Strengthening the EMU and the European Financial Area after the Recent Financial and Economic Crisis

1. Strengthening the EMU and the European Financial Areaafter the Recent Financial and Economic Crisis MOCOMILA Academic Session in cooperation with the Eastern Carribean Central Bank, St. Kitts, November 12, 2010 Professor Christos V. Gortsos

2. A. Outline A. The re-adjustment of the European financial supervisory framework: proposals and implementation of the Larosiere Report B. Regulatory developments to enhance the European financial area C. Dealing with SIFIs D. Strengthening European economic governance

3. A. Proposals and implementation of the Larosiere Report • Proposals of the Larosiere Report 1.1 Short-term proposal a. Strengthening the quality of supervision exercised at European level – creation of a “European System of supervision and crisis management” b. Strengthening the quality of supervision exercised by national supervisory authorities

4. A. (continued) In particular: the European system of supervision: emphasis on both micro- and macro-prudential supervision (and regulation) through the establishment of two European bodies: • on macro-prudential supervision (centralisation): “European Systemic Risk Council” • on micro-prudential supervision (no centralisation): “European System of Financial Supervision” based on three so-called “European Supervisory Authorities” (successors to the existing “3 Level 3 Committees” (CEBS-CESR-CEIOPS)

5. A. (continued) 1.2 Medium-term proposal Establishment of two (2) European Supervisory Authorities for micro-prudential supervision (according to the “twin-peaks approach”)

6. A. (continued) 2. Implementation of the Larosiere Report 2.1 The European System of Financial Supervisors (ESFS) a. Network of three European Supervisory Authorities (EBA - ESMA – EIOPA) with legal personality b. Composition and governance of the Authorities c. Tasks and powers of the Authorities – in particular: issuance of draft technical standards d. Accountability of the Authorities vis-à-vis the European Parliament and the Council

7. A. (continued) 2. Implementation of the Larosiere Report (continued) 2.2 The European Systemic Risk Board a. Composition and governance of the Board b. Tasks and powers of the Board

8. B. Regulatory developments • Amendments to the “basic” legal acts constituting the sources of European banking law: an overview • Directives 2006/48/EC (CRD) and 2006/49/EC on authorisation and micro-prudential supervision and regulation of credit institutions: amended (under 2) • Directive 2000/46/EC on electronic money institutions: amended (EMIs not treated anymore as credit institutions) • Directive 2001/24/EC on the reorganisation and winding-up of credit institutions: no amendment yet • Directive 94/19/EC on deposit guarantee schemes: amended and to be further amended (under 3)

9. B. (continued) 2. Amendments to Directives 2006/48/EC and 2006/49/EC 2.1 Directive 2009/111/EC (“CRD II”): • “significant branches” • eligibility of hybrid capital instruments for inclusion in “tier 1” capital • enhancement of rules on large exposures • establishment of “colleges of supervisors” for credit institutions operating in several member states

10. B. (continued) 2. Amendments to Directives 2006/48/EC and 2006/49/EC (continued) 2.2 Proposal for a new Directive to be adopted in 2010 (“CRD III”) • new capital requirements for re-securitisations • enhancement of disclosure requirements for securitisation exposures • stricter capital requirements for trading-book exposures • rules on “remuneration policies”

11. B. (continued) 2. Amendments to Directives 2006/48/EC and 2006/49/EC (continued) 2.3 Draft proposal for a new Directive to be adopted in 2011 (CRD IV) • adoption of the “Basel III” framework (leverage ratio – liquidity standards – additional capital requirements – redefinition of regulatory capital – counter-cyclical regulatory measures) • establishment of a “single rulebook”

12. B. (continued) 3. Amendments to Directive 94/19/EC 3.1 Directive 2009/14/EC • increase of coverage level: from 20,000 euros to 50,000 and then to 100,000 (by 2011) • shortening of the “payout period”: from 3 months to 10 working days • enhancement of information to be provided by credit institutions to depositors (actual and potential) 3.2 Proposal for a new Directive (July 2010) • max. harmonisation of coverage level to 100,000 euros • further shortening of the “payout period”: 5 working days

13. C. Dealing with SIFIs 1. Communication from the European Commission: an EU framework for crisis management in the financial sector – dealing with SIFIs The crisis management framework comprises three classes of measures: • Preparatory and preventative measures • Early supervisory intervention • Resolution tools and powers 2. Proposals (still) to establish a “bank resolution fund” to be financed by the industry

14. D. Strengthening European economic governance • European economic union is based on three pillars: • Budgetary autonomy • Economic policy coordination • Fiscal discipline This in contrast to the monetary union, in the context of which a single monetary and foreign exchange policy is exercised and a single currency has been introduced The institutional framework on the economic union was lacking a “crisis management mechanism”

15. D. (continued) 2. Specific “temporary” crisis management mechanisms were established during the spring of 2010, initially for Greece (120 bn euros) and then for the entire eurozone, the “European financial stabilisation mechanism” (750 bn euros) 3. In September 2010, the European Commission submitted a “legislative package” containing: • proposals for three Regulations and one Council Directive dealing with fiscal issues, • proposals for two Regulations aiming at effectively preventing and correcting emerging macroeconomic imbalances within the EU and the euro area

16. D. (continued) 4. At its meeting on 28-29 October 2010, the European Council endorsed the Report of the “Task Force on Economic Governance”. Its main implication will be the creation of a “permanent” crisis management mechanism to safeguard the financial stability of the entire euro area This will require a limited-scope amendment of the TFEU, with no modification of the so-called “no-bail-out clause”