This chapter provides an introduction to the most important EU legislation affecting the regulation of banks. It also analyses developments that have led to the concentration of certain regulatory powers in a series of EU supervisory authorities.
i Financial crises
The development of EU banking legislation since 2011 took place against the background of the global financial crisis of 2007–2009 and the subsequent eurozone crisis, which highlighted concerns about the prudential position of eurozone banks and related threats to financial stability in the eurozone and beyond.
The legislative response to the eurozone crisis can be characterised as consisting of two different approaches. First, an urgent and necessary fire-fighting operation was carried out to shore up embattled eurozone economies and banks. Second, a more fundamental restructuring of the foundations of financial supervision as a whole was considered necessary to prevent a recurrence of the crisis, with more European integration in many areas being seen as the long-term solution to problems arising from European monetary union. This second, more fundamental development is another step towards the fulfilment of the ever-closer union envisaged by EU Member States in the preamble to the Treaty on the Functioning of the European Union.
In Section IX, we have summarised the developments in relation to the second of these approaches, in particular the implementation of a Single Supervisory Mechanism (SSM) for banking institutions in the eurozone, and common bank recovery and resolution arrangements.
It is important to note that much EU legislative activity in the area of banking regulation historically took the form of directives, which do not normally have legal effect in EU Member States until implemented by provisions of national laws. In the past 10 years, however, there has been a marked change of approach. Following changes to the European supervisory architecture and the commitment of the European Commission (the Commission) to introduce an EU-wide single rule book for financial services (both discussed in this chapter), the introduction of new EU rules relevant to banks is increasingly taking the form of EU regulations that apply directly in all Member States.
It would be remiss to introduce this chapter without mention of the UK’s departure from the EU on 31 January 2020. Since then, the UK has not participated in the EU’s decision-making processes or been represented in EU institutions, agencies or other bodies. The post-Brexit transition period (the Transition Period), during which the UK remained (broadly speaking) subject to EU law, ended on 31 December 2020.
The Trade Cooperation Agreement (TCA), which establishes the economic relationship between the UK and the EU beyond the Transition Period, was agreed on 24 December 2020. The TCA was incorporated into UK law on 30 December 20212 and has applied as a matter of EU law since the end of the Transition Period.3
The TCA contains only certain limited provisions relating to financial services (concerning, for instance, basic rights to commercial establishment and cross-border contracting). The TCA contains no regulatory equivalence regime and explicitly excludes financial services from the most-favoured nation clause with respect to any future trade deals with third countries. The UK and the EU have agreed in principle a limited memorandum of understanding (MOU) on financial regulatory cooperation, which will establish the Joint UK–EU Financial Regulatory Forum to facilitate dialogue on financial services issues. However, at the time of writing, the MOU has not been finalised or published.
While the detailed effects of Brexit are addressed more fully in the United Kingdom chapter of this book, the particular impact of Brexit on EU regulatory law must be noted. Without the UK – a historically influential voice in the financial services arena – sitting at the table, the course of EU banking regulation may flow in a different direction.
The European Central Bank (ECB), the European Banking Authority (EBA) and relevant national regulators in Member States have been forced to coordinate efforts to alleviate the short-term operational burden caused by the pandemic for banks and have introduced a series of supervisory measures and proposals. By way of example:
- in the early days of the pandemic, the ECB announced a number of crisis measures, including allowing banks to operate temporarily below the level of capital ordinarily required;
- the EBA postponed its 2020 EU-wide stress test exercise, which was instead undertaken in the first half of 2021; and
- throughout 2020, the ECB issued a number of recommendations that banks refrain from or limit the payment of dividends.
These measures demonstrate the flexible approach to the pandemic adopted by EU regulators. Some of these measures have since been unwound. For instance, the recommendation against the payment of dividends was repealed with effect from 30 September 2021. The long-term effects of the covid-19 crisis on the EU banking sector remain unclear.