Banking and Financial Regulation

This chapter provides a basic overview of banking and financial regulation for the forthcoming Oxford Handbook of Law and Economics (Francesco Paris, ed.). Among other things, the chapter compares traditional and shadow banking and their regulation, differentiating “micro prudential” regulation (which focuses on protecting individual components of the financial system, such as banks) and “macro prudential” regulation (which focuses on protecting against systemic risk). The chapter also examines how regulation can help to correct market failures that undermine financial efficiency. In that context, it discusses, among other things, capital requirements, ring-fencing, and stress testing. Finally, the chapter examines how regulation can help to protect against systemic risk, including by addressing potential triggers of systemic risk (such as maturity transformation—the asset-liability mismatch that results from the short-term funding of long-term projects—and limited liability)

Legal, compliant and suitable: The ECB‘s Pandemic Emergency Purchase Programme (PEPP).BertelsmannStiftung/jacques Delors Centre Policy Brief 25 March 2020

The ECB has announced a 750-billion-euro purchase programme to fight the economic impact of the COVID-19 pandemic. But like all ECB programmes in recent years, the new Pandemic Emergency Purchase Programme (PEPP) will likely be challenged in court. This policy brief assesses whether the PEPP will likely survive a legal challenge. It argues that the PEPP is compatible with EU law because it meets the three criteria the Court of Justice of the EU has established to check the legality of monetary policy measures: First, the PEPP falls within the ECB’s mandate. Second, it respects the principle of proportionality. And third, it does not violate the prohibition of monetary financing. This assessment even holds if the ECB were to relax some of the constraints in the PEPP like the issuer limit currently applicable to other bond-buying programmes

Restructuring a Sovereign Debtor’s Contingent Liabilities

How should the contingent liabilities of a sovereign be treated in a general restructuring of the debts of that sovereign? This question has played only a minor role in past sovereign debt restructurings because the size of such contingent liabilities has in most cases been small. In recent years, however, slathering government guarantees on third party debt has become the tool of choice for many countries in their efforts to quell an incipient panic in their financial markets. Some of those sovereigns are now, or may soon be, in the position of needing to restructure their debts. Ignoring large contingent liabilities in a sovereign debt restructuring may plant a land mine on the road to debt sustainability once the restructuring closes. That said, the answers to the questions of whether and how to restructure contingent liabilities are not obvious. Is the restructurer to assume that some, all or none of those contingent liabilities will eventually wind up as direct claims against the sovereign? Even if the underlying instrument can be successfully restructured, the guarantee will typically stand as an independent obligation of the guarantor that will require separate treatment in the restructuring

Legal, compliant and suitable: The ECB‘s Pandemic Emergency Purchase Programme (PEPP). Bertelsmann Stiftung Policy Brief March 2020.

The ECB has announced a 750-billion-euro purchase programme to fight the economic impact of the COVID-19 pandemic. But like all ECB program- mes in recent years, the new Pandemic Emergency Purchase Programme (PEPP) will likely be challenged in court. This policy brief assesses whether the PEPP will likely survive a legal challenge. It argues that the PEPP is com- patible with EU law because it meets the three criteria the Court of Justice of the EU has established to check the legality of monetary policy measu- res: First, the PEPP falls within the ECB’s mandate. Second, it respects the principle of proportionality. And third, it does not violate the prohibition of monetary financing. This assessment even holds if the ECB were to relax some of the constraints in the PEPP like the issuer limit currently applicable to other bond-buying programmes

Legal, compliant and suitable: The ECB‘s Pandemic Emergency Purchase Programme (PEPP)

The ECB has announced a 750-billion-euro purchase programme to fight the economic impact of the COVID-19 pandemic. But like all ECB programmes in recent years, the new Pandemic Emergency Purchase Programme (PEPP) will likely be challenged in court. This policy brief assesses whether the PEPP will likely survive a legal challenge. It argues that the PEPP is compatible with EU law because it meets the three criteria the Court of Justice of the EU has established to check the legality of monetary policy measures: First, the PEPP falls within the ECB’s mandate. Second, it respects the principle of proportionality. And third, it does not violate the prohibition of monetary financing. This assessment even holds if the ECB were to relax some of the constraints in the PEPP like the issuer limit currently applicable to other bond-buying programmes

The impact of the energy-induced EU recession on Sub-Saharan Africa

The EU is one of the three largest economies in the world. But its economy, which is still suffering from the COVID-19 pandemic and the negative effects of the Russian war in Ukraine, faces a bleak outlook. Inflation, or even stagflation, is a major concern as it reflects cost pressures from disrupted supply chains and tight labor markets. The war in Ukraine could also lead to a sustained stop in European gas supplies from Russia. Fitch Ratings therefore forecast the likelihood of a technical recession in the euro zone due to ongoing gas rationing. Apparently the EU is at the mercy of two unpredictable powers, Putin and the weather. China is also affected by global imbalances, and when China coughs, Europe catches the flu. However, the risks are greatest in sub-Saharan Africa. Its global growth spillovers come mainly from the EU and the BRICS countries. In addition to its strong demographic growth, the continent is already suffering from climate change, including prolonged droughts, and political destabilization, particularly in the Sahel, Horn of Africa and East Africa. The two major African powers, Nigeria and South Africa, are currently going through major socioeconomic crises. Many sub-Saharan African countries are heavily dependent on energy and food imports, particularly wheat from Russia and Ukraine. For the approximately 30 million African poor, this means an increase in inequality. A recession in Europe would amplify external pressures and growth challenges. In addition, the emerging sub-Saharan markets bear the greatest export risk to the EU. The debt problem is also looming again, because lower global commodity prices slowed down economic growth.Die EU gehört zu den drei größten Volkswirtschaften der Welt. Doch ihre Wirtschaft, die immer noch unter der Corona-Pandemie und den negativen Auswirkungen des russischen Krieges in der Ukraine leidet, sieht sich düsteren Aussichten gegenüber. Inflation oder sogar Stagflation geben Anlass zu großer Sorge, da sie den Kostendruck durch unterbrochene Lieferketten und angespannte Arbeitsmärkte widerspiegeln. Der Krieg in der Ukraine könnte zudem zu einem anhaltenden Stopp der europäischen Gaslieferungen aus Russland führen. Fitch Ratings prognostizierte daher eine technischen Rezession in der Eurozone aufgrund der anhaltenden Gasrationierung. Offenbar ist die EU der Gnade zweier schwer einzuschätzender Mächte ausgesetzt, Putin und dem Wetter. Auch China ist von globalen Ungleichgewichten betroffen, und wenn China hustet, bekommt Europa die Grippe. In Subsahara-Afrika sind die Risiken jedoch am größten. Seine globalen Wachstums-Spillover-Effekte kommen hauptsächlich aus der EU und den BRICS-Staaten. Neben seinem starken demografischen Wachstum leidet der Kontinent bereits unter dem Klimawandel, einschließlich anhaltender Dürren, sowie politischer Destabilisierung, insbesondere in der Sahelzone, am Horn von Afrika und in Ostafrika. Die beiden afrikanischen Großmächte, Nigeria und Südafrika, durchleben derzeit große sozioökonomische Krisen. Viele afrikanische Länder südlich der Sahara sind stark abhängig von Energie- und Lebensmittelimporten, insbesondere von Weizen aus Russland und der Ukraine. Für die rund 30 Millionen afrikanischen Armen bedeutet dies eine Verschärfung der Ungleichheit. Eine Rezession in Europa würde externe Belastungen und Wachstumsherausforderungen verstärken. Darüber hinaus tragen die aufstrebenden Subsahara-Märkte das größte Exportrisiko in die EU. Auch die Schuldenproblematik droht erneut, denn niedrigere globale Rohstoffpreise bremsten das Wirtschaftswachstum

The Gathering Storm: Restructuring Sovereign Contingent Liabilities

The contingent liabilities of a sovereign, such as guarantees of the debts of third parties, can normally be kept off the balance sheet of the sovereign guarantor. That is their charm. As the debt to GDP ratios of many developed countries approach red-zone levels, contingent liabilities are increasingly being favored over direct, on-the-balance-sheet, borrowings. But what happens if a country carrying large contingent liabilities needs to restructure its debt? The borrower dare not leave its contingent claims out of the restructuring. To do so would risk undermining the financial predicates of the sovereign’s economic recovery program should the beneficiaries of the guarantees demand payment in full after the restructuring closes. Attempting to shoehorn sovereign contingent liabilities into a debt restructuring, however, is a particularly challenging task. There are few precedents for how to do so, and no good precedents. The explosion in the size of contingent sovereign obligations since the financial crisis began in 2008 inevitably means that these issues will need to be confronted sooner or later, probably sooner

The Gathering Storm: Restructuring Sovereign Contingent Liabilities

The contingent liabilities of a sovereign, such as guarantees of the debts of third parties, can normally be kept off the balance sheet of the sovereign guarantor. That is their charm. As the debt to GDP ratios of many developed countries approach red-zone levels, contingent liabilities are increasingly being favored over direct, on-the-balance-sheet, borrowings. But what happens if a country carrying large contingent liabilities needs to restructure its debt? The borrower dare not leave its contingent claims out of the restructuring. To do so would risk undermining the financial predicates of the sovereign’s economic recovery program should the beneficiaries of the guarantees demand payment in full after the restructuring closes. Attempting to shoehorn sovereign contingent liabilities into a debt restructuring, however, is a particularly challenging task. There are few precedents for how to do so, and no good precedents. The explosion in the size of contingent sovereign obligations since the financial crisis began in 2008 inevitably means that these issues will need to be confronted sooner or later, probably sooner

L'impact d'une récession européenne déclenchée par la crise énergétique sur l'Afrique subsaharienne

L'UE est l'une des trois plus grandes économies du monde. Mais leur économie, qui souffre toujours de la pandémie de COVID-19 et des effets négatifs de la guerre russe en Ukraine, fait face à de sombres perspectives. L'inflation, voire la stagflation, est une préoccupation majeure, car elle reflète les pressions sur les coûts des chaînes d'approvisionnement perturbées et des marchés du travail tendus. La guerre en Ukraine pourrait également entraîner un arrêt durable des approvisionnements européens en gaz depuis la Russie. Fitch Ratings prévoit donc une récession technique dans la zone euro en raison de la poursuite du rationnement du gaz. Apparemment, l'UE est à la merci de deux puissances imprévisibles, Poutine et de la météo. La Chine est également touchée par les déséquilibres mondiaux, et quand la Chine tousse, l'Europe attrape la grippe. Cependant, les risques sont les plus grands en Afrique subsaharienne. Ses retombées sur la croissance mondiale proviennent principalement de l'UE et des pays BRICS. Outre sa forte croissance démographique, le continent souffre déjà du changement climatique, notamment de sécheresses prolongées, et de déstabilisation politique, notamment au Sahel, dans la Corne de l'Afrique et en Afrique de l'Est. Les deux grandes puissances africaines, le Nigeria et l'Afrique du Sud, traversent actuellement des crises socio-économiques majeures. De nombreux pays d'Afrique subsaharienne sont fortement dépendants des importations d'énergie et de denrées alimentaires, en particulier du blé en provenance de Russie et d'Ukraine. Pour les quelque 30 millions d'Africains pauvres, cela signifie une augmentation des inégalités. Une récession en Europe amplifierait les pressions externes et les défis de la croissance. En outre, les marchés subsahariens émergents supportent le plus grand risque d'exportation vers l'UE. Le problème de la dette se profile également à nouveau, car la baisse des prix mondiaux des matières premières a ralenti la croissance économique.The EU is one of the three largest economies in the world. But its economy, which is still suffering from the COVID-19 pandemic and the negative effects of the Russian war in Ukraine, faces a bleak outlook. Inflation, or even stagflation, is a major concern as it reflects cost pressures from disrupted supply chains and tight labor markets. The war in Ukraine could also lead to a sustained stop in European gas supplies from Russia. Fitch Ratings therefore forecast the likelihood of a technical recession in the euro zone due to ongoing gas rationing. Apparently the EU is at the mercy of two unpredictable powers, Putin and the weather. China is also affected by global imbalances, and when China coughs, Europe catches the flu. However, the risks are greatest in sub-Saharan Africa. Its global growth spillovers come mainly from the EU and the BRICS countries. In addition to its strong demographic growth, the continent is already suffering from climate change, including prolonged droughts, and political destabilization, particularly in the Sahel, Horn of Africa and East Africa. The two major African powers, Nigeria and South Africa, are currently going through major socioeconomic crises. Many sub-Saharan African countries are heavily dependent on energy and food imports, particularly wheat from Russia and Ukraine. For the approximately 30 million African poor, this means an increase in inequality. A recession in Europe would amplify external pressures and growth challenges. In addition, the emerging sub-Saharan markets bear the greatest export risk to the EU. The debt problem is also looming again, because lower global commodity prices slowed down economic growth

L'impact d'une récession européenne déclenchée par la crise énergétique sur l'Afrique subsaharienne

The EU is one of the three largest economies in the world. But its economy, which is still suffering from the COVID-19 pandemic and the negative effects of the Russian war in Ukraine, faces a bleak outlook. Inflation, or even stagflation, is a major concern as it reflects cost pressures from disrupted supply chains and tight labour markets. The Russian invasion of Ukraine could also lead to a sustained stop in European gas supplies from Russia. Fitch Ratings forecast the likelihood of a technical recession in the eurozone due to ongoing gas rationing. Apparently, the EU is at the mercy of two unpredictable powers, Putin and the weather. Moreover, China is also affected by global imbalances, and when China coughs, Europe catches the flu. However, the risks are greatest in sub-Saharan Africa. Its global growth spillovers come mainly from the EU and the BRICS countries. In addition to its strong demographic growth, the continent is already suffering from climate change, including prolonged droughts, and political destabilization, particularly in the Sahel, Horn of Africa and East Africa. The two major African powers, Nigeria and South Africa are currently going through major socio-economic crises. Many sub-Saharan African countries are heavily dependent on energy and food imports, particularly wheat from Russia and Ukraine. For the approximately 30 million African poor, this means a further increase in inequality. A recession in Europe would amplify external pressures and growth challenges. In addition, the emerging sub-Saharan markets bear the greatest export risk to the EU. The debt problem is also looming again because lower global commodity prices slowed down economic growth