ROUTLEDGE INTERNATIONAL STUDIES IN MONEY AND BANKING European Banking Union Prospects and challenges Edited by Juan E Castañeda, David G Mayes and Geoffrey Wood European Banking Union Recent failures and rescues of large banks have resulted in colossal costs to society In the wake of such turmoil a new banking union must enable better supervision, pre-emptive coordinated action and taxpayer protection While these aims are meritorious they will be difficult to achieve This book explores the potential of a new banking union in Europe This book brings together leading experts to analyse the challenges of banking in the European Union While not all contributors agree, the constructive criticism provided in this book will help ensure that a new banking union will mature into a stable, yet vibrant, financial system that encourages the growth of economic activity and the efficient allocation of resources This book will be of use to researchers interested in banking, monetary economics and the European Union Juan E Castañeda is lecturer in economics, University of Buckingham and deputy director, Institute of International Monetary Research, UK David G Mayes is professor of banking and financial institutions; chairman, Europe Institute; and director, NZ Governance Centre, University of Auckland, New Zealand Geoffrey Wood is emeritus professor, University of Buckingham and Cass Business School, UK Routledge International Studies in Money and Banking For a complete list of titles in this series, please visit www.routledge.com 57 The New International Monetary System Essays in honour of Alexander Swoboda Edited by Charles Wyplosz 58 Taxation and Gender Equity A comparative analysis of direct and indirect taxes in developing and developed countries Edited by Caren Grown and Imraan Valodia 59 Developing Alternative Frameworks for Explaining Tax Compliance Edited by James Alm, Jorge Martinez-Vazquez and Benno Torgler 60 International Tax Coordination An interdisciplinary perspective on virtues and pitfalls Edited by Martin Zagler 61 The Capital Needs of Central Banks Edited by Sue Milton and Peter Sinclair 62 Monetary and Banking History Edited by Geoffrey E Wood, Terence Mills and Nicholas Crafts 63 New Approaches to Monetary Economics and Theory Interdisciplinary perspectives Edited by Heiner Ganßmann 64 Social Banks and the Future of Sustainable Finance Edited by Olaf Weber and Sven Remer 65 Policy Makers on Policy The Mais lectures Edited by Forrest H Capie and Geoffrey E Wood 66 Prediction Markets Theory and applications Edited by Leighton Vaughan Williams 67 Towards a Socioanalysis of Money, Finance and Capitalism Beneath the surface of the financial industry Edited by Susan Long and Burkard Sievers 68 Doing Money Heiner Ganßmann 69 Banking Regulation and the Financial Crisis Jin Cao 70 Banking Crises, Liquidity and Credit Lines A macroeconomic perspective Gurbachan Singh 71 New Paradigms in Financial Economics How would Keynes reconstruct economics? Kazem Falahati 72 Risk, Risk Management and Regulation in the Banking Industry The risk to come Peter Pelzer 78 Monetary Policy in Theory and Practice Facing the internal vs external stability dilemma Nicolas Barbaroux 79 New Contributions to Monetary Analysis The foundations of an alternative economic paradigm Edited by Faruk Ülgen (with the collaboration of Matthieu Méaulle, Rémi Stellian and Ramón Tortajada) 80 Money and its Origins Shahzavar Karimzadi 73 Financial Systems in Troubled Waters Information, strategies, and governance to enhance performances in risky times Edited by Alessandro Carretta and Gianluca Mattarocci 81 Cultures of Expertise in Global Currency Markets Leon Wansleben 74 Reforming the Governance of the Financial Sector Edited by David G Mayes and Geoffrey Wood 83 A New Measure of Competition in the Financial Industry The Performance-ConductStructure Indicator Edited by Jacob A Bikker and Michiel van Leuvensteijn 75 Money in Economic Theory Hasse Ekstedt 76 New Perspectives on Emotions in Finance The sociology of confidence, fear and betrayal Edited by Jocelyn Pixley 77 Global Finance in Emerging Market Economies Todd A Knoop 82 The Global Financial Crisis and the New Monetary Consensus Marc Pilkington 84 Money, Valuation and Growth Conceptualizations and contradictions of the money economy Hasse Ekstedt 85 European Banking Union Prospects and challenges Edited by Juan E Castañeda, David G Mayes and Geoffrey Wood European Banking Union Prospects and challenges Edited by Juan E Castañeda, David G Mayes and Geoffrey Wood First published 2016 by Routledge Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2016 selection and editorial material, Juan E Castañeda, David G Mayes and Geoffrey Wood; individual chapters, the contributors The right of the editors to be identified as the authors of the editorial material, and of the authors for their individual chapters, has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988 All rights reserved No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloguing in Publication Data European banking union : prospects and challenges / edited by Juan E Castañeda, David G Mayes and Geoffrey Wood — First Edition pages cm Includes bibliographical references and index Banks and banking—European Union countries European Union countries—Economic policy Monetary policy—European Union countries Banking law—European Union countries I Castañeda, Juan E., editor II Mayes, David G., editor III Wood, Geoffrey, 1925- editor HG2980.5.A6E877 2015 332.1094—dc23 2015023397 ISBN: 978-1-138-90650-1 (hbk) ISBN: 978-1-315-69546-4 (ebk) Typeset in Times New Roman by Swales & Willis Ltd, Exeter, Devon, UK This book is dedicated to Yolande Hinson, who with good humour and friendly efficiency organised the conference which brought all the authors together She served as senior administrator in the University of Buckingham’s department of economics and international studies from 2012 until early 2015, when she died after a short illness Contents List of figures List of tables List of contributors Preface Acknowledgements   Banking union in Europe xi xii xiii xv xvii JUAN E CASTAÑEDA, DAVID G MAYES AND GEOFFREY WOOD   Banking union: the way forward 23 THOMAS F HUERTAS   Plausible recovery and resolution plans for cross-border financial institutions 38 GIANNOULA KARAMICHAILIDOU AND DAVID G MAYES   The Cyprus debacle: implications for the European banking union 67 KATE PHYLAKTIS   Euro area bank resolution and bail-in: intervention, triggers and writedowns 78 THOMAS CONLON AND JOHN COTTER Comment 100 ALESSANDRO ROSELLI   Lender of last resort and banking union ROSA M LASTRA 109 Monetary policy and long-term trends 213 failure to reform housing financing modalities in the aftermath of the GFC has been a missed opportunity, indeed a tragedy The decline in (long-term) real interest rates has been a major factor leading to a rise in housing and property prices, relative to labour incomes It has, of course, benefitted those already on the housing ladder, the old and the rich So, affordability has been on a trend decline, though less in the US than elsewhere (Figure 10.4) Against this background, the bipartisan political incentive prior to 2008 in the US to encourage more mortgage lending to the poorer, disadvantaged classes was entirely understandable But it ended in the sub-prime crisis Insofar as the main domestic transmission route of monetary policy to the real economy lies in the housing market, the authorities would appear to be caught in a dilemma Either they encourage the young, the workers and the poor to take on an unstable and excessive burden of debt, or they pump up all other asset prices further and further for less and less effect on the real economy, with a potentially growing risk of some future (disorderly?) reversal The current mantra is to constrain any incipient overheating and excess indebtedness in the housing market by macro-prudential measures (e.g the UK and Sweden), while pressing on with expansionary monetary policies to regain output inflation targets This raises several queries First, will the macro-prudential measures be pressed aggressively enough to work? But if they do, and the housing transmission channel is blocked, may not the resulting effects on other asset prices, including the exchange rate, have to be even more extreme (relative to labour incomes) and hence more distortionary and cause yet greater inequality? There is, therefore, a longer-term, structural problem with monetary policy: As the BIS (2014) Annual Report noted: Policy does not lean against the booms but eases aggressively and persistently during busts This induces a downward bias in interest rates and an upward bias in debt levels, which in turn makes it hard to raise rates without damaging the economy – a debt trap Systemic financial crises not become less frequent or intense, private and public debts continue to grow, the economy fails to climb onto a stronger sustainable path, and monetary and fiscal policies run out of ammunition Over time, policies lose their effectiveness and may end up fostering the very conditions they seek to prevent In this context, economists speak of “time inconsistency”: taken in isolation, policy steps may look compelling but, as a sequence, they lead policymakers astray (BIS, 2014: 18) Whether this is true for fiscal policy as well is a contentious issue, which we shall duck Let us just state that policies of consciously allowing public sector debt ratios to rise further now are unlikely to prove acceptable in most countries Having thus argued that expansionary monetary and fiscal policies have both largely ‘shot their bolt’, the BIS argues instead for: ‘balance sheet repair and structural reforms’ Alas, we believe that its positive proposals are much less compelling than its criticisms of existing policies 1980 1980 1990 1990 House price index 1985 2000 2005 2000 Nominal compensation index 1995 2005 Nominal compensation index 1995 France: Housing affordability House price index 1985 US: Housing affordability 2010 2010 1975 500 1000 1500 2000 2500 (e) 1975 100 200 300 400 500 600 700 800 900 1000 (b) 1980 1980 1990 1990 House price index 1985 2000 2005 2000 Nominal compensation index 1995 2005 Nominal compensation index 1995 UK: Housing affordability House price index 1985 Sweden: Housing affordability Figure 10.4  Housing (un)affordability driven by post-2000 surge in house prices 1975 200 400 600 800 1000 1200 (d) 1975 100 200 300 400 500 600 700 (a) 2010 2010 1975 200 400 600 800 1000 1200 1400 1600 1800 2000 (f) 1975 200 400 600 800 1000 1200 1400 1600 (c) 1980 1980 1990 1990 House price index 1985 2000 2005 2000 Nominal compensation index 1995 2005 Nominal compensation index 1995 Australia: Housing affordability House price index 1985 Italy: Housing affordability 2010 2010 Monetary policy and long-term trends 215 Whereas structural reforms and deleveraging are beneficial in the longer term, almost by definition, they are much easier to achieve during periods of fast growth, rather than the current sluggish expansion Moreover, structural reform commonly involves removing the monopolistic rents of protected sectors, and thus initially is deflationary, prior to the subsequent expansion of output and productivity The longer the stagnation, the more difficult it may be politically to introduce supplyside reforms, such as cutting subsidies In the absence of specifics, and there are virtually none in the BIS (2014) Annual Report, a call for more structural reform and deleveraging is akin to an appeal to a deus ex machina Improving the form of housing finance A better proposal is to be found in the book by Mian and Sufi (2014), House of Debt, especially chapter 12 The GFC primarily impacted the poor, especially those subject to foreclosure, whereas the countervailing expansionary monetary policy mainly benefitted the rich, thereby worsening the longer-term trends already reported earlier in this chapter Their solution is for financial intermediaries to offer: ‘[A] shared-responsibility mortgage (SRM) [which] has two important differences: (1) the lender offers downside protection to the borrower, and (2) the borrower gives up [a part of his/ her] capital gain to the lender on the upside . . . ’ (Mian and Sufi, 2014: 192) If housing price movements were independently and identically distributed, this would be a perfect solution Unfortunately, they are not; they are strongly auto-correlated, with long periods of rising prices, sometimes culminating in a frenzy of sharp increases, interspersed with shorter periods of collapses in such prices The way that this would work is shown in the box below, which is mainly taken from Mian and Sufi (2014: 171–173) How the SRM works The key difference between the SRM and typical mortgage is that the SRM provides downside protection to the owner if house prices fall The owner’s mortgage payment schedule is linked to some form of local house-price index: For example, if her local house-price index is 100 when she buys the home, and falls by 30 per cent by the end of her first year of ownership, [the owner’s] mortgage payment in her second year would decline 30 per cent ( . . . ) Her amortization schedule would remain the same As a result, even though she will make a lower payment, her mortgage balance goes down according to the original formula This in effect means 216  Charles A E Goodhart and Philipp Erfurth that [the owner] is given an automatic principal reduction when house prices in her area fall below her purchasing level In our specific example, if [the owner’s] house-price index remains at 70 for the remaining twenty-nine years of her mortgage, she will have received a 30 per cent forgiveness in principal by the end of her thirty years (Mian and Sufi, 2014: 172–173) However, on average, house prices are expected to grow At some point house prices are again likely to exceed the original purchase price Increasing gradually, once the house-price index reaches that original level, the owner will be making full payments again The downside protection comes at the expense of the lender, who would therefore charge a fee To eliminate that, Mian and Sufi suggest: [g]iving the lender a small share in the upside as well In particular, an SRM should also provide the lender with a per cent share of the capital gain whenever [the owner] sells or refinances her house The per cent capital-gain rule is a small charge for [the owner], especially considering that capital gains on owner-occupied housing are otherwise tax-free (Mian and Sufi, 2014: 173–174) During the upswing, and even perhaps especially in the final frenzy, home buyers may not be keen to share prospective capital gains with lenders, despite the self-insurance advantage Some tentative attempts to introduce shared-equity mortgages in the UK apparently ran into consumer resistance during the long periods of rising house prices Some complained that they had not understood the terms of the contract and had been missold Perhaps more seriously, would a lender be prepared to offer downside price protection, once the market had begun to crack? At what rate would lenders have offered such protection in, say, Las Vegas in 2008? Given the pattern of autocorrelation on housing prices, we fear that too few mortgage buyers would seek such SRMs in upswings, and that no sellers would offer it, or not at feasible rates, during downswings Nevertheless we think that the idea of greater (self-)insurance via a larger equity element in the housing market is good This was a key feature of the UK government’s Help to Buy equity loan, which has now been extended to 2020 It should be possible to build on this For example, the government could decree that all house purchases had to have at least, say, a 30 per cent equity share, of which a minimum of per cent would have to belong to the purchasers, though both such numbers are, at this point, somewhat arbitrary and would need much more careful analysis in any practical application Insofar as purchasers were unable to reach the 30 per cent level themselves, they could either purchase an SRM in the market, or go to the government for equity funding Of course, during downturns, Monetary policy and long-term trends  217 the authorities would then be landed with almost all such housing finance, but this would be strongly counter-cyclical; it would be politically (more) popular (than bank bail-out); and, given all that we know about the housing market, it should be long-term profitable for taxpayers The media has, in general, been critical of the Help to Buy equity loan scheme, but supportive of aggressively expansionary monetary policy We reverse the argument: Help to Buy is part of the solution to a long-term structural problem, which has been, in part, exacerbated by aggressively expansionary monetary policies However, the more fundamental problem is not those policies, but the financing context in which they operate, which gives advantages to debt over equity financing The most egregious is the relative tax advantage of debt finance, and the ‘Holy Grail’ would be to equalise, or even shift, such advantages to the benefit of equity finance Moreover, in a world with massive existing debt overhang, the transition to a much higher equity ratio can be very painful to existing shareholders, usually including top management, who are in a position to block any such move Among such changes to a more equity-financed world could be a change in the pattern of government finance Thus, a move towards nominal income bonds should help to make government finance less pro-cyclical, with less austerity during deflation and less temptation for ministers of finance to raid surpluses during booms Of course, there are problems of revisions, and even falsification, to data, but these could be handled Reforming the structure of financial intermediation It is not only the form of housing finance that needs reform but also the structure of financial intermediation through which such finance is provided As Jordà et al (2015) have demonstrated, it is the rapid growth of lending on real estate, both on housing and on commercial property, which has led bank loans to expand much faster than bank deposits in recent decades, since the 1970s That funding gap was filled, until 2009, by increasing reliance on wholesale funding, mostly short-term, uninsured and provided by informed and flighty investors (Schularick and Taylor, 2009) As Turner (2013) has noted, banks changed from providing (short-term) finance for business to making much longer-term (mortgage) loans to households This led to enhanced maturity mismatch and excessive leverage and took banking away from its traditional role and functions So long as housing prices remained strong, the system was stable, since the property was by itself good collateral for the original loan Similarly, all financial markets that were derivative of the housing market, such as collateralised mortgage obligations, remained liquid and accessible But once the housing market began to weaken, the system became fragile, though the extent of fragility depended on a variety of other factors, such as whether the mortgage loans were made on a recourse, or non-recourse, basis, the initial loan to value (LTV) or loan to income (LTI) ratio, the ease of foreclosure by the lender, etc That fragility was evidenced by the frequency whereby financial crises were triggered by collapses 218  Charles A E Goodhart and Philipp Erfurth in property markets in recent decades In the UK all three recent crises, 1973– 1975, 1990–1992 and 2007–2009, were triggered in this manner Moreover, the demise of Lehman Brothers was caused by unwise investment in a portfolio of housing and property related securities, not by its derivative book For reasons that remain unclear, the main subsequent attack on the banking industry has been focused on the role and functions of investment banking, which, though undoubtedly culpable in several respects, was not primarily responsible for the GFC The role of banking in the provision of property finance, which was at the centre of the crisis, was ignored Indeed, the separation of universal banks, as proposed by Vickers, into separate investment and retail banking subsidiaries is likely to aggravate the tendency for the latter to concentrate on mortgage and property finance The need, instead, is to reverse the collapse of the housing finance specialist intermediaries – S&Ls in the US and building societies in the UK – into the arms of the banks All housing, commercial real estate and property related lending (with a residual life to maturity greater than, say, one year) should be done by specialist property finance companies, who should not be allowed to offer transactions accounts, or short-term deposit liabilities There should be a much greater equity element in such mortgage loans (the Mian and Sufi (2014) SRMs), balanced by an equally large, or larger, equity ratio in the property finance houses Such houses would be encouraged to securitise their fixed interest book, preferably in the form of Danish-style covered bonds, but banks would be forbidden to hold such securities unless they had a remaining life of under one year The aim would be to take banking back to its traditional verities and to revise a refashioned ‘real bills’ doctrine, whereby banks deploy their short-term deposit funding to lend on a shortterm, self-liquidating basis, or to hold assets that would remain liquid in a crisis The shortage of equity prior to 2008 was, perhaps, most egregious in those banks taking a punt on the property market, e.g Anglo-Irish, Northern Rock, RBS, etc., but leverage was excessive throughout the banking sector The calls for much higher equity ratios, e.g Admati and Hellwig (2013) and Miles et al (2013), are correct in principle But the problem is how to get there With bank CEOs committed to trying to reach some desired level for their banks’ return on equity (RoE), a weak market for bank equity and a massive existing debt overhang, the incentive for bank management is to meet tougher capital adequacy requirements by deleveraging With governments all imploring ‘their own banks’ to maintain domestic lending, such deleveraging has had an especially severe effect on cross-border lending The results have not been pretty, with the macroeconomic effects of tougher regulation counteracting the expansionary force of unconventional expansionary monetary policy and leading to the enormous pile-up of commercial bank deposits at the central bank There are several possible routes to ease this conflict of objectives One such route would be to try to adjust the incentive structure of management, perhaps along the lines suggested in Goodhart (2014) Another would be to force banks with insufficient equity capital to accept injections of public sector equity, but on terms expected to be highly profitable for the taxpayer and costly Monetary policy and long-term trends 219 for the existing private sector shareholders Whereas this was successfully done in the US with the Troubled Asset Recovery Program and the 2009 (Comprehensive Capital Analysis and Review Program) stress tests, it was, mistakenly, ruled out elsewhere by the wildly exaggerated hue and cry about the evils of bail-out So within Europe little has been done to mitigate the restrictive effect of much tougher bank regulation This has played a role in Europe’s continuing stagnation, though the scale of such effect is almost impossible to measure and highly contentious Opinions vary widely Conclusions There has been a long-term downwards trend in the share and strength of labour in national income, depressing both demand and inflation This has prompted ever more expansionary monetary policies While understandable, indeed appropriate, within a short-term business cycle context, this has exacerbated longer-term trends, increasing inequality and financial distortions Perhaps the most fundamental problem has been over-reliance on debt finance (leverage) We propose measures, involving government intervention, to raise the share of equity finance in housing markets Such reforms could be extended to other sectors of the economy Similarly, we propose shifting the provision of housing finance from banks back to specialist property finance companies These, like banks and other financial intermediaries, should hold a much higher equity ratio than heretofore The problem is how to reach that goal without instigating massive deleveraging, a problem which has not so far been solved in Europe References Admati, A and Hellwig, M (2013) The Bankers New Clothes: What’s Wrong with Banking and What to Do about It Princeton, NJ: Princeton University Press BIS (2014) 84th Annual Report, released 29 June 2014 Available at http://www.bis.org/ publ/arpdf/ar2014_ec.pdf (last accessed 19 July 2015) Buttiglione, L., Lane, P R., Reichlin, L and Reinhart, V (2014) Deleveraging? What Deleveraging? Geneva Reports on the World Economy 16, International Center for Monetary and Banking Studies, and Centre for Economic Policy Research Available at http://www.voxeu.org/article/geneva-report-global-deleveraging (last accessed 19 July 2015) Goodhart, C A E (2014) Risk, reward and bank resilience In Shigehara, K (ed.) The Limits of Surveillance and Financial Market Failure: Lessons from the Euro-Area Crisis London, UK: Palgrave Macmillan, chapter 10 Jordà, O., Schularick, M and Taylor, A M (2015) Leveraged Bubbles Presented at the JME Conference, Swiss National Bank, Gerzensee, 7–8 November 2014 Available at http://conference.nber.org/confer/2015/EASE15/Jorda_Schularick_Taylor.pdf (last accessed 19 July) Kumhof, M., Ranciere, R., and Winant, P (2013) Inequality, Leverage and Crises: The Case of Endogenous Default IMF Working Papers 13/249 Available at http://www imf.org/external/pubs/ft/wp/2013/wp13249.pdf (last accessed 19 July 2015) 220  Charles A E Goodhart and Philipp Erfurth Mian, K and Sufi, A (2014) House of Debt Chicago, IL: University of Chicago Press Miles, D., Yang, J and Marcheggiano, G (2013) Optimal bank capital Economic Journal 123(567): 1–37 Piketty, T (2014) Capital in the Twenty-First Century Cambridge, MA: Harvard University Press Schularick, M and Taylor, A M (2009) Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870–2008 National Bureau of Economic Research Working Paper 15512, November Available at http://www.nber.org/papers/ w15512 (last accessed 19 July 2015) Turner, A (2013) Credit, Money and Leverage: What Wicksell, Hayek and Fisher Knew and Modern Macroeconomics Forgot Stockholm School of Economics Conference, 12 September Available at http://www.princeton.edu/jrc/events_archive/repository/ credit_money_turner/Credit_Money_Leverage.pdf (last accessed 19 July 2015) Index ABN AMRO 186 accountability 163 adverse selection 11, 122 AIG 112, 114 Alpha Bank 88 Amargerbanken 41, 56 ambiguity 112–4 amortization 215 Anglo-Irish Bank 56, 62, 88, 91, 97 assessment of resolvability 135 asset: backed securities 128; management company 157; prices 212; separation tool 162, 195; valuation 168 Asset Quality Review 7, 27–8 asymmetry attachment point 178 Australia 44–5, 50–3, 55 Austria 56 authorised deposit-taking institutions 51 ‘baby boom’ backstop 204 bad bank 81, 97, 197 bail-in 54–9, 68–9, 157, 159, 162–80, 190–2, 194–7: strategy 168; tool 56, 78–97, 161–2, 170, 172 bailinable: capital 60; debt 142, 202; liabilities 143 bail-out 68–9, 71, 141, 157, 160, 190–2, 196, 217 Baker Plan 128 balance sheet 84–7, 93, 106; trigger 91 Baltic States 21 bank: funding cost 55; holding company 193; insolvency 128; run 74, 186 Bank of: America 40; Cyprus 69, 72; England 5, 111, 117–18, 161–2, 164, 166–9, 196; Finland xv bankers’ bank 110–11 Bankia 186 Banking: Act 2009 167; Reform Act 2013 46, 161–2; (Special Provisions) Act 2008 161 Bankruptcy: Abuse Prevention and Consumer Protection Act 2005 186; Code 47, 165–6, 182 Bankscope 14, 83–5 Barclays 201 Basel: 185; 185; 7, 12, 75, 87, 179, 184, 201, 205; Committee on Banking Supervision 2, 159 Bear Stearns 112, 114 Belgium 4, 12, 157 Board of Supervisors 61 book equity 93 boundary problem 50 Brady bonds 128 branches 141, 144–8, 185 bridge bank 18, 29, 81, 156–7, 162, 164–6, 168–9, 194–5, 197–8; sale 195 BRRD (Bank Recovery and Resolution Directive) 3–4, 7, 12, 19, 29, 31, 45, 53–4, 58, 78, 80–2, 87, 96–7, 100–1, 114, 124, 129, 131–9, 143–5, 162–3, 167–72, 184, 195–200 buffer 104 building societies 218 Bulgaria 34 burden-sharing 55, 62, 192 business: cycle 212; models 130, 140, 143 222 Index capital: adequacy 188; buffer 40, 175; conservation buffer 174; controls 69; gains tax 70; injections 157; labour ratio 212; markets 105: union 6, 119; mobility 124; requirements 157 Capital: Adequacy Directive 2: IV 184; Purchase Program 185, Requirements Directive 193 Central Bank of Cyprus 69, 72–3, 75 certificates of entitlement 168 Chancellor of the Exchequer 166 Chapter 11 165, 182 China civil law close cooperation agreement 61 close out 170 collateral 110, 118, 125, 217; crunch 56 collateralised debt obligations 217 collective: bargaining agreement 171; failure commercial paper funding facility 112 Commerzbank 186 Committee of European Banking Supervisors 1–2, 12 Commodities Futures Trading Commission 166 common: deposit insurance fund 185, 193–4; equity Tier capital ratio 173, 198, 201–2; law 5; supervisory rule book 124 competent authorities 61, 135–6, 138, 143 competition 188, 191 compliance cost 4, 55 Comprehensive Capital Analysis and Review Program 219 concentration risk 33 confidence 20, 39–40, 59 conflict of interest 20 conformance: period 176; process 179 conservator 51 consolidated supervision 133, 137, 142, 147–8 constructive certainty 112 contagion 20, 38, 41, 44, 105, 110, 117, 199 contingency plans 147 contingent: capital 179; convertibles (CoCos) 39, 60, 93, 170, 198, 202; liabilities 103 continuity 80; of business 42 convergence of regulatory policy 142 convertible notes 157 core Tier ratio 197 cost: benefit analysis 180; of regulation 105; of resolution 170, 191; to income ratio 189 countercyclical buffer 175 covered bonds 128, 170, 218 credible ex ante commitments 176 credibility 200 credit: concentration risk 24; rating 74; worthiness 101 Credit Suisse 11 creditors 156, 168–9; rights 158; risk 158 crisis: management group 42–3, 59, 159, 176; resolution 130 critical: information 42; functions 48, 133, 168; services 161 critically undercapitalised 123 cross-border: bank 13, 198; banking 185; cooperation agreement 42, 59, 159; coordination issues 164; problem 42–6 Cross-border Resolution Group 159–60 cross-default provisions 166 current account deficit 71 Cyprus 7, 12, 15–7, 57, 67–76, 124 Danske Bank 40 Datastream 83 debt 208: finance 208, 219; for equity conversion 161, 167; instruments 170; level 213; overhang 217–18; ratio 213; trap 213 decentralisation 144 Denmark 11, 41, 56–7 dependency ratio deposit guarantee 4; fund 54; scheme 25, 29, 33, 45, 54, 56, 61–2, 81–2, 170 Deposit Guarantee Schemes Directive 31 deposit insurance 3–4, 16–17, 25, 41, 74–5, 110, 124, 185–6, 193; fund 198; scheme 199 depositor preference 3, 31, 45, 81 depositors 68–9: insured 68–9 derivatives 50, 176; contracts 170, 174 Deutsche Bank 201 devaluation 10 Dexia 42 dilution 81 Index 223 discount window lending (DWL) 112–13, 122 disintegration 145, 148 DnB NOR 40 Dodd-Frank Act 5, 17, 46–9, 60, 100, 112, 114, 123, 131, 160, 163, 184, 192–3 ‘doom loop’ 23, 34, 100, 197, 200 double counting 83 early: intervention 36, 80; redemption plan 47; termination rights 165; warning models 79 EBA (European Banking Authority) 7, 12, 27, 29, 35, 45, 61, 133, 135, 163, 194–5 EBS Building Society 91 ECB (European Central Bank) 1–3, 5, 7, 10, 12, 14, 17, 20, 25–30, 33–4, 41, 45–6, 61, 72–3, 81–2, 111–12, 114–20, 127–8, 137–9, 142–8, 162, 185, 191–6 ECOFIN 194 EEA (European Economic Area) xvi, 3, 11, 40 efficiency 141, 188 ELA (emergency liquidity assistance) 30–1, 33, 36, 48, 73, 109, 111, 115, 118, 120, 124–6 eligible: liabilities 35, 170, 172–4, 176; instruments 179 Emergency Economic Stabilization Act 113, 123 emergency legislation 156 equity 85, 88, 106, 167, 202, 208, 216: capital 186; conversion 14, 88; finance 217; volatility 91; writedown 14 Erkki Liikanen 49, 61 ESM (European Stability Mechanism) 59, 114, 124, 194–5, 198, 200; treaty 123 EU 43, 45–6, 55, 156–83, 190–2 euro 15, 23: area 1–3, 5, 10, 12, 45–6, 78–97, 112, 114, 144, 146–8, 184, 195, 197–200 Euro Medium Term Notes 74 Eurobank Ergasias 88, 186 Eurogroup 16 European: Charter 33; Commission 10, 128, 163, 171, 188, 190–2, 194–7; Convention on Human Rights 168; Deposit Insurance Corporation 1; Passport 145, 155; System of Central Banks Statute 115 Eurosystem 126 exchange: controls 16; rate 212–3 Executive Board 26 exit strategy 165, 167 external TLAC 175, 178 Farm Credit System 181 FDIC 1, 4, 18, 38, 47, 53, 56, 58, 113, 128, 157, 160, 163–9, 174, 185–6, 193–4 FDICIA 47, 113, 123, 186 Federal Deposit Reform Act 2005 186 Federal Reserve 5, 17, 38, 56, 111–14, 117, 120, 166, 186, 201; Act 112–13, 122, 157, 192–4; Bank of New York 166 fiat money 112 Finance Watch 200 financial: backstop 191, 195, 197; crises 217; deepening 75; holding company 35, 135; instability 75; intermediation 208, 217–9; stability 2, 39, 111, 125, 192 Financial: Conduct Authority 166, 196; Policy Committee 196; Services Act 161; Stability: Board (FSB) 2, 12, 29, 42, 58, 130, 132, 158–60, 175–7, 179–80, 193, 201; Oversight Council 193; System Inquiry 51 financiers’ banks 111 Finland 11, 40 fiscal: assistance 117–8; backstop 5, 114, 117, 119; deficit 70; union 17, 20 Fjordbank Mors 41, 56 flexibility 163 forbearance 25, 33 Fortis 12–3, 42–3, 91, 97, 157 France 4, 49, 84, 157 Frankfurt 145–6 freedom of movement 144–5 ‘fresh start’ accounting model 165 funding 52–4 G20 2; summit 139, 158–9 GAAP 185 German: banking system 139; Constitutional Court 119, 126–7 Germany 4, 49, 62, 84, 157 Glass Steagall 15 global: financial crisis (GFC) 1–2, 8, 10, 12, 40; loss absorbing capacity (GLAC) 174 224 Index globalisation 211 going concern 81 Goldman Sachs 112 Governing Council 2, 26, 34, 46, 61, 126 government: bonds 74; guarantee 40, 54 Greece 2, 8, 12, 15–6, 20, 33, 69, 71–2, 74 Greek bonds 72 group recovery plans 143 G-SIB 100, 158–9, 167, 175, 178, 180; surcharge 176 G-SIFI 42–3, 59, 201 guarantee 39, 104, 118 haircut 14, 56, 67, 125, 170 harmonised rulebook 190 HBOS 40 hedge funds 52, 192 Hellenic Financial Stability Fund 69 Help to Buy 216–7 high-level expert group 49, 130 high powered money 110 holding company 83, 164–6, 168–9, 174, 178 home: authority 141; buyers 216; country 146, 166: control 185 host: authority 141; control 185, 201; country 146, 166 housing 8, 212; affordability 214; finance 208, 213, 215–8; market 217 Hurricane Katrina 56 hybrid securities 104 Hypo Real Estate 91, 97 Iceland xv, 7, 15, 42–3, 60 idiosyncratic risk 14, 104 IFRS 185 imbalances 9, 74, 76 IMF 16, 68, 73 impairment 78, 103–4; charges 87, 96, 101 implicit subsidy 55 insolvency 3, 129, 144, 159, 168: code 13; frameworks 156, 158; proceedings 157, 161, 170, 172; regime 44, 160 institutional hierarchy 145 insurance 10, 59; company 192; intermediation insured depositors 176 interconnection 72–3 interim funding 54 internal TLAC 176, 178, 180 International Banking Act 122 international monetary standard 121 intra-group funding 143 investment banking services 143 Ireland 12, 21, 56, 74, 84 Irish Nationwide Building Society 91 ISDA 165 IT infrastructure 131 Italian banking system 101 Italy 84, 101, 103 Japan 43 key attributes 42, 132 158–60 labour 208, 212; costs 211 legal infrastructure 158 Lehman Brothers 41–2, 50, 52–3, 58 lender of last resort (LOLR) 4, 21, 54, 61, 109–28, 192 level playing field 191 leverage 10, 15, 48, 60, 106, 133, 193, 208, 219; ratio 88, 175, 185 lex specialis xv liabilities 78 liquidation 141, 181–2 liquidity 5, 93, 114, 116, 160, 193; crisis 109–10; management 10; support 118 living will 13, 40–1, 48, 51, 54–5, 58–60, 129, 132 Lloyds 40 loan: loss provisions 187; to income ratio 217; to value ratio 101, 217 London 12, 145–6 long-term: refinancing operations (LTRO) 112, 192; trends 208–19 loss 164, 167; absorbing capacity 62, 169; given failure 33–4; see also TLAC LTCM 13 Luxembourg 12 macro-prudential: measures 213; policy 110–1 Marfin-Laiki Bank 69, 71–3, 76 Mario Draghi 192 market: discipline 104, 156; infrastructure 59; liquidity 141, 168: assistance 109, 115, 119 Index 225 mergers and acquisitions 40 Meroni doctrine 195, 205 Merrill Lynch 40 minimum standards minority shareholders 69 monetary: financing 119, 126; policy 2, 110–11, 126, 208–19; system 106 Monte dei Paschi di Siena 186 moral: hazard 54–5, 57, 101, 112–13, 122, 160; suasion 200 Morgan Stanley 112 mortgage loans 218 MoU (memorandum of understanding) 62 MPOE (multiple point of entry) 4, 11, 43–5, 131, 142, 169, 175, 177 MREL (minimum required eligible liabilities) 7, 131, 173 multiple equilibria mutual fund 106–7 narrow bank 15, 52, 106–7 National Asset Management Agency 97 national: central bank (NCB) 5, 115, 125–6; competent authorities (NCA) 25–7, 116; resolution: authorities 30; fund 172 nationalisation 100, 156 nationalised banks 85, 88, 91 Netherlands 12, 84, 157 New Zealand 44–5, 50–5, 57, 61 no creditor worse off 196 nominal income bonds 217 non-participating member states 145–7 non-performing loans (NPL) 101, 188–9 Nordea 11, 40 Nordic countries 43 Northern Rock 5, 50, 59, 111, 117, 126, 161, 218 Norway 11, 40 Office of the Comptroller of the Currency 193 Open Bank Resolution 51, 54, 57–8, 61 open market operations 109, 126 Orderly Liquidation: Authority (OLA) 41, 47–8, 53, 100, 159–60, 163–4, 167, 170, 184; Fund 165, 174, 194, 197 orderly resolution 166 outright monetary transactions (OMT) 112, 118–19, 126–8, 192 overconcentration 40 ownership 165 own funds 171, 173 panic 104 pension fund 10 Permanent TSB 91 PIIGS countries 187, 190 Pillar 175; 175 Piraeus Bank 69 Pittsburgh Summit 158 point of non-viability 180 political repercussions 158 Portugal 74 principle of non-discrimination 145 Pringle ruling 114 private sector: funding 165; involvement 71 productivity 212 prompt corrective action 28, 60 property: bubble 71; finance 218; market 218; rights 69 proportionate 144, 172 Prudential Regulation Authority 97, 161, 166, 196, 201 prudential: regulation 199; requirements 143; supervision 5, 116 public: intervention 91; money 39; sector debt ratio 211 pulling the trigger 30 qualified financial contracts 182 quantitative easing 111, 118–9, 126 quasi-equity 106 real: bills doctrine 218; compensation 210; estate bubble 15, 70; interest rates 213 recapitalisation 10, 40, 57, 68, 100, 127, 157, 161, 167, 172, 190, 198 receiver 51 receivership 160, 164 recovery 20, 184: plan 12, 131–5, 38–62, 80, 129, 158 regionalisation 141, 144 regulatory capital 175 Reserve Bank of New Zealand xv, 51 resilience 157 resolution 16, 20, 29, 78–97, 180, 184–202: authority 3, 17, 135–6, 138, 161, 171, 174, 180, 195; entity 175–7; 226 Index funds 7, 171, 197, 200; plan 12, 18, 30, 38–62, 80, 105, 129–55, 158, 169, 200; powers 162; regime 17; strategies 156–83; tools 42, 73, 129, 157–8 resolvability 30, 35, 38, 46–52, 59, 129, 133, 143–4, 149, 178 resource allocation restructuring 10, 80; plan 169, 190 retained earnings 93, 187 retirement return on equity 187, 189, 218 ring-fencing 49, 52, 140–1, 144, 157, 185 risk: taking 75; weighted assets 175–6, 179, 185, 197 Romania 34 Roman law Royal Bank of Scotland (RBS) 186, 218 R-SIFI 42, 44 Russia 76 safe to fail 28–31 safety net 113 sale of business tool 161 Santander 201 Satterthwaite approximation 95 savings and loans (S&L) 218 Schengen agreement 24 search for yield 105 secondary insolvency proceedings 141 Secretary of the Treasury 194 Securities and Exchange Commission 165–6 securities market programme (SMP) 112, 118–19 senior unsecured debt 167 separability 44 shadow banking 10, 52, 59, 105, 192 shared responsibility mortgage 215–6 shareholders 217; rights 13, 42 shares 174 SIFIs (systemically important financial institutions) 12, 18, 38, 41, 43, 45–6, 48, 51–5, 58, 79, 100, 157–61, 163–9, 174, 178–80, 184, 197 single: bank resolution fund 194; deposit guarantee scheme (SDGS) 24,31, 33; market 191; resolution authority 194; rulebook 6, 82 social: benefit 55; cost 55, gains 142; welfare 142 Société Générale 201 solvency 5, 193 sovereign: debt 7, 78, 109; crisis 190; risk 24 Spain 21, 56, 74, 83 Special Liquidity Scheme 111 special: purpose vehicle 157; resolution regime 161 SPOE (single point of entry) 4, 11, 18, 41, 43–5, 131, 142, 163–9, 174, 177–8 SRB (Single Resolution Board) 2–3, 11, 20, 31, 45, 53, 61, 81–2, 137–9, 143–5, 185, 194, 198 SRF (Single Resolution Fund) 7, 34, 45, 53, 114, 146, 148, 162, 194, 198 SRM (Single Resolution Mechanism) 3, 11, 14, 23–4, 28–31, 33–35, 41, 45–6, 49, 53–4, 73, 79–82, 96–7, 114, 129, 131, 137–8, 144–5, 162, 184, 191, 194–200; Regulation 35, 82, 148 SSM (Single Supervisory Mechanism) 2–3, 7, 11–2, 14, 16, 23–30, 33–4, 41, 45–6, 53–4, 61, 72–3, 83, 114, 128–9, 131, 137–8, 185, 193, 195–6, 198–200 stakeholders 169 standing facilities 126 state: aid 101, 117–18, 127, 191–2; recapitalisation 107 statutory: management 54; manager 51–2 stay 166 stock market 10 stress test 186, 219 structural: bank reform 129–55; measures 49; reform 18 structured: investment vehicles 52; notes 176 subordinated debt 88, 93, 104, 164, 167, 198 subordination agreement 172 sub-prime crisis 213 subsidiarisation 141, 155 subsidiary 134–5, 141–2, 144, 146–8, 164, 166, 176, 178, 185, 201 subsidy 117 supervisability 139–40 supervision 17 Supervisory Board 26–7, 34, 46, 61 survivor principle 18 Sweden xv, 11, 40, 61, 193, 196–8 Index 227 Switzerland 11, 43, 157 systemic: crisis 14, 186, 202; risk authority 181; stability 144, 149 Systemic Resolution Advisory Council 164 TARP (Troubled Asset Relief Program) 156–7, 185–6, 219 tax: amnesty 70; liabilities 176 taxpayer: bailout 192; funded backstop 185; money 13, 100, 156–7, 167, 184 technical standards 29, 163 Temporary Liquidity Guarantee Program 186 temporary stay 160 termination of derivatives contracts 165 territoriality 44 tier: capital 97, 185; ratio; instruments 173; leverage ratio time inconsistency 213 TLAC (total loss-absorbing capacity) 7, 19, 58, 100, 106, 131, 174–81, 201–2 too big to: fail 39–40, 50, 55, 71, 85, 133,141, 156, 158, 184, 190, 201; save xv, 41, 71–2 too complex to fail 133 too interconnected to fail 133, 156 trade creditors 171 trade-off 141–2, 147 Trans-Tasman Council on Banking Supervision 44 Treaty on the Functioning of the European Union 116 trickle-down effect 212 trigger 14, 78–97, 100 Troika 16, 68–9, 74 troubled bank 166 trust 148 turf war 146 UBS 11 UK 4, 6, 11, 43, 54, 61, 111, 156–83 Unibank 40 unionisation 211 universality 44 unlisted banks 88 unsecured debt 178 US 17, 47–8, 53–5, 112, 156–83, 185–8; Treasury 166 valuation 168 variable geometry 24 viability 127 Vickers 106; Commission 46, 49; Report 56, 62 Volcker rule 46, 49 wage share 209, 211 warrants 168 wholesale funding 50 winding down 168 write down 29, 57, 78–97, 168, 172–3 zero: -risk weight 72; -sum game 212 zombie banks 198 Züchner case 117 ... references and index Banks and banking European Union countries European Union countries—Economic policy Monetary policy European Union countries Banking law European Union countries I Castañeda,... Data European banking union : prospects and challenges / edited by Juan E Castañeda, David G Mayes and Geoffrey Wood — First Edition pages cm Includes bibliographical references and index Banks and. .. Union Prospects and challenges Edited by Juan E Castañeda, David G Mayes and Geoffrey Wood European Banking Union Prospects and challenges Edited by Juan E Castañeda, David G Mayes and Geoffrey Wood