The banking sector has been hit by an avalanche of regulation since the financial crisis erupted in 2008, and was promptly followed by the eurozone’s sovereign-debt crisis. Recent years have wreaked havoc on banks’ financial position, with the marking-down of assets on banks’ balance sheets, and write-downs on property, derivatives contracts and other investments, intensified by the eurozone recession.
The European Commission estimates that to ease the difficulties, European Union member states disbursed some €600 billion on recapitalisation and asset relief. Including state guarantees, the banking crisis added €1.6 trillion to EU member states’ public debt in the two years 2008-10 alone. A regulatory clampdown was entirely predictable. So although new capital-requirement rules were introduced in 2010, they were revised four years later. The EU adopted legislation regulating derivatives, the use of credit-rating agencies, hedge funds and investment funds, and benchmarks. After three years of negotiations between legislators, a revision of financial markets rules, known as MiFID II, is to come into effect in 2017.
The supervisory regime for banks in the eurozone has been overhauled, and banks must now pay into a bank bail-out fund as well as deposit guarantee schemes. And financial consumers have been given a wide range of new rights. Regulators have hit banks in other ways too. US authorities fined Crédit Suisse $2.6 billion in 2014 for helping US citizens evade tax.
The US threatened to prosecute the bank under criminal law, with the possibility that it could lose its licence to operate in the US. Another European bank, France’s BNP Paribas, was fined $8.9bn for helping clients in Cuba, Iran and Sudan circumvent US sanctions. In the EU, the Commission fined eight banks €1.71bn over their traders’ manipulation of the LIBOR and EURIBOR benchmarks, used as a reference in trillions of euros of contracts worldwide. It is still investigating some banks that have refused to settle the charges, and has mounted another probe into a dozen investment banks accused of manipulating the market for credit-default swaps. Complying with the regulations is costly. Banks have hired thousands of new employees to monitor compliance, and have set aside billions for fines and legal costs. More burdensome capital adequacy rules are making global banking less profitable than it was.
On Monday, US authorities rejected as inadequate the “living wills” presented by three European banks – effectively guides on how to wind them up in case they go bust. The banks must now consider whether they need to further restructure their activities on the other side of the Atlantic. But on this side of the Atlantic, the regulatory mood may be changing. The new European Commission has diagnosed a dramatic fall in investment as one of the root causes of the eurozone’s persistent economic woes. It plans a grand reform that will liberate capital to be invested freely across the EU. Yet a genuine increase in lending and investment may prove impossible without the intermediation of Europe’s banks.
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