Governing Financial Services in the European Union

Banking, Securities and Post-Trading

Lucia Quaglia

• Publisher: Routledge
• Year: 2010
• ISBN:
  9781136998164
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

The global financial crisis that reached its peak in late 2008 has brought the importance of financial services regulation and supervision into the spotlight.

This book examines the governance of financial services in the EU, asking who governs financial services in the EU, how and why, and explaining where the power lies in the policy-making process. It covers the main financial services: banking, securities, payments systems, clearing and settlement. Addressing the politics and public policy aspects of financial market integration, regulation and supervision in the European Union, this book conducts a theoretically-informed and empirically-grounded analysis of financial services governance from the establishment of Economic and Monetary Union (1999) and the launch of the Financial Services Action Plan (1999), to date. It also assesses the EU responses to the global financial crisis.

Providing a reliable and unique insight into the politics of financial services regulation in the EU based on an extensive programme of interviews with policy makers and stakeholders across Europe, the book will be of great topical interest to students and scholars of European Union studies, political science and political economy.

1
Introduction

The global financial turmoil that began in 2007 and gained full force in the autumn of 2008 brought into the spotlight the importance of financial services regulation and supervision. Although this is not a book on those global financial troubles – the project was well under way before the first signs of the crisis erupted – the research is very topical because, in order to shed some light on that situation, it is necessary to gather a better understanding of how financial regulation is made, who are the main players, how they define their regulatory preferences and how they exert their influence in the rule-making process, as well as the effects of all this on the regulatory outcomes – i.e. the rules set in place.

This project examines the governance of financial services in the European Union (EU) in banking, securities markets and post-trading activities – it explains where the ‘power’ lies in the rule-making process. Paraphrasing Dahl (1961), it addresses the question of ‘who governs financial services’ in the EU, how and why. Since governance is, inherently, multi-level, the book not only explores the politics and public policy aspects of financial regulation and supervision in the EU, it also concisely evaluates how such processes interact with international and national policy-making in this area.

In the multi-level governance of financial services, the EU level is paramount because EU rules, unlike international regulatory agreements, are legally binding and national financial legislation in the member states is shaped by, or at the very least incorporates, EU legislation. This has been the case particularly over the last decade, when the project of the completion of the Single Market in financial services gained momentum and a host of new rules were issued by the EU.

The volume has two main goals, which are both exploratory and explanatory. The first goal is to map and explain the complex institutional framework underpinning the governance of banking, securities markets and post-trading activities in the EU, analysing how it interplays with regulatory and supervisory arrangements in international arenas and selected countries. This mapping exercise is a challenging and worthwhile activity in its own right, given the intricacy of the multi-level institutional framework in place and the vast number of committees, of various types, at work.

The second goal is to analyse the EU policy-making processes in the financial sector and their outcomes: the main policy-makers and stakeholders involved; their resources and influence on the policy process and outcome; the relations between the public authorities and industry; and the role of ‘experts’ and policy paradigms in framing ‘technical’ policies. The assessment is conducted in a multidimensional policy space, taking into account the interplay between international, EU and national financial services regulation.

The research is both academically interesting and policy relevant. In academia, there is a considerable gap in the literature in political science. Two path-breaking studies on the politics of financial market integration in the EU were conducted in the mid-1990s, by Josselin (1997) and Story and Walter (1997), focusing mainly on specific member states rather than the EU as a whole, and stressing the intergovernmental character of the negotiations concerning the Single Market in financial services (see also Underhill 1997; Coleman and Underhill 1998). Armstrong and Bulmer (1998) and Jabko (2006) examined the coming about of the 1992 project and the governance of the Single Market as a whole, dealing only marginally with financial services, one important reason being that market integration and regulation in the EU lagged behind in this sector in the period covered in their study. Apeldoorn (2002) focused on the activities of the European Round Table in the same period, hence it does not cover the last decade. Academic research has not kept pace with the new developments since the relaunch of the Single Market in financial services in 1999, especially in political science. Whereas lawyers and economists have analysed specific aspects of financial services regulation in the EU (Ferran and Goodhart 2001; Ferran 2004; Moloney 2002; Padoa-Schioppa 2004b), a comprehensive public policy analysis of financial services governance over the last crucial decade is still lacking.

In the last few years, several journal articles and book chapters have dealt with specific aspects of financial services governance, without, however, providing a complete picture. Posner (2005, 2009a) has investigated the creation of the European Association of Securities Dealers Automatic Quotation System (EASDAQ), which was a common stock market for start-up enterprises operating on a pan-European basis and the opening of new markets in several European countries in the mid-1990s, emphasising the role played by the European Commission. More recently, he has focused on the ‘transatlantic regulatory dialogue’ and disputes concerning securities markets (Posner 2009b).

Grossman (2004, 2005) has focused on banking policy, and particularly the activity of banking associations and their interactions with their respective national governments. Mügge (2006), Bieling (2003, 2006) and Macartney (forthcoming) have identified transnational capital and multinational financial companies as the main drivers in the making of the Single Market in the financial sector over the last decade. Macartney and Moran (2008), Moran and Macartney (2009) and Posner (2007) have taken stock from recent developments concerning financial market regulation and supervision in the EU.

In a study of networks of regulators, Coen and Thatcher (2008) have analysed the activity the Committee of European Securities Regulators (CESR), which is a ‘Lamfalussy committee’, as explained in Chapter 3. De Visscher et al. (2008) have also scrutinised the functioning of the so-called Lamfalussy committees in the securities sector, and Quaglia (2008c) has extended this analysis to the committees in the banking sector. All these works provide some useful insights, though in a piecemeal fashion. A systematic cross-sectoral study of financial services governance in the EU is needed.

This research is also policy relevant. As the global financial crisis has demonstrated, the governance of financial services has far-reaching economic and political repercussions, and the politics of financial services regulation is a very topical subject of broad public interest. The financial sector is a core part of national economies in the EU and has been one of the most dynamic areas of EU regulatory activity in the last decade or so. At the same time, this policy area is often perceived or deliberately presented as being ‘technical’, receiving limited public scrutiny, whereas politics is omnipresent in the process. Since accountability and transparency of financial services governance have of late become a matter of great public interest, this volume contributes towards opening up and informing public discussion.

Thematic context of the research

Five main sets of developments, taking place in the European, international and national arenas, have had far-reaching repercussions on financial services governance in the EU, providing the background to this research.

First, there was the relaunch of the Single Market in financial services with the Financial Services Action Plan (FSAP) issued by the European Commission in 1999, discussed in more detail in Chapter 3. The FSAP was a five-year plan that contained a set of forty-two legislative measures (see Mügge 2006). Moreover, the final stage of Economic and Monetary Union (EMU) in 1999 and the physical introduction of the single currency in 2002 gave new momentum to financial market integration, with clear repercussions on the configuration of the financial services industry, which has undergone national and cross-border consolidation (ECB 2004a; Deutsche Bank 2004a). This was followed by increasing interpenetration between the main segments of the financial sector, on account of the growth of securitisation of banking activities, the creation of other financial instruments, such as credit derivatives or collateralised debt obligations, and the formation of financial conglomerates (CEC 2002c; Group of Ten 2001; De Nicoló et al. 2003).

The Lamfalussy framework, which was agreed in 2001 with a view to improving financial regulation and supervision in the EU (on the Lamfalussy reform, see Mügge 2006 and Quaglia 2007), and the establishment or restructuring of the committees that underpin such a framework, were partly a response to the changes taking place in Europe, and partly a response to international trends and global competition, as discussed in Chapter 3. Moreover, the institutional framework and hence the policy processes in the financial sector in the EU are still in flux, particularly following the global financial crisis in 2007–8 (see Chapter 8). For example, the report of the de Larosière Group (2009) proposed a series of far-reaching institutional changes, such as the creation of the European Systemic Risk Council and the European System of Financial Supervisors, even though it fell short of proposing a single EU regulator.

Second, important (though non-legally binding) international agreements concerning financial regulation have been negotiated from the late 1990s onwards. For instance, the ‘Core Principles for Effective Banking Supervision’ were agreed in 1997 in Basel and the ‘Basel II Accord: Revised International Capital Framework’ was signed in 2004, as discussed in Chapter 4 (see Wood 2005; Quaglia 2008b; Underhill and Zhang 2008). Moreover, new regulatory and supervisory fora – such as the Financial Stability Forum established in Basel in 1999 (Porter 2005; Drezner 2007) – were created, with a view to coordinating the activities of national regulators and supervisors and in order to step up the cooperation between international regulatory and supervisory bodies dealing with different segments of the financial sector. This body came to the fore in leading the response to the global financial turmoil in 2007–8 (Angeloni 2008), as explained in Chapter 8. More generally, the crisis renewed policy-makers’ interest and public concern for the stability of the financial system, highlighting some open issues concerning the arrangements for financial stability in the EU.

Third, many EU countries have reformed their domestic frameworks for financial regulation and supervision in the last decade. Some of the most noticeable examples were the UK, Germany, Belgium, the Netherlands and Ireland, as well as some of the new member states (for an overview, see Masciandaro 2005; Masciandaro and Quintyn 2007; Westrup 2007; Quaglia 2008d). Several of these reforms moved towards a similar model of supervision, namely, a single supervisor for the entire financial sector, within or outside the central bank. It should also be noted that there are differences even among the countries that established a single financial supervisor. For example, in Germany the central bank retains some responsibility for banking supervision, unlike in the UK. However, different macro-regional models of supervisory authorities persist within the EU (Lütz 2004; Busch 2004). The most noticeable alternative to the ‘Anglo-German model’ outlined above is the ‘Mediterranean model’, which assigns an important supervisory role to the central bank. At any rate, the field of financial services remains a very sensitive issue for the member states, as suggested by relatively slow and often painstakingly negotiated progress made both in the EU and internationally.

Fourth, the augmented complexity of governance in this area has led to an increased reliance on the private sector for the provision of information and expertise; the issuing of private (soft) regulation; and the self-monitoring and self-enforcement of agreed norms. Intensive consultation with financial sector associations, interest groups, individual companies and experts has taken place internationally (Porter 2005; Underhill and Zhang 2008). In the EU, this is generally led by the European Commission. For example, the Commission’s Green Paper on Financial Services Policy was followed by intensive and extensive public consultation (principally with market participants) and, in the light of the responses received, the White Paper on Financial Services Policy was issued in 2005 (CEC 2005a, 2005b). Moreover, the so-called Lamfalussy committees, discussed in Chapter 3, consult industry in a systematic manner (Quaglia 2008c).

Internationally, the Basel Committee on Banking Supervision (BCBS) published several consultation papers on the Basel II Accord from 1999 through to 2002 and received hundreds of responses, which were then incorporated in successive amendments of the accord (Wood 2005; Underhill and Zhang 2008). Furthermore, in-depth consultation takes place at the national level both before and after important EU and international negotiations (Quaglia 2008b), and monitoring and enforcement of regulation is sometimes delegated (at least partly) to the private sector, mainly to private sector associations, as in the case of the Code of Conduct on Clearing and Settlement and the Single Euro Payments Area, discussed in Chapter 6.

Finally, financial governance has become a matter of interest outside the restricted circle of the policy-makers, the stakeholders and the experts involved. This increased public salience is linked to the fact that policy failures in this sector directly affect citizens in their capacity as bank account holders, small investors, insurance holders, pensioners, and so on, as underscored by recent financial scandals in several European countries (Westrup 2007). There is also growing concern among the public about the transparency and accountability of the institutions and policy-making processes in this area (for an overview, see Masciandaro and Quintyn 2007), which feeds into the broader debate on the democratic deficit of the EU and, more generally, democracy and legitimacy in global finance (Porter 2005, Underhill and Zhang 2008).

Caveats and limitations

There are three main caveats concerning this research. First, it does not deal with all financial services. A traditional classification of financial services comprises 1) banking, including financial conglomerates; 2) securities markets; and 3) insurance. Post-trading activities, which include payment services and the clearing and settlement of securities, can broadly be seen as part of banking and securities markets, respectively. Nonetheless, these activities became an important policy area in their own right after the establishment of EMU and the Single Market in financial services. They have been almost completely overlooked by the academic literature reviewed above, partly because they are rather ‘technical’ (hence, perhaps, the presumption that their regulation is not ‘political’), partly because, before the establishment of EMU and the FSAP, EU regulatory activity had been minimal in this field. The politics of these seemingly technical activities is explored here.

The regulation of insurance services in the EU is not examined for several reasons (on recent developments on insurance regulation, see Quaglia 2009d). For a long time, insurance was not considered as a financial service stricto senso and, indeed, it was regulated in many countries not by the finance ministry but by the social affairs ministry, the ministry for industry, or the ministry for economic activities. Second, banking and securities markets have been dealt with together in previous studies of financial sector governance (see Coleman 1996; Josselin 1997), whereas insurance is generally treated separately. Finally, and perhaps more substantially, it would have been overambitious to treat the governance of all financial services in one volume. Indeed, there is a trade-off between the scope of the research and its depth. I have preferred to develop an accurate analysis of EU rule-making processes of three highly interconnected financial services – banking, securities markets and post-trading activities – corroborated by substantial empirical evidence, rather than stretching the research to cover insurance regulation.

The second caveat is that this research focuses at the EU level. The national level is dealt with rather succinctly and only whenever this is necessary to understand the policy preferences and strategic actions of national actors and forces interacting at the EU level. The research does not cover the implementation of EU legislation and soft measures in the member states, which would be an interesting project in its own right. Following the same logic, the international level is mentioned only whenever this is directly relevant to explain developments in the EU.

The third caveat is that this is not a book abou...

Table of contents

• Routledge/UACES Contemporary European Studies
• Contents
• Tables
• Acknowledgements
• Abbreviations
• 1 Introduction
• 2 The research design
• 3 The making of the Single Market in financial services
• 4 Governing banking in the EU
• 5 Governing securities markets in the EU
• 6 Governing post-trading in the EU
• 7 An overall cross-sectoral assessment
• 8 The EU response to the global financial turmoil in 2007–9
• Conclusions
• Interviews
• Notes
• References
• Index