EU Financial Regulations
Inhoudsopgave
Part 0 Introduction to the course....................................................................8
I. What is financial regulation......................................................................................... 8
II. Goals of financial regulation (second part of def).......................................................9
III Sources of financial regulation - – Who regulates?....................................................15
IV. Historic Context/Evolution of EU Financial Regulation..............................................19
PART I Basic structures of financial law.........................................................28
I. Legislative procedure.................................................................................................28
II. Supervision of the financial sector............................................................................30
PART 2 STABILITY OF THE BANKING SYSTEM..................................................43
I. Regulating banks....................................................................................................... 43
1.1 What?.................................................................................................................. 43
1.2 Why Regulate Banks/Credit institutions?.............................................................45
1.3 How Regulate?..................................................................................................... 46
II. Basel Standards: capital and liquidity standards.......................................................47
2.1 Basel Committee................................................................................................. 47
2.2 Basel I................................................................................................................. 47
2.3 Basel II................................................................................................................. 52
2.4 Basel III................................................................................................................ 58
2.5. “Basel IV”: amendments to Basel III in 2017......................................................67
2.6. Basel III and Sustainable finance........................................................................68
2.7. Basel “Climate change framework”....................................................................68
III. European Regulation of credit institutions...............................................................68
3.1 Introduction......................................................................................................... 68
3.2 Differences with Basel Standards........................................................................69
3.3. Additions to Basel Standards..............................................................................69
3.4. Implementation of Basel Standards....................................................................70
3.5. Integrating sustainable finance into CRD...........................................................71
3.6. Internal market................................................................................................... 72
IV The Banking Union.................................................................................................... 73
4.1 Introduction......................................................................................................... 73
4.2. Single Supervisory Mechanism...........................................................................74
4.3 Single resolution mechanism...............................................................................74
4.4. Deposit guarantee.............................................................................................. 83
4.5. Will EBU succeed in avoiding future crises?........................................................88
V. Will EBU succeed in avoiding future crises?..............................................................88
Part III Financial Instruments........................................................................89
Introduction.................................................................................................................. 90
I. Loans......................................................................................................................... 90
II. Deposits.................................................................................................................... 91
III. Financial instruments............................................................................................... 93
Part IV Rating Agencies..............................................................................109
1
, I Background:.............................................................................................................. 110
1.1 Business of a rating agency...............................................................................110
1.2. Alternative business offers...............................................................................110
1.3. Some numbers................................................................................................. 110
1.4. Opinion expressed in ratings............................................................................111
II. Rating agency business model................................................................................111
2.1. Evolution.......................................................................................................... 111
2.2. Conflict of interest............................................................................................ 111
2.3. Impact of a downgrade.....................................................................................114
2.4. CRAs and information asymmetry....................................................................115
2.5. Rating agency rating model.............................................................................115
III. Rating agency liability............................................................................................117
IV. Failing rating agencies........................................................................................... 117
V. Legislation applicable to CRA’s in EU.......................................................................118
5.1 Background....................................................................................................... 118
5.2 IOSCO Code (2004)........................................................................................... 119
5.3. CRA Regulation................................................................................................. 119
ST NEW: Sustainability ratings.................................................................................124
VI. The way forward?..................................................................................................125
PART V Financial Markets............................................................................125
I. Market regulation..................................................................................................... 125
1.1. From markets to venues...................................................................................125
1.2.Types of venues................................................................................................. 125
1.3 Regulation of markets.......................................................................................128
1.4. Functioning of markets.....................................................................................129
II. Market abuse.......................................................................................................... 130
2.1 Concept............................................................................................................. 130
2.2.European rules regarding market abuse............................................................130
2.3. Insider dealing.................................................................................................. 131
2
,22 sep
Practical info:
- Pp + notes + readers
- Handbook don’t need to know it
- Background materials don’t need to read it
Assignments: read or watch st
Recordings? Yes for one week
Cross reference can See case 1993 CJEU (Every reader is checked)
Exam: +- 4 essay questions (!! verwijs nr articles !!)
- Explain concept / rule
- Link between different parts of the course
- Opinion about a rule / Evolution -> conclusion how should it be
- New York times article: situate in the course
- Give advice on a certain case, often market abuse
+ 1 question: Explain some concepts
Last class: discuss example exam
What is this class about? (see schedule on pp)
Intermediates
- Credit institution = bank
- Investment fund
3
,Market
- Regulated market = Stock exchange
Credit rating agency
- Private company who make evaluations on companies who issue
financial instruments or on financial instruments itself how likely it
is the company will pay you back?
- Ratings: triple A C
Overview Of the class
Part 1 Basic structures of financial regulations
o Regulators
o Procedure
o Who are the supervisors? Who is competent for what and
when?
Part 2 Stability
Part 3 Financial instruments
Part 4 Rating financial instruments
Part 5 Financial markets
Intro class 1:
- Inside job (movie)
- 1929 first market crash
- 2007-2008 financial crisis
- EU financial regulations why these rules are there
Lehman brothers (FT 16 Sept 2016) -> the big investment bank in US
- It has been eight years since Lehman Brothers went bankrupt and
still it defines the calendar. For anyone in the financial world, time is
divided into Before Lehman, and After Lehman
- Such an outcome seemed inevitable in 2008. But many believe post-
crisis re- regulation has been inadequate. …
The big short (movie)
- Investment fund managers
- Shorting: borrow a share ex from pension funds and sell the share on
day one on the market buy it back at a lower price and give it
back to the fund = profit
o Selling st that isn’t yours and buy it back at a lower price
- Going long: buy a chair hoping the price will go up
- Big Short’ fund manager says financial system is safe (FT 31 July
2017)
For the first time in my working life, which is more than 30 years, I
would regard the financial system as safe,” Mr Eisman told FTfm on
the eve of the 10-year anniversary of the subprime mortgage crisis.
“The system is now heavily regulated and closely watched, which I
believe is right.
4
,Banking remains far too undercapitalised for comfort (FT 21 September
2017)
- The simplest question this anniversary raises is whether we now
have a safe financial system. Alas, the answer is no. Banking
remains less safe than it could reasonably be. That is a deliberate
decision. … The conclusion is simple. Banks are in better shape, on
many fronts, than they were a decade ago (though the questionable
treatment of income and assets in banks’ accounts continues to
render their financial robustness highly uncertain). But their balance
sheets are still not built to survive a big storm. That was true in
2007. It is still true now. Do not believe otherwise
Corona: How coronavirus became a corporate credit run (FT 15 March
2020)
- Companies couldn’t pay back loans
- New credits couldn’t been given
- “this is not a financial crisis”, when markets began acting very much
as though it was. Investors dumped assets resulting in the worst
trading day since 1987.
- that it hasn’t been a 2008-style banking crisis — of the kind that
jumps like a virus between highly leveraged global financial
institutions and causes them to bleed dry. The Dodd-Frank and Basel
III regulations that followed in the wake of the subprime crisis were
designed to mitigate that risk. …
Nobody assumed that a pandemic would result in huge credit
drawdowns by many companies all at once. Losing these deposits so
quickly threatens the liquidity profile and regulatory compliance of
banks themselves
Investment funds need bolstering to stop market turmoil repeat, says IMF
(FT 17 sept ‘21)
- Fundamental reforms are needed to bolster investment funds to
prevent a repeat of the financial market turmoil triggered by the
coronavirus pandemic, the IMF said on Friday. Central banks were
forced to intervene aggressively to restore order after sharp price
falls across financial markets in the first quarter of 2020 were
amplified by heavy selling by fund managers,
Ukraine: Sberbank’s Austrian unit is first bank to fail after sanctions on
Moscow, FT 2 March 2022
- Sberbank (important bank Russia) branches in EU
- EU took sanctions against Russia: breaking all ties
- Run to the bank and the (Russian) mother bank couldn’t help
- The Austrian unit of Sberbank has been pushed into failure by far-
reaching sanctions on Russia, becoming the first banking victim of
the measures after they caused a run on the bank and left its parent
unable to help
- König said the eurozone financial system was stable “for the time
being” but “clearly banks that have a Russian ownership are under
stress”
5
,The financial system is still dealing with the fallout from 2008, FT 25 Sept
2022
- 15 years on from the great financial crisis, there’s still plenty of risk
in the market system — it’s just coming from different places. …
This gets us back to one of the core, and still unanswered, questions
of the great financial crisis — why are banks so special?
- banks increasingly have to compete with less regulated market
actors… Financial “innovation” is still running far ahead of
regulation, just as it did before 2008. …
- … we still have a market system that all too often exists more to
serve itself than the real economy. Perhaps we will need another
crisis before that problem is finally fixed .
- Examples:
o Silicon Valley Bank
Heavily involved in crypto
Bank run
US government saved the bank
o Credit Swiss
Deposit insurance is key to the confidence trick of banking (FT, 17 April
2023)
- in short order, three US lenders and the globally systemic Credit
Suisse became victims of a not-so-mini-banking crisis that all too
closely resembled the chaotic collapses of 2007-08.
push for deregulation among politicians on both sides of the Atlantic has
been staunched
6
,7
, Part 0 Introduction to the course
Fin Regulation = law financial market
With a number of objectives to achieve;
1° Avoiding systemic risk + Market stability
2° User protection
3° Market integrity = fair play -> market must not me
manipulated by people giving falls information
4° Sustainable finance
I. What is financial regulation
Sectoral description on the basis of “subsectors”: = outdated
(many people will get insurance at their bank insurance law =
applicable to this bank)
- Banking law (including law on payment and credit services)
- Securities law
- Insurance law
Another ex of why the sectoral description is outdated: In many
countries you get a tax benefit when taking a life insurance policy
instead of investing in a investment fund (e.g. pension saving)
- Life insurance contract: pay premium monthly and when you die
your family will get a sum of money
- By paying premiums you invest via an intermediate
- Legally you haven’t invested but taken an insurance insurance
law (= less strict)
Definition of financial regulation: “The law regulating the financial
markets in order (i) to ensure their optimal functioning and (ii) to pursue a
number of predefined goals”
- Functions of the financial markets:
1° Channelling money to where it is needed
o Financial markets as channels through which private savings
find their way to industrial and commercial investments
o Intermediation between excess of money and demand of
money
o also intermediation by volume: collection of relatively small
amounts (“retail”) and supply in relatively large amounts
2° Creation of money
o Central banks (ECB prints euro’s, national Central Banks) = the
makers of money
o Financial markets make money in a different way:
8
Inhoudsopgave
Part 0 Introduction to the course....................................................................8
I. What is financial regulation......................................................................................... 8
II. Goals of financial regulation (second part of def).......................................................9
III Sources of financial regulation - – Who regulates?....................................................15
IV. Historic Context/Evolution of EU Financial Regulation..............................................19
PART I Basic structures of financial law.........................................................28
I. Legislative procedure.................................................................................................28
II. Supervision of the financial sector............................................................................30
PART 2 STABILITY OF THE BANKING SYSTEM..................................................43
I. Regulating banks....................................................................................................... 43
1.1 What?.................................................................................................................. 43
1.2 Why Regulate Banks/Credit institutions?.............................................................45
1.3 How Regulate?..................................................................................................... 46
II. Basel Standards: capital and liquidity standards.......................................................47
2.1 Basel Committee................................................................................................. 47
2.2 Basel I................................................................................................................. 47
2.3 Basel II................................................................................................................. 52
2.4 Basel III................................................................................................................ 58
2.5. “Basel IV”: amendments to Basel III in 2017......................................................67
2.6. Basel III and Sustainable finance........................................................................68
2.7. Basel “Climate change framework”....................................................................68
III. European Regulation of credit institutions...............................................................68
3.1 Introduction......................................................................................................... 68
3.2 Differences with Basel Standards........................................................................69
3.3. Additions to Basel Standards..............................................................................69
3.4. Implementation of Basel Standards....................................................................70
3.5. Integrating sustainable finance into CRD...........................................................71
3.6. Internal market................................................................................................... 72
IV The Banking Union.................................................................................................... 73
4.1 Introduction......................................................................................................... 73
4.2. Single Supervisory Mechanism...........................................................................74
4.3 Single resolution mechanism...............................................................................74
4.4. Deposit guarantee.............................................................................................. 83
4.5. Will EBU succeed in avoiding future crises?........................................................88
V. Will EBU succeed in avoiding future crises?..............................................................88
Part III Financial Instruments........................................................................89
Introduction.................................................................................................................. 90
I. Loans......................................................................................................................... 90
II. Deposits.................................................................................................................... 91
III. Financial instruments............................................................................................... 93
Part IV Rating Agencies..............................................................................109
1
, I Background:.............................................................................................................. 110
1.1 Business of a rating agency...............................................................................110
1.2. Alternative business offers...............................................................................110
1.3. Some numbers................................................................................................. 110
1.4. Opinion expressed in ratings............................................................................111
II. Rating agency business model................................................................................111
2.1. Evolution.......................................................................................................... 111
2.2. Conflict of interest............................................................................................ 111
2.3. Impact of a downgrade.....................................................................................114
2.4. CRAs and information asymmetry....................................................................115
2.5. Rating agency rating model.............................................................................115
III. Rating agency liability............................................................................................117
IV. Failing rating agencies........................................................................................... 117
V. Legislation applicable to CRA’s in EU.......................................................................118
5.1 Background....................................................................................................... 118
5.2 IOSCO Code (2004)........................................................................................... 119
5.3. CRA Regulation................................................................................................. 119
ST NEW: Sustainability ratings.................................................................................124
VI. The way forward?..................................................................................................125
PART V Financial Markets............................................................................125
I. Market regulation..................................................................................................... 125
1.1. From markets to venues...................................................................................125
1.2.Types of venues................................................................................................. 125
1.3 Regulation of markets.......................................................................................128
1.4. Functioning of markets.....................................................................................129
II. Market abuse.......................................................................................................... 130
2.1 Concept............................................................................................................. 130
2.2.European rules regarding market abuse............................................................130
2.3. Insider dealing.................................................................................................. 131
2
,22 sep
Practical info:
- Pp + notes + readers
- Handbook don’t need to know it
- Background materials don’t need to read it
Assignments: read or watch st
Recordings? Yes for one week
Cross reference can See case 1993 CJEU (Every reader is checked)
Exam: +- 4 essay questions (!! verwijs nr articles !!)
- Explain concept / rule
- Link between different parts of the course
- Opinion about a rule / Evolution -> conclusion how should it be
- New York times article: situate in the course
- Give advice on a certain case, often market abuse
+ 1 question: Explain some concepts
Last class: discuss example exam
What is this class about? (see schedule on pp)
Intermediates
- Credit institution = bank
- Investment fund
3
,Market
- Regulated market = Stock exchange
Credit rating agency
- Private company who make evaluations on companies who issue
financial instruments or on financial instruments itself how likely it
is the company will pay you back?
- Ratings: triple A C
Overview Of the class
Part 1 Basic structures of financial regulations
o Regulators
o Procedure
o Who are the supervisors? Who is competent for what and
when?
Part 2 Stability
Part 3 Financial instruments
Part 4 Rating financial instruments
Part 5 Financial markets
Intro class 1:
- Inside job (movie)
- 1929 first market crash
- 2007-2008 financial crisis
- EU financial regulations why these rules are there
Lehman brothers (FT 16 Sept 2016) -> the big investment bank in US
- It has been eight years since Lehman Brothers went bankrupt and
still it defines the calendar. For anyone in the financial world, time is
divided into Before Lehman, and After Lehman
- Such an outcome seemed inevitable in 2008. But many believe post-
crisis re- regulation has been inadequate. …
The big short (movie)
- Investment fund managers
- Shorting: borrow a share ex from pension funds and sell the share on
day one on the market buy it back at a lower price and give it
back to the fund = profit
o Selling st that isn’t yours and buy it back at a lower price
- Going long: buy a chair hoping the price will go up
- Big Short’ fund manager says financial system is safe (FT 31 July
2017)
For the first time in my working life, which is more than 30 years, I
would regard the financial system as safe,” Mr Eisman told FTfm on
the eve of the 10-year anniversary of the subprime mortgage crisis.
“The system is now heavily regulated and closely watched, which I
believe is right.
4
,Banking remains far too undercapitalised for comfort (FT 21 September
2017)
- The simplest question this anniversary raises is whether we now
have a safe financial system. Alas, the answer is no. Banking
remains less safe than it could reasonably be. That is a deliberate
decision. … The conclusion is simple. Banks are in better shape, on
many fronts, than they were a decade ago (though the questionable
treatment of income and assets in banks’ accounts continues to
render their financial robustness highly uncertain). But their balance
sheets are still not built to survive a big storm. That was true in
2007. It is still true now. Do not believe otherwise
Corona: How coronavirus became a corporate credit run (FT 15 March
2020)
- Companies couldn’t pay back loans
- New credits couldn’t been given
- “this is not a financial crisis”, when markets began acting very much
as though it was. Investors dumped assets resulting in the worst
trading day since 1987.
- that it hasn’t been a 2008-style banking crisis — of the kind that
jumps like a virus between highly leveraged global financial
institutions and causes them to bleed dry. The Dodd-Frank and Basel
III regulations that followed in the wake of the subprime crisis were
designed to mitigate that risk. …
Nobody assumed that a pandemic would result in huge credit
drawdowns by many companies all at once. Losing these deposits so
quickly threatens the liquidity profile and regulatory compliance of
banks themselves
Investment funds need bolstering to stop market turmoil repeat, says IMF
(FT 17 sept ‘21)
- Fundamental reforms are needed to bolster investment funds to
prevent a repeat of the financial market turmoil triggered by the
coronavirus pandemic, the IMF said on Friday. Central banks were
forced to intervene aggressively to restore order after sharp price
falls across financial markets in the first quarter of 2020 were
amplified by heavy selling by fund managers,
Ukraine: Sberbank’s Austrian unit is first bank to fail after sanctions on
Moscow, FT 2 March 2022
- Sberbank (important bank Russia) branches in EU
- EU took sanctions against Russia: breaking all ties
- Run to the bank and the (Russian) mother bank couldn’t help
- The Austrian unit of Sberbank has been pushed into failure by far-
reaching sanctions on Russia, becoming the first banking victim of
the measures after they caused a run on the bank and left its parent
unable to help
- König said the eurozone financial system was stable “for the time
being” but “clearly banks that have a Russian ownership are under
stress”
5
,The financial system is still dealing with the fallout from 2008, FT 25 Sept
2022
- 15 years on from the great financial crisis, there’s still plenty of risk
in the market system — it’s just coming from different places. …
This gets us back to one of the core, and still unanswered, questions
of the great financial crisis — why are banks so special?
- banks increasingly have to compete with less regulated market
actors… Financial “innovation” is still running far ahead of
regulation, just as it did before 2008. …
- … we still have a market system that all too often exists more to
serve itself than the real economy. Perhaps we will need another
crisis before that problem is finally fixed .
- Examples:
o Silicon Valley Bank
Heavily involved in crypto
Bank run
US government saved the bank
o Credit Swiss
Deposit insurance is key to the confidence trick of banking (FT, 17 April
2023)
- in short order, three US lenders and the globally systemic Credit
Suisse became victims of a not-so-mini-banking crisis that all too
closely resembled the chaotic collapses of 2007-08.
push for deregulation among politicians on both sides of the Atlantic has
been staunched
6
,7
, Part 0 Introduction to the course
Fin Regulation = law financial market
With a number of objectives to achieve;
1° Avoiding systemic risk + Market stability
2° User protection
3° Market integrity = fair play -> market must not me
manipulated by people giving falls information
4° Sustainable finance
I. What is financial regulation
Sectoral description on the basis of “subsectors”: = outdated
(many people will get insurance at their bank insurance law =
applicable to this bank)
- Banking law (including law on payment and credit services)
- Securities law
- Insurance law
Another ex of why the sectoral description is outdated: In many
countries you get a tax benefit when taking a life insurance policy
instead of investing in a investment fund (e.g. pension saving)
- Life insurance contract: pay premium monthly and when you die
your family will get a sum of money
- By paying premiums you invest via an intermediate
- Legally you haven’t invested but taken an insurance insurance
law (= less strict)
Definition of financial regulation: “The law regulating the financial
markets in order (i) to ensure their optimal functioning and (ii) to pursue a
number of predefined goals”
- Functions of the financial markets:
1° Channelling money to where it is needed
o Financial markets as channels through which private savings
find their way to industrial and commercial investments
o Intermediation between excess of money and demand of
money
o also intermediation by volume: collection of relatively small
amounts (“retail”) and supply in relatively large amounts
2° Creation of money
o Central banks (ECB prints euro’s, national Central Banks) = the
makers of money
o Financial markets make money in a different way:
8
