EU Financial Services Policy since 2007: Crisis, Responses, and Prospects
| Author | Nicolas Véron |
| Date | 01 June 2018 |
| DOI | http://doi.org/10.1111/1758-5899.12564 |
| Published date | 01 June 2018 |
EU Financial Services Policy since 2007: Crisis,
Responses, and Prospects
Nicolas V
eron
Bruegel and Peterson Institute for International Economics
Abstract
This paper presents a holistic description and assessment of the European Union’sfinancial services policy since the start of
financial crisis in mid-2007. The decade-long sequence is divided into four themes, in broadly chronological order: the initial
reaction to the 2007–08 financial shock; subsequent initiatives framed by political developments at the EU and G20 level; the
banking union from mid-2012; and more recent events centered on the UK vote to exit the EU (Brexit). The analysis identifies
banking union as the watershed moment, and correspondingly assesses the EU policy response as mostly inadequate in the
first half and mostly effective in the second half of the period covered. Recommendations for future reforms are made in the
conclusion.
Policy Implications
•Complete the task of breaking the bank-sovereign vicious circle in the euro area with a reform package that includes a
European Deposit Insurance Scheme that equally protects all insured deposits, the introduction of sovereign concentration
charges to reduce the home bias in banks’sovereign exposures, and the phasing out of national authorities’ability to
ring-fence banks’capital and liquidity.
•Move towards a simpler, “twin-peaks”architecture for financial supervision in the European Union with a strengthening of
the governance and funding of the European Securities and Markets Authority and an expansion of its scope of direct
responsibility over financial business conduct.
•A long-haul effort of further harmonization in both banking and non-bank activities (banking union and capital markets
union) to move closer to the vision of a single market for financial services, including areas such as accounting, auditing,
insolvency legislation, and investment taxation.
This paper presents a holistic overview and assessment of
the European Union (EU)’sfinancial services policy since the
start of its financial crisis in mid-2007. Its emphasis is on
public policy initiatives and developments at the European
level, including those specific to the euro area.
Given this focus, national-level reactions in individual EU
member states are not reviewed comprehensively, even
those in countries with systemic relevance from an EU per-
spective such as the United Kingdom. Thus restricted, the
scope of analysis still covers dozens of legislative texts, radi-
cal changes in the architecture of European financial regula-
tory institutions, and innumerable policy challenges. The
underlying material is of staggering complexity, and the
attempt made here is to see the forest for the trees. It
implies that some policies that are important in their own
right are omitted or only superficially mentioned.
Policy initiatives during that period were mostly moti-
vated by the simultaneous crisis. As a consequence, the
description of policy developments relies on an underlying
analysis of the crisis itself. The European financial sector
(which, much more than in the United States, is dominated
by banks) entered a sequence of systemic fragility in mid-
2007, at the same time as in the United States. But the
analytical framework adopted here views the events of the
last eleven years primarily as a home-grown European crisis,
following years of dysfunctional financial supervision during
the previous ‘Great Moderation’, rather than a consequence
of US financial disorder. In this narrative, the US subprime
crisis was not the main cause of subsequent turmoil in the
European financial system, but only a trigger that revealed
the extent of accumulated vulnerabilities. The causes of
crisis on both sides of the Atlantic were fundamentally dif-
ferent. In the United States, the dominant driver was regula-
tory arbitrage by financial firms, enabled by complacent
supervision especially of systemically important non-banks
(subsequently reviled as a ‘shadow banking system’). But
the European problem was worse than supervisory neglect,
as excessive risk-taking by banks was effectively encouraged
by national authorities in a combination of financial repres-
sion and banking nationalism, as detailed below in Sec-
tion 1. Similarly, in the analysis of developments in the euro
area since 2010, Greece is not viewed as a major and central
story in its own right, but rather as a revelator of area-wide
weaknesses.
Both the home-grown risk accumulation pre-crisis, and
the structural fragilities revealed by the Greek tragedy,
©2018 University of Durham and John Wiley & Sons, Ltd. Global Policy (2018) 9:Suppl.1 doi: 10.1111/1758-5899.12564
Global Policy Volume 9 . Supplement 1 . June 2018
54
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