The following article has been compiled by Peter James Sant, a lecturer with the ifs University College based on information from the European Union websites. Mr Sant recommends that readers consult EU’s Europa website www.europa.eu to keep abreast with the latest updates and developments Following the outbreak of the recent financial and sovereign debt crisis, the regulatory framework within the European Union has passed through a rapid transformation. The concept of self regulation has been thrown out of the window while new regulatory structures and legislative frameworks have come into play. The more stringent regulatory framework has certainly reduced the amount of regulatory arbitrage among EU member states’ financial jurisdictions while impacting on the competitiveness of Europe compared to other non-European Union jurisdictions. The EU and EU member states have agreed to the establishment of the European Stability Mechanism (ESM) located in Luxembourg. The European Banking Authority (EBA) located in London increased the functions of the European Central Bank (ECB) from purely monetary policy and financial stability to include supervision through the Banking Union and the Single Supervisory Mechanism (SSM). Certainly, the recast Depositor Guarantee Scheme that was agreed to on 15 April by the European Parliament is another important initiative that reintroduces confidence into the European banking and financial system. This Directive also breaks away from the concept of “Bail-Out” based on the taxpayer and introduces the concept of “Bail-In” thereby removing sovereign debt from banking rescue plans.    The European Stability Mechanism (ESM) The European authorities have worked on a number of important initiatives to enhance European confidence in the stability of the financial services industry. The European authorities set up the ESM that is responsible for assisting member states’ governments that need financial bailouts because they are finding it too expensive to raise funds from the markets. The ESM is the permanent crisis resolution mechanism for the countries of the euro area. The ESM issues debt instruments in order to finance loans and other forms of financial assistance to euro area members states. The decision leading to the creation of the ESM was taken by the European Council in December 2010. The euro area member states signed an intergovernmental treaty establishing the ESM on 2 February 2012. The ESM was inaugurated on 8 October 2012. The ESM is authorised to make use of the following lending instruments for the benefit of its members, subject to appropriate conditionality: ·         Provide loans in the framework of a macroeconomic adjustment programme ·         Purchase debt in the primary and secondary debt markets ·         Provide precautionary financial assistance in the form of credit lines ·         Finance recapitalisations of financial institutions through loans to the governments of ESM members. The ESM will be empowered to directly recapitalise banks in the euro area once an effective single supervisory mechanism for euro area banks is established Two important success stories that have used the financing from the ESM and now are back to rise funds from the markets are Ireland and Spain.    The European Banking Authority (EBA) The EBA is an independent EU Authority which works to ensure effective and consistent prudential regulation and supervision across the European banking sector. Its overall objectives are to maintain financial stability in the EU and to safeguard the integrity, efficiency and orderly functioning of the banking sector. The main task of the EBA is to contribute to the creation of the European Single Rulebook in banking whose objective is to provide a single set of harmonised prudential rules for financial institutions throughout the EU. The Authority also plays an important role in promoting convergence of supervisory practices and is mandated to assess risks and vulnerabilities in the EU banking sector. The EBA was established on 1 January 2011 as part of the European System of Financial Supervision (ESFS) and took over all existing responsibilities and tasks of the Committee of European Banking Supervisors. Within the euro area, the European institutions have rapidly embarked on the Banking Union and the Single Supervisory Mechanism. Banking Union The Banking Union is one of the four building blocks towards a genuine Economic and Monetary Union. The Banking Union aims at building an integrated financial framework to safeguard financial stability and minimise the costs of bank failures. It will be composed of the Single Supervisory Mechanism and new integrated frameworks for deposit insurance and the resolution of credit institutions. The Banking Union will be based on a comprehensive and detailed single rulebook for financial services. The EBA has the competence to further develop this single rulebook and monitor its implementation. On 15 April Internal Market and Services Commissioner Michel Barnier said: “Today, the European Parliament has adopted three key texts to complete the legislative work underpinning the Banking Union. Thanks to the assiduous work of the co-legislators, we have turned the idea of a Banking Union into reality in less than two years. The EU has lived up to its commitments: the Banking Union completes the economic and monetary union and ensures taxpayers will no longer foot the bill when banks face difficulties. Not only does the Banking Union help to restore confidence in the banking sector, but it also ensures a truly European system of supervision and resolution of banks when they fail.”   Single Supervisory Mechanism (SSM) The ECB is preparing to take on new banking supervision tasks as part of a Single Supervisory Mechanism (SSM). The SSM will create a new system of financial supervision comprising the ECB and the national competent authorities of participating EU countries. Among these EU countries are those whose currency is the euro and those whose currency is not the euro but who have decided to enter into close cooperation with the SSM. Specific tasks relating to the prudential supervision of credit institutions will be conferred on the ECB according to Article 127(6) of the Treaty on the Functioning of the European Union. The main aims of the SSM will be to ensure the safety and soundness of the European banking system and to increase financial integration and stability in Europe. The ECB will be responsible for the effective and consistent functioning of the SSM, cooperating with the national competent authorities of participating EU countries.   Depositor Guarantee Schemes Currently, in 21 member states, bank contributions are paid in advance on a regular basis (ex ante), but in six member states, banks only contribute after a failure (ex post). The maximum resources available to DGS range between €27m and €8.1bn while the amount of covered deposits in the EU is about €5.7 trillion. The recast EU Directive on Deposit Guarantee Schemes ensures that depositors will continue to benefit from a guaranteed coverage of €100,000 in case of bankruptcy backed by funds to be collected in advance from the banking sector. For the first time since the introduction of DGS in 1994, there are financing requirements for DGS in the Directive. In principle, the target level for ex ante funds of DGS is 0.8% of covered deposits (i.e. about €55bn) to be collected from banks over a 10-year period. In addition, access to the guaranteed amount will be easier and faster. Repayment deadlines will be gradually reduced from the current 20 working days to seven working days in 2024. These new rules will benefit all EU citizens: not only will their savings be better protected, but they will also have the choice of the best savings products available in any EU country without worrying about differences in the level of protection. The new Directive will require better information to be provided to depositors to ensure that they are aware of how their deposits are protected by the guarantee schemes.   The key elements of the Directive are as follows: ·         Better Coverage: the upgrade to €100,000 by the end of this year is now confirmed. This means that 95% of all bank account holders in the EU will get all their savings back if their bank fails. Coverage now includes small, medium and large companies as well as all currencies. Excluded are all deposits of financial institutions and public authorities, structured investment products and debt certificates. ·         Faster payouts: bank account holders will be reimbursed within seven days. This will be a major improvement as today many account holders wait weeks, even months, before getting their money back. In order to facilitate such a short payout, managers of Deposit Guarantee Schemes will have to be informed early about problems at banks by supervisory authorities. Banks will have to specify in their books whether deposits are protected or not. ·         Less red tape: for example, if you live in Portugal and have your account at a failing bank whose headquarters are based in Sweden, the Portuguese scheme would repay you on its own initiative and act as your contact point. The Swedish scheme would then reimburse the Portuguese scheme. This would be a strong improvement over the current situation, where all correspondence has to be done via the scheme of the country where the bank's headquarters are located. The new approach will mean less bureaucracy and faster payouts. ·         Better information: bank account holders will be better informed on the coverage and functioning of their scheme by a new easy to understand standard template and on their account statements. ·         Long-term and responsible financing: concerns have been expressed that existing Deposit Guarantee Schemes are not well funded. Today's proposals will ensure that they are now more soundly financed following a four-step approach. First, solid ex-ante financing provides for a solid reserve. Second, if necessary, this can be supplemented by additional ex-post contributions. Third, if this is still insufficient, schemes can borrow a limited amount from other schemes (mutual borrowing). Fourth, as the last resort, other funding arrangements would have to be made as a contingency. Contributions will, as is currently the case, be borne by banks. However, they will be calculated in a fairer way since they will be adjusted to the risks posed by individual banks.   The bailout packages offered to Cyprus by the famous Troika (that is composed of a member of the International Monetary Fund, European Central Bank and European Commission) have brought in a very important concept. The time of having the European taxpayer pay for the bailing out of larger banks is over. With the new bailing in concept it is the bank’s shareholders and creditors who will need to bailout the banks. Certainly as per EU directive, depositors who have aggregate balances up to €100,000 are fully insured.   Internal Market and Services Commissioner Michel Barnier said: “The Bank Restructuration and Resolution directive sets new rules for all 28 member states to put an end to the old paradigm of bank bailouts, which cost taxpayers' hundreds of billions of euros in the crisis. For the first time, it enshrines in binding rules the principle of bail-in so that shareholders and creditors pay for banks' mistakes, not taxpayers. Any additional funds exceptionally required will come from the banking sector itself in the shape of specially set up resolution funds.”   More information on the recast Deposit Guarantee Schemes is found on the European Commission website Frequently Asked Questions http://europa.eu/rapid/press-release_MEMO-14-296_en.htm