethinking ‘equivalence’ for the EU capital market

The EU/UK negotiations on Brexit are now imminent following the formal notification by Prime Minister May of the UK’s intention to leave the EU in the ‘Article 50 letter’ delivered to European Council President Tusk on 29 March 2017. The treatment of financial services will be a critical element of these negotiations. Prime Minister May had previously indicated in her 17 January 2017 speech on the UK’s negotiating objectives that the UK is to leave the single market and confirmed this position in the Article 50 letter. Under current EU financial law the UK will accordingly become a ‘third country’ on Brexit. UK financial firms and actors will lose the ability to ‘passport’ into the single market in financial services from the UK – unless passporting rights are preserved under any new EU/UK arrangement, an outcome which is highly unlikely. This paper considers the risks to the EU from its oft-described ‘investment banker’ becoming a third country and explores the regulatory remedies which may be available and the preferences which may shape these remedies. The paper adopts a legal-institutionalist perspective, which draws on the insights of comparative/international political economy, to examine the implications of the UK’s future status as a ‘third country’ for the EU capital market and for its current flagship Capital Markets Union (CMU) agenda. The extent to which EU regulation is transformative is contested in relation to the development of the EU capital market. But the EU regulatory regime which governs third country access to the EU capital market is likely to be a significant determinant of the strength of the EU’s capacity to absorb the loss of the UK from the single EU capital market and to contain related stability, liquidity, and efficiency risks. Drawing on international experience with access arrangements and on EU preferences and incentives, the paper considers the likely future of the current third country regime and how it might be re-configured so that third country access is based on a more secure footing

LSE Law Brexit special #6: negotiating a financial services deal

The upcoming negotiations on the UK’s exit from the EU can be expected to take particular account of financial services, the treatment of which has dominated much of the policy discourse on Brexit since June 2016