Well over a decade ago, in the aftermath of the financial and euro crisis, the European Commission came up with the idea of a common system for protecting bank depositors – the European deposit insurance scheme (EDIS). At the time, it seemed important that everything in the EU was shared. Very little attention was paid to whether things actually need to be done at the EU level – even though the principle of subsidiarity is one of the EU’s leading legal principles.
Legislators in Brussels or in the member states did not give much thought to whether simpler could be better or whether national measures could be enough. They wanted to extend the deposit protection scheme to include joint liability across member states and use it to cover the losses of investors. Some still do. But would this even be necessary anymore?
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Legislators in Brussels or in the member states did not give much thought to whether simpler could be better or whether national measures could be enough.
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Over the past five years, the EU’s vulnerabilities and poor preparation for the current economic and geopolitical situation have been exposed time and again. As a result, the EU has taken the first steps to correct the course. At least in political soapbox speeches, there seems to be an understanding that the EU has overregulated itself into a corner globally speaking. It has finally been understood that regulation is not in fact a celebrated export commodity, but an obstacle to the EU’s economic growth and development and a barrier to a higher standard of living for EU citizens.
And this is unfortunately where the good news seem to end. Although overregulation is seen as a real problem, regulators are not slowing down. What is more, they are also cautioning against reducing the regulatory burden, unwilling to give an inch.
One reason for this could be that current regulation is so layered, complex and even conflicting that it is easy to get lost in the details and lose sight of the big picture. In other words, they are not seeing the wood for the trees. Another reason could be that rationalising regulation could take power away from the authorities. Economic stability could also be a concern, although nobody has suggested large-scale deregulation, only more rational regulation.
The banking union’s structures are also in need of streamlining; the aims of regulation could be reached through much easier means. If legislators stopped to carefully review the regulatory framework, they would notice that they have spent more than a decade regulating the same things over and over.
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Against this backdrop, it seems almost impossible that a bank could fail at all.
Then again, the situation makes it difficult for banks to finance economic growth by taking risks and growing their business.
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The obligations imposed on banks have reached such a massive scale that they have started to affect not only the operations of banks themselves, but the entire economy. To exaggerate a tiny bit, banks must now report every keystroke and flip of a paper to supervisors. Supervisors seem to have somehow become the highest authorities on banking, instructing banks on how to run their business. The extent of data and control supervisors have on banks’ capital, liquidity, business processes, risks, organisation and the management’s competence is extremely detailed, even overly detailed.
Against this backdrop, it seems almost impossible that a bank could fail at all. Then again, the situation also makes it difficult for banks to finance economic growth by taking risks and growing their business.
And on the odd chance that a bank should fail, either an EU or a national resolution authority will have a detailed plan for winding the bank down in a controlled fashion. The bank itself must have processes in place for this, and its agreements and organisational structure must also allow for it to be winded down. And if that is not enough in itself, the resolution authority also requires banks to do supervised dry runs.
EU regulation is not a panacea. The EU should focus its efforts decidedly on improving competitiveness and promoting economic growth.
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