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LLM CANDIDATE IN BANKING AND FINANCE QMUL FUTURE ECB TRAINEE IN THE FINANCIAL LAW DIVISION

This detailed narrative explores the creation and development of the European Banking Union, focusing on key milestones such as the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism. It delves into the complexities of banking supervision, regulatory changes post the Global Financial Crisis, and proposals for a European Deposit Insurance Scheme. The text also covers the role of the European Central Bank (ECB) and the European System of Central Banks.

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LLM CANDIDATE IN BANKING AND FINANCE QMUL FUTURE ECB TRAINEE IN THE FINANCIAL LAW DIVISION

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  1. I TRE PILASTRI DELL’UNIONE BANCARIA EUROPEA.Origini, sviluppi e possibiliprospettiveDott. Ronzino Giulio LLM CANDIDATE IN BANKING AND FINANCE QMUL FUTURE ECB TRAINEE IN THE FINANCIAL LAW DIVISION

  2. Banking union Banking Union (based upon the Single Rulebook) This process replicates the experience of the Federal Reserve System and the Federal Deposit Insurance Corporation in the USA one century ago. Establishment of the Single Supervisory Mechanism (SSM) Regulation of 15 October 2013 Start – 4 Nov 2014 Resolution* Regulation of 15 July 2014 Single Resolution Mechanism Regulation & IGA Commission, SRB/SRF & national resolution authorities Banking supervision SSM ECB / National competent authorities Deposit guarantee European Deposit Insurance Scheme Proposal published Nov 2015 European Stability Mechanism (ESM) Direct recapitalisation LOLR (the missing pillar) Fiscal union? Fiscal backstop

  3. The euro and the European Central Bank. The latter forms together with the National Central Banks of the EU Member States the European System of Central Banks. Austria, Belgium, France, Finland, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain adopted the euro on 1 of January 2002. Slovenia adopted the euro on 1 January 2007. Estonia joined in 2011. Latvia adopted the euro on 1 January 2014, Lithuania – in 2015 19 Member States of the European Union use the euro as their currency: Belgium, Germany, Ireland, Greece, Spain, France, Italy, Cyprus, Luxembourg, Malta, The Netherlands, Austria, Portugal, Slovenia, Slovakia, Finland, Estonia, Latvia, Lithuania NON – PARTICIPANTS - Bulgaria, Czech Republic, Denmark, Hungary, Poland, Romania, Sweden and the United Kingdom are EU Member States but do not currently use the single European currency. EURO AREA

  4. I PILLAR SINGLE SUPERVISORY MECHANISM

  5. GLOBAL FINANCIAL CRISIS • The Global Financial Crisis of 2007-2009 was originated by a number of factors: v  Macro-economic imbalances that led to asset and credit bubbles v  Weak or absence of regulation in certain areas. The operations of ‘Large and Complex Financial Institutions’ (‘LCFIs’) highlighted a weakness in EU regulation. As known, it takes time to adopt legally binding decisions at EU level • The crisis led to a complete overhaul of the EU regulatory and supervisory architecture with the aims of: Strengthening existing rules v  Extending EU regulation to areas that were not regulated (RAs, HFs, PEs) v  Focusing on crisis prevention + crisis management + crisis resolution

  6. DE LAROSIERE MANDATE October 2008 the President of the European Commission conferred a mandate to the former Governor of the Banque de France (Jacques de Larosière) to chair a high-level group on financial supervision to make proposals to strengthen European supervisory arrangements covering all financial sectors, with the objective of establishing a more efficient, integrated and sustainable European system of supervision.

  7. European Financial Architecture + ecb in 2013 European Systemic Risk Board (ESRB) Early risk warnings and recommendations to governments Macro-prudential supervision General Board: Voting members: –Governors of NCBs; – President and the vice-President of the ECB; – a Member of the European Commission; –Chairpersons of the three European Supervisory Authorities. Non-voting members: –representatives of national supervisors; –President of the Economic and Financial Committee. ECOFIN Steering committee, Secretariat Early risk warning and recommendation to supervisors Micro-prudential information European System of Financial Supervisors (ESFS) SSM 2014 Micro-prudential supervision Joint Committee of European Supervisory Authorities Board of Appeal European Insurance and Occupational Pensions Authority (EIOPA) European Securities and Markets Authority (ESMA) European Banking Authority (EBA) National Banking Supervisors National Insurance and Pension Supervisors National Securities Supervisors

  8. SSM The Single Supervisory Mechanism (first pillar of the Banking Union) is the system of banking supervision composed of the ECB and national competent authorities (NCAs) of participating Member States

  9. Interaction between ECB and National Competent Authorities

  10. ESCB – ECB + NCBs • The European System of Central Banks is a complex central banking system. • The European Central Bank + National Central Banks = The European System of Central Banks • Multi-layered complexity • Structural complexity • The ESCB is composed of the ECB and the NCBs. • EU Member States: “ins” and “outs” • The complex duality of the ESCB is further compounded - for a transitional period of unknown duration - by the division between the ‘ins’ (i.e., member states whose currency is the euro) and the ‘outs’ (i.e., and member states not participating in the single currency or ‘member states with a derogation’ according to the language of the Treaty). • The NCBs of the ‘ins’ and the ECB constitute the Eurosystem. Article 282 TFEU enshrines into EU law the term ‘Eurosystem’

  11. Article 127 TFEU (legal basis) • The primary objective of the European System of Central Banks (hereinafter referred to as ‘the ESCB’) shall be to maintain price stability. Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union. The ESCB shall act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources, and in compliance with the principles set out in Article 119. • The basic tasks to be carried out through the ESCB shall be: - to define and implement the monetary policy of the Union, - to conduct foreign-exchange operations consistent with the provisions of Article 219, - to hold and manage the official foreign reserves of the Member States, - to promote the smooth operation of payment systems. 3. The third indent of paragraph 2 shall be without prejudice to the holding and management by the governments of Member States of foreign-exchange working balances. 4. The ECB shall be consulted: - on any proposed Union act in its fields of competence, - by national authorities regarding any draft legislative provision in its fields of competence, but within the limits and under the conditions set out by the Council in accordance with the procedure laid down in Article 129(4). The European Central Bank may submit opinions to the appropriate Union institutions, bodies, offices or agencies or to the national authorities on matters in its fields of competence. 5. The ESCB shall contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system. 6. The Council, acting by means of regulations in accordance with a special legislative procedure, may unanimously, and after consulting the European Parliament and the European Central Bank, confer specific tasks upon the European Central Bank concerning policies relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings.

  12. A new era for banking supervision in the EU! FI SE LT IE NL Banking supervision 3,600 banks, 19 countries, one system On 4 November 2014 the ECB took over supervisory responsibility for banks in the euro area. The ECB directly supervises the 120 significant banks of the participating countries. These banks hold almost 82% of banking assets in the euro area. IT ES PT GR

  13. Functioningofthe SSM European Central Bank (ECB) National Competent Authorities (NCAs) in Joint Supervisory Teams (ECB + NCA staff) Indirect supervision Direct supervision Direct supervision The ECB may decide at any time to take responsibility for a less significant banks. “Significant” banks (approx. 120 groups) “Less significant” banks

  14. SIGNIFICANCE CRITERIATo qualify as significant, banks must fulfil at least one of these criteria:

  15. A JST for every significant banking group JST supervision is done at the highest level of consolidation within the SSM JST is the main tool within which NCAs assist the ECB in the supervision of significant banking groups Horizontal and specialised functions support JSTs Joint Supervisory Teams (JSTs)

  16. SINGLE RULEBOOK • CRR (CAPITAL REQUIREMENTS REGULATION 575/2013 ) • CRD IV (CAPITAL REQUIREMENTS DIRECTIVE 36/2013) • BRRD (BANKING RECOVERY AND RESOLUTION DIRECTIVE 59/2014) • DGSD (DEPOSIT GUARANTEE SCHEME DIRECTIVE 49/2014)

  17. II PILLAR SINGLE RESOLUTION MECHANISM

  18. SRM: Simple, efficient, European Single Resolution Fund manages ECB National Supervisors COM/CON notify Single Resolution Board bails in supervise contribute instructs Owners / creditors National Resolution Authorities hold shares/claims resolve All banks Failed bank

  19. SRM REGULATION (806/2014) Article 16 of the SRM Regulation regulates the following legislative process: (a) the ECB signals when a significant bank or crossborder group in a participating Member State is failing or likely to fail; (b) the Single Resolution Board (SRB) determines that there is no reasonable prospect of a timely private sector rescue and also that a resolution action is in the public interest; and, (c) the SRB with the help of the relevant national resolution authorities, prepares and adopts the resolution scheme.

  20. BRRD (59/2014) • RESOLUTION • PRECAUTIONARY RECAPITALISATION

  21. RESOLUTIONREQUISITES • Breach of authorisation requirements sufficient to withdraw authorisation, including because losses depleting all or substantially all own funds*; • Assets less than liabilities*; • Unable to pay debts as fall due*; or • Requires extraordinary public financial support 1.Institution failing or likely to fail; 2. No reasonable prospect of other actions preventing failure; and 3. Resolution action in public interest

  22. RESOLUTION TOOLS Sale of business Asset separation Bail in Bridge institution

  23. BAIL IN • Consists in: • Write down the claims of shareholders and creditors • Convert debt into equity • Purpose: • to recapitalise an institution which meets the conditions for resolution • to convert to equity or reduce the principal amount of claims

  24. Bail in may be applied to all liabilities other than: • covered deposits • secured liabilities • liabilities arising through holding client assets • liabilities to unrelated institutions (<7 days original maturity) • liabilities arising from designated systems with residual maturity <7 days • liabilities to employees (except for bonuses), critical trade creditors, preferred tax and social security claims

  25. PRECAUTIONARY RECAPITALISATION • Precautionary recapitalisation is an innovative legal tool regulated by BRRD. • It allows Member States to support with public money those banks that, although not insolvent, need an increase of capital according to the results of stress tests in the so-called adverse scenario. BUT: the use of such a tool is allowed only in order to remedy a serious disturbance in the economy of a Member State and preserve financial stability • ECB “[a] precautionary recapitalisation describes the injection of own funds into a solvent bank by the state when this is necessary to remedy a serious disturbance in the economy of a Member State and preserve financial stability. It is an exceptional measure that is conditional on final approval under the European Union State aid framework. It does not trigger the resolution of the bank”.

  26. PRECAUTIONARY RECAPITALISATION • The most critical aspect of such a new legal tool is the meaning of the expression “serious disturbance in the economy”. • The use of such expression lies in art 107(1) that establishes the general prohibition of State aid (unless it is justified by the existence of a serious disturbance in the economy (Art 107 (3) (b)) • No qualitative or quantitative thresholds are provided ► the financial crisis was unanimously seen as an example of this situation and as such the provision of State aid was extraordinarily declared compatible with the Treaty, albeit subject to certain conditions. • The absence of a legal definition of “serious disturbance” leaves the authorities with a fair degree of flexibility in determining the need, or lack thereof, to provide extraordinary public financial support

  27. III PILLAR EUROPEAN DEPOSIT GUARANTEE SCHEME

  28. DGSD 49/2014 • NATIONAL DGSs set up and officially recognised in 1 EU country must cover the depositors at branches of their members in other EU countries. • The directive maintains the deposit protection of €100,000, and includes a gradual reduction of the repayment times of deposit guarantees. • It also restates the principle of resolving bank failures with the use of funds provided by financial institutions, and not by taxpayers

  29. COMMISSION PROPOSAL 2015

  30. Gradual approach for EDIS 2024 2020 - 2023 2017 - 2019

  31. Re-Insurance (3 years) • Risks remain largely national. This reduces moral hazard and addresses legacy. • EDIS would only provide liquidity and, eventually cover excess loss, if the national DGS has exhausted its own resources and complies with DGSD obligations (e.g. capitalisation). • There are other caps and safeguards to protect EDIS.

  32. Co-Insurance (4 years) • Co-Insurance is a further development of re-insurance. • Main difference: The national DGS would not have to be exhausted before it can access EDIS. • EDIS will cover some amount from the first euro that the national DGS pays out to its depositors. Risk is therefore partially mutualised. • The degree of available EDIS cover would increase over four years till it is fully mutualised.

  33. IV. ELA as the missing pillar in the Banking Union Banking Union (based upon the Single Rulebook) Establishment of the Single Supervisory Mechanism (SSM) Regulation of 15 October 2013 Start – 4 Nov 2014 Resolution* Regulation of 15 July 2014 Single Resolution Mechanism Regulation & IGA Commission, SRB/SRF & national resolution authorities Banking supervision SSM ECB / National competent authorities Deposit guarantee European Deposit Insurance Scheme Proposal published Nov 2015 European Stability Mechanism (ESM) Direct recapitalisation LOLR (the missing pillar) Fiscal union? Fiscal backstop

  34. III. ELA in thecurrent legal framework National competence, i.e. competence of NCBs Legal framework: • Art. 14.4 ESCB Statute: national law • ELA Agreement May 2017: procedural requirements for cooperation between NCBs and ECB (Governing Council) Why role of Governing Council? Art.14.4: Governing Council has to decide whether ELA interferes with objectives and tasks of the ESCB

  35. CHALLENGES • Completing the third pillar and, eventually, the fourth pillar • Increasing the harmonisation and cooperation in the banking system (political aspects) • Fostering cross-border banking services

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