A common theme in recent public European Union (EU) policy debates is improving cross-border integration of the EU financial sector while preserving financial stability of the banking systems. In addition, this debate also relates to the proposition raised by some EU member states’ governments that EU needs large, cross-border banks able to compete with non-EU global players (from US, Asia, etc.). Resolving this debate is of importance to several stakeholders such as large banking groups which operate across-borders in Europe, local banks in the EU competing with the largest cross-border banks in some segments, central banks and bank supervisors and fiscal authorities/taxpayers. The manner in which EU cross-border integration is pursued has the potential to make big differences to how large EU banks can structure themselves to compete effectively outside their Home Country markets. And the shape of the cross-border banks will also impact the resilience of the EU’s local banking sectors, and how they will weather future crises.
Among policy suggestions to improve cross-border integration is that the Euro area should be treated as if it were a single jurisdiction - across which banks should be able to freely move capital and liquidity across the entities in their groups. Proponents of this view state that otherwise, financial fragmentation will continue to trap capital and liquidity in local Host country subsidiaries which is suboptimal, hindering cross-border provision of credit and resulting in inefficient economic allocation with higher costs for customers and lower profitability for the industry. But European Member States continue to push back against proposed measures, by raising serious arguments pointing to the risks to local financial stability, lack of cross-border insolvency framework, unfinished Banking Union architecture (EDIS, fiscal backstop), and the need to preserve at least some national options for stability reasons.
The level of cross-border banking is often used as a yardstick to gauge the level of financial integration in the EU. Cross-border banking can currently be done in three basic ways: via subsidiaries, via passported branches or via remote, cross-border provision of services. The higher levels of cross-border banking, following views of several EU policy makers in the Eurozone (EZ) could be enhanced by completion of the Banking Union (BU), the reduction of national discretions and greater convergence of supervisory practices, development of cross-border insolvency framework, etc. And increasingly, they are looking at adopting rules that would allow the use of capital, liquidity and MREL waivers in subsidiaries.
In November 2016, in its first proposals for changes to the Capital Requirements Regulation (CRR), Capital Requirements Directive IV (CRD IV) and Bank Resolution and Recovery Directive (BRRD), the European Commission suggested allowing, under certain conditions, the application of capital, liquidity and MREL (Minimum Required Eligible Liabilities) waivers in the EU subsidiaries of EU-based banking groups. These propositions faced opposition and were not ultimately adopted in the recently published CRR 2.0, CRD V and revised BRRD, due to lack of support from various Member States. But the arguments in favour of change have not disappeared1
So, if the EU wants to benefit from more efficient banks and more competitively-delivered banking services for users, facilitating cross-border banking will need:
In broad terms, Bednarski and Polk suggest the European Commission should review and propose a more comprehensive set of safeguards which will facilitate acceptance by Host countries of liquidity and capital flexibly transferred among entities in cross-border groups. Among these measures can be improved guarantees which banking groups and Home Country authorities could sign up to and which could give confidence to Host Country authorities that they would have the tools and resources to deal with a crisis. Such measures should be also supplemented by the development of a legal framework for cross-border insolvency regime, finalisation of the European Deposit Insurance Scheme (EDIS), solid fiscal backstop for SRF, and other steps.
The authors also look at alternatives to the use of waivers, such as expanding the use of branches to replace subsidiaries in Europe. This approach could have the quickest impact on levels of cross-border banking, but for a branch-based strategy to be acceptable to Home Countries (especially in case of large, systemic branches), it seems that the completion of the Banking Union (adoption of European Deposit Insurance Scheme, so that responsibility for insuring deposits across a pan-European structure would not fall only to the Home Country’s deposit insurance authority) could be the key catalysing factor.