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The European banking system (2)

The changes in the financial environment, the realization of risks that were underestimated, and the establishment of new regulation are appreciably modifying the business of banking in Europe. For this reason, after having described the European banking systems in its last issue, the Revue d’économie financière turns to their transformation and to the new perspectives flowing from that.

The articles offer an analysis of how the business perimeters and the economic models of European banks have evolved, as well as the main regulations they must follow, particularly within the framework of the European banking union and its three aspects: supervision, resolution, and deposit insurance. Also dealt with are the subjects of confidence, of risk taking, and of the consequences of the internationalization of the retail banking business.

Following this main subject, four articles deal with different current economic and financial topics: the relationship between microfinance and ethics, mobile payments, the situation in Cyprus as telling of the flaws in European governance, and following the financial crisis, how valuations of financial instruments have evolved in European banks.

REF 112 The European banking system (2)

New Perspectives

publication : December 2013 348 pages

The European banking system

Introduction accès libre

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Hans-Helmut Kotz Catherine Lubochinsky

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The institutional and structural framework

Banks in Europe: The Impact of the Recent Regulatory Reforms accès libre

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European countries have undertaken a large number of regulatory reforms since the outburst of the financial crisis or are in the process of doing so. These reforms range from higher capital and liquidity requirements for banks, to size and activity restrictions and a banking union for the Eurozone. The latter seems to be the most significant reform in terms of the effects that it will have on the structure and the functioning of the banking industry in Europe.

Classification JEL : F36 G21 G28


Franklin Allen Thorsten Beck Elena Carletti

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The Banking Union and European Supervision accès libre

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The global financial crisis has revealed several drawbacks in financial regulation and supervision. The article, after having identified the main lessons from the financial and sovereign crises, reviews the main features of the Banking Union with particular regard to the SSM and assesses their effectiveness. The article argues that the establishment of the Banking Union is of fundamental importance to address the roots of the sovereign crisis and complete the project of the EMU. After the conclusion of the political negotiation on the SSM, a key challenge for the ECB in the short term is the preparation of the legal and operational framework to underpin an effective and efficient prudential supervision of banks in the years to come. The SSM will need to be complemented by the establishment of a Single Resolution Mechanism with a single resolution authority at its centre. Finally, a deepened EMU should be also accompanied by reinforced governance and accountability structures to keep the trust of citizens.

Classification JEL : E58 F36 G21 G28


Jörg Asmussen

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Governance of the Single Supervisory Mechanism: Some Reflections accès libre

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Euro area countries agreed on the Single Supervisory Mechanism (SSM) where the European Central Bank (ECB) will assume a crucial role. Our article reflects on the involvement of the ECB in bank supervision and the governance arrangements of the new centralized supervisor that still rely on coordination along different dimensions. After reviewing the national bank supervisors' governance arrangements and highlighting critical individual criteria on which there has been lack of convergence, we analyze the governance arrangements of the ECB as defined in the Proposed Council Regulation. We focus on the operational content of the independence and accountability arrangements as well as the implications of those governance arrangements for more effective bank supervision, making some policy consideration to improve the new European supervisory architecture.

Classification JEL : E58 F36 G21 G28


Donato Masciandaro María J. Nieto

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CRD IV: An Asset for French and European Banks accès libre

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The CRD IV package, which transposes Basel III in Europe, is an unprecedented effort to foster financial stability within the European banking system. Compared to what is being done in the United States, the implementation of Basel III is broader and more homogeneous. European institutions have already very significantly improved their financial situation. They are often as healthy and efficient as US banks, provided that discrepancies between the accounting and regulatory standards are correctly factored in. Indeed, the differences between the observed leverage ratios of European and American banks come from accounting standards for the most part.

Classification JEL : F36 G21 G28


Christian Noyer

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Risk-Based Regulation: Time to Go Back to the Future? accès libre

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The regulatory infrastructure supporting the financial system has become increasingly complex over time. In this article, we focus on what has been the backbone of the regulatory infrastructure for banks in recent decades: risk-based capital regulation. We start by outlining the costs of the increasing granularity and complexity of the risk weighting regime. These costs are observable and material, risking an erosion of market confidence in the overall regime. We then turn to the benefits, investigating whether more granular and complex approaches to risk weighting have improved regulators' capacity to assess bank risk. These benefits are more elusive – both in theory and in practice. We outline some policy options for streamlining the regulatory infrastructure to make it more robust to its inherent uncertainty.

Classification JEL : G21 G28


Andrew G.  Haldane Vasileios Madouros

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What Have We Learned from the Financial Crisis? accès libre

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The relationship between monetary policy and financial stability is reciprocal: financial stability will facilitate successful monetary policy and vice versa. There is now a growing consensus that the most important part of stability policy is crisis prevention. It is important that excessive growth of credit and indebtedness can be better controlled in the future. This would benefit from structural reform of the banking system, including the separation of the riskiest investment from deposit banking. However, structural reform of banks is a complement, not a substitute for other regulatory improvements. For central banks, the development of macro-prudential policies and instruments is especially relevant. These instruments operate so close to monetary policy that central banks should be closely involved in their use.

Classification JEL : E58 F36 G01 G21 G28


Erkki Liikanen

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Adaptation of banking business models

Universal Banks: Successful, yet Under Threat accès libre

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Universal banks are the predominant model of banking in Europe. Under the umbrella of the term “universal banking”, a wide variety of different models co-exist. What is common to them is their ability to serve the diverse needs of their client base which, in turn, reflects the great diversity of Europe's economies. Universal banks have not only been the financial foundation of the growth of Europe over the past decades, they have also proven resilient in the face of the various crises that engulfed Europe during that period, including the Great Recession of 2009 and thereafter. Yet, notwithstanding this resilience, the universal banking model in Europe has lately come under regulatory scrutiny. Plans for fundamental reform to Europe's banking system, like the Liikanen proposals, constitute a material threat to the universal banking model.

Classification JEL : G01 G21


Jan Schildbach Bernhard Speyer

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Banks: What Business Model in the Aftermath of the Crisis? accès libre

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The crisis that started in 2008 has not impacted the banks equally and did not reveal any optimal business model. In particular, the liquidity crisis triggered by the downward spiral of the originate-to-distribute model intensified and reached universal banks with the sovereign crisis. As a response to the crisis, public authorities developed new regulatory requirements, complemented in some countries by structural measures. These two complementary aspects have a common objective, namely to limit bankruptcy and contagion risks but also to facilitate the resolution of complex entities.

However, it is necessary to make sure that these rules does not have unintended consequences, including by reviving pre-crisis business models and activities that turned out to be unsustainable and by limiting banks' activities to an extent that would be detrimental to the economy funding. Therefore, it is essential to assess properly the cumulative impact of all the reforms related to the banking sector in order to develop a framework that would ensure at the same time risks' control and sound economy financing.

Classification JEL : G01 G21 G28


Sylvie Matherat

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Additional papers

Capital, Trust and Competitiveness in the Banking Sector accès libre

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This paper provides an analysis of the Basle Committee. It argues that the whole process of capital regulation led to an unintentional erosion of capital and, ultimately, trust in the Continental European banking industry. Thus, the Basle process effectively has been successful in eliminating the competitive advantage of well capitalized banking systems of the early 1980s, especially those of Japan and Germany.

This is a surprising development since well capitalized banks historically did, and according to recent studies still do enjoy competitive advantages in their respective markets. Moreover, resiliency, stability and trust of depositors is largely based on stable balance sheets.

By way of concluding the paper argues in favor of strengthening bank balance sheets and in favor of rewarding solid financing strategies. Quantitative easing and expansive monetary policies effectively subsidize less subsidized competitors and reduce the taste for resilient balance sheets.

Classification JEL : G21 G28


Thomas P. Gehrig

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Bank Corporate Governance, Risk-Avoidance or Risk-Taking accès libre

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Following up on the publication of the Walker Report (2009) in the United Kingdom, international organizations such as the Basel Committee, the OECD, and the European Union have proposed guidelines to improve bank corporate governance and, more specifically, risk governance. These international reports vary widely on what the prime objective of bank corporate governance should be, with one group recommending a shareholder-based approach, and the other a stakeholder-based one. Moreover, the focus of these reports is exclusively on risk avoidance, with little guidance as to how an acceptable level of risk, the risk appetite, should be defined. Drawing on insights from economics and finance, this paper is intended to contribute to the debate on bank corporate governance.

Classification JEL : G21 G30


Jean Dermine

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Cross-Border Retail Banking: Exploring the Unknown Financial Globalization in Times of Financial Crises accès libre

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The surge in cross-border banking prior to the 2007/08 global financial crisis took place not only in the interbank market but also in the retail market, e.g. between banks and their private customers abroad. Cross-border retail activities of banks now account for a substantial share of total international activities. Despite its rising importance, we are just starting to understand the role of cross-border retail banking for globalization and stability. In this study, we assess this less known part of financial globalization by reviewing the development and structure of cross-border banking, identifying the factors that drive retail customers across borders and assessing the impact of financial crises on global retail banking.

Classification JEL : F30 G01 G15 G21


Stefanie Kleimeier Harald Sander

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Articles

Ethics in Microfinance accès libre

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This paper argues that despite its moral crisis, microfinance is still today socially, economically and morally valuable, provided that it is done properly, which requires that it is based on a clear commercial orientation and avoids excessive commercialization. Finally it places the specific debate about competing approaches to microfinance in the context of the general philosophical debate about what can be considered as ethically valuable human conduct.

Classification JEL : G21 O16 O17


Reinhard H. Schmidt

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Mobile Payment: Economic Models and Financial Regulation accès libre

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In recent years, a new means of payment tries to emerge: the mobile payment. Despite its advantages, the adoption of mobile payment seems to take time, especially when are neglected the immediate extensions to the mobile Internet of the payment services already in use online. One of the causes is that mobile payment service providers are not restricted to traditional operators of payment: these potential partners do not fully cooperate for the definition of one single economic model and jointly slowdown the rhythm of adoption of the new service. Regulators, already appealed during the implementation of online payment, will have an important role to play for the determination of the relevant model of distribution of the new service. This article first considers the available economic models of m-payment and the respective interactions they define between service providers and users, before discussing the institutional framework able to control from a “public economics” view this new form of monetary circulation.

Classification JEL : E42 O33


Laetitia Chaix

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Was it Possible to Solve the Cyprus Financial Crisis without Undermining Europe? accès libre

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The two major banks in Cyprus – Bank of Cyprus and Laiki Popular Bank – have lost more than €4 billion because of their exposure to the Greek bond market. In this paper, we look at how the European Union has responded to banking and financial problems that affected Cyprus since the end of 2011. Although the financial crisis is minor in absolute terms, it showed that even the failure of a small country can generate systemic risk throughout the euro area.

The rescue plan drawn up by the European Commission, the European Central Bank and the IMF was adopted very late. Taxation of deposits and exchange controls establishment create an unprecedented situation that could affect investor confidence in the euro area. Furthermore the control of Cyprus gives authorities very small margins of action and may jeopardize the future of this country.

Classification JEL : E50 F36 G21


Jean Messiha Bruno-Laurent Moschetto Frédéric Teulon

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Financial Instrument Valuation in European Banks between 2009 and 2011: Market Value or Model Value? accès libre

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When financial markets are no more active, as in 2008, the question of fair value valuation techniques becomes crucial. IFRS 7 specifies a three-level hierarchy for fair value measurement disclosures: market value, model using significant observable market data and models not using significant observable market data. The aim of this work is to study the evolution of fair value measurement techniques in European Banks since the beginning of the crisis. Our results show that banks – and more specifically great banks – increased the use of model valuation.

Classification JEL : G01 G12 G21 G28 M41


Dominique Dufour Grégory Heem

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