Cross-border resolution of failed banks in the EU: A search for the second-best policies

This paper analyzes the reasons for the failure of the multilateral resolution of EU cross-border banks such as Fortis. We argue that the pre-crisis regime based on soft law and voluntary coordination was unable to align the incentives of national authorities acting under the time pressure and uncertainty of a banking crisis. We ask whether this experience induced the Commission to propose reforms that would close the regulatory gap between integrated cross-border banks and national resolution regimes. Although, the Commission proposals submitted within a year of the crisis considered the more radical reform options, such as shifting the regime to the EU level or reorganizing cross-border banks so that they could be resolved on the national level, in the end the Commission supported the traditional reform path of deepening soft law and strengthening pre-crisis governance arrangements. At the same time, the new financing mechanisms introduced to stabilize the Eurozone can pave the way for the introduction of an EU-level bank resolution regime, when the next reform opportunity arises.political science; European Commission

Regulatory aftermath of banking rescues: More Europe or business as usual?

This paper analyzes the EU experience with the cross-border banking failures during the crisis and evaluates the post-crisis reform proposals in the light of this experience. It shows that the Commission considered substantive reforms that would shift the crossborder bank resolution regime to the EU level to match the operational presence of pan- European banks. However, the political compromises on the European System of Financial Supervisors in the Council, led the Commission to withdraw from more ambitious proposals in favor of gradual improvements of the pre-crisis status quo. The reformed structures are still too complex to be functional in real-time under the pressure of a financial crisis and they leave too many crucial issues such as sharing of information and of fiscal burdens in the domain of non-binding soft law agreements yet to be prepared by supervisory colleges. The new framework does not change the exclusively national accountability of supervisory authorities, thus the new regime is unlikely to prevent non-cooperative resolution strategies. The first round of post-crisis regulatory reforms brings in more Europe to the cross-border bank resolution regime, but just barely so

Banking reform in China: Driven by international standards and Chinese specifics

This paper reviews the progress of banking reforms in China over the last five years. The stated goal of reform is to “transform major banks into internationally competitive joint‐stock commercial banks with appropriate corporate governance structures, adequate capital, stringent internal controls, safe and sound business operations, quality services as well as desirable profitability.” The reform strategy relies on three pillars – extensive publicly financed bailouts, implementation of the international best practices in bank governance and regulation and listing of major banks at the Hong Kong stock exchange. This strategy has been successful in stabilizing the three major banks. However, our review of academic and commercial research indicates that there is no evidence that the stabilization is sustainable. Prudential indicators of the largest banks are comparable to international averages, but this is an outcome of large bail outs and ongoing credit boom rather than fundamental change in banker’s incentives. Reforms of bank governance and regulatory framework need more time to proliferate throughout the banking and regulatory hierarchies. However, time alone would not solve the problem as the reform design retains important departures from international standards. These standards are implemented in a selective manner; those aspects that help to concentrate key powers in the center are implemented rather vigorously, whereas principles that require independence of banks’ boards and regulators are ignored. Thus the largest Chinese banks remain under the firm state control and can be used as development policy tools for the better or the worse.China, banks, reform, international standards

Banking reform in China: Driven by international standards and Chinese specifics

This paper reviews the progress of banking reforms in China over the last five years. The stated goal of reform is to “transform major banks into internationally competitive joint‐stock commercial banks with appropriate corporate governance structures, adequate capital, stringent internal controls, safe and sound business operations, quality services as well as desirable profitability.” The reform strategy relies on three pillars – extensive publicly financed bailouts, implementation of the international best practices in bank governance and regulation and listing of major banks at the Hong Kong stock exchange. This strategy has been successful in stabilizing the three major banks. However, our review of academic and commercial research indicates that there is no evidence that the stabilization is sustainable. Prudential indicators of the largest banks are comparable to international averages, but this is an outcome of large bail outs and ongoing credit boom rather than fundamental change in banker’s incentives. Reforms of bank governance and regulatory framework need more time to proliferate throughout the banking and regulatory hierarchies. However, time alone would not solve the problem as the reform design retains important departures from international standards. These standards are implemented in a selective manner; those aspects that help to concentrate key powers in the center are implemented rather vigorously, whereas principles that require independence of banks’ boards and regulators are ignored. Thus the largest Chinese banks remain under the firm state control and can be used as development policy tools for the better or the worse

The EU Financial Market Policy: Evolution, Innovation and Research Outlook

This paper reviews the process of regulatory integration in the financial markets of the European Union. It shows that the regulatory framework for the single market in financial services has progressed in stages reflecting the evolution of EU policy-modes; from market opening to attempts at harmonization, to reliance on mutual recognition. The slow progress induced the EU to innovate its decision-making processes by introducing the Lamfalussy procedure in 2001. The new procedure accelerated the adoption of new regulations and is being adapted to ensure consistent enforcement across all EU jurisdictions. The next round of challenges to regulatory integration will stem from weak crisis management mechanisms revealed by the current crisis.financial markets; Euro; harmonisation; harmonisation; political science; regulation; regulatory politics; joint decision making

Conflict among member states and the influence of the Commission in EMU politics

The recent reforms of the euro zone are best explained in three steps: (a) member states’ preferences were determined by national governments on the basis of their economic interests, which are interpreted through a distinct set of ideas, (b) the diverging preferences among member states translated into a straightforward intergovernmental bargaining setting, and (c) the European Commission maintained a leading role throughout the process of negotiating policy outcomes. On the interstate bargaining level, all major reform proposals were negotiated between two opposing groups of member states: one advocating for fiscal discipline and the other asking for more burden sharing and transfers. In this intergovernmental bargaining setting, the Commission was influential in policy negotiations and in turning the political compromises into reform outcomes. Taken together, the politics of euro zone reform were shaped by the conflict among two opposing coalitions of member states and the influential role of the Commission

The return of political risk: Foreign-owned banks in Eastern Europe

Political risk—risk that investments are damaged by policy action of authorities—increased during the financial crisis due to controversies about the distribution of accumulated losses among stakeholders. Authorities interconnected by cross-border banks considered unilateral policies that minimised losses for domestic stakeholders at the expense of their foreign counterparts. This is at odds both with the assumption behind financial integration which presumes multilateral responses to cross-border shocks and with the typical definition of political risks that ignores the fact that not only host-country, but also home-country authorities can create such risks. This paper recasts the definition of political risk and reviews instances when political risk materialised within the EU banking market between 2007 and 2011. The analysis reveals that the EU regulatory framework needs to be enhanced to contain resurgent political risks systematically rather than through ad hoc interventions of the EU and international bodies

Book Reviews

[Book reviews] Winiecki, J.: Transition Economies and Foreign Trade. London and New York: Routledge, 2002, 150 pp.; Olson, M.: Power and Prosperity: Outgrowing Communist and Capitalist Dictatorship. New York: Basic Books, 2000, 233 pp.; Krizsán, A. - Zentai, V. (eds): Reshaping Globalization - Multilateral Dialogues and New Initiatives. Budapest: Central European University Press, 2003, 327 pp

Analysing European Union Decision-Making during the Eurozone Crisis with New Data

The collection of articles in this special issue provides a comprehensive analysis of European Union decision-making during the Eurozone crisis. We investigate national preference formation and interstate bargaining related to major reforms of the Economic and Monetary Union. The analyses rely on the new ‘EMU Positions’ dataset. This dataset includes information about the preferences and saliences of all 28 EU member states and key EU institutions, regarding 47 contested issues negotiated between 2010 and 2015. In this introductory article, we first articulate the motivation behind this special issue and outline its collective contribution. We then briefly summarise each article within this collection; the articles analyse agenda setting, preference formation, coalition building, bargaining dynamics, and bargaining success. Finally, we present and discuss the ‘EMU Positions’ dataset.publishe