Dirk Schoenmaker

Governance of International Banking: The Financial Trilemma

In the aftermath of the financial crisis, the business model of international banks is under pressure. Regulators across the world are retrenching to national lines by applying restrictions on cross-border banking. Applying game theory, this book develops a model of the financial trilemma to understand the co-ordination failure among regulators. It also provides governance solutions to overcome this co-ordination failure. The goal is to offer a long-term perspective on international banking for regulators and academics. The book combines academic insights and policy issues. Available in OSO: http://www.oxfordscholarship.com/oso/public/content/economicsfinance/9780199971596/toc.html

European Deposit Insurance and Resolution in the Banking Union

Since the European Council of June 2012, ‘banking union’ is a key item for the EUs policy agenda. This contribution outlines the state of the policy debate – identifying the elements that are missing but important from a theoretical viewpoint. Concrete proposals are made as to how the missing elements could be added in the form of a new European Deposit Insurance and Resolution Authority, which would work alongside the ‘single supervisory mechanism’ under which the European Central Bank assumes supervisory powers for the largest eurozone banks. The paper also illustrates how a gradual transition could align incentives and mitigate the political resistance to a full banking union. Finally, new estimates are provided for how much would be needed for a European Deposit Insurance and Resolution Fund.

Cross-Sector Supervision: Which Model?

The purpose of this paper is to take the analysis one step further by focusing on the key question as regards the organizational structure: what are the pros and cons of combining different supervisory activities within one organization? In this context, we start by briefly describing the old and new Dutch supervisory models. The question is: how did we arrive at the new model? To answer this question, we take a closer look at financial market developments. We then compare cross-sector organizational models for financial supervision. We introduce a new framework for comparing these models and apply it to the functional model of the Netherlands and the integrated model of the United Kingdom. While confirming the familiar conclusion that there is no uniform best model,

The Skill Profile of Central Bankers and Supervisors

Using a new database covering some 91 supervisory agencies, this paper examines how important various skilled experts are in the regulatory process and the relative usage of different kinds of such experts. We seek to explore what kind of perspective supervisors in different institutional settings may adopt: a macro-oriented perspective or a more micro-approach? The answer to this question is relevant, as there is evidence that any financial crises have been macro-induced. It is found that central banks employ more economists and fewer lawyers in their supervisory/financial stability wing than non-central bank supervisory agencies. Next, there are significant economies of scale in financial supervision, though this can be measured by several alternative variables (e.g. the relative scale of bank intermediation). Finally, there do not appear to be major economies of scope. A more complex financial system with a well-developed stock market would need both more supervisors as well as more skilled ones.

Macroprudential Policy: The Need for a Coherent Policy Framework

The recent literature on macroprudential policy contains several suggestions for possible instruments. This paper puts forward and implements a method for arriving at a coherent policy framework. It starts by defining the role of macroprudential policy in the overall policy framework for the monetary and financial system. It then specifies the objective, intermediate targets (pillars), instruments, decision-making, accountability, and the legal base. We introduce a two pillar strategy. The basic presumption is that each instrument should be related to its intermediate target (pillar). This allows us to select a limited set of core instruments aimed at stabilising financial imbalances (pillar 1) and addressing externalities that arise from interconnections in the financial system (pillar 2).

Banking Supervision and Resolution: The European Dimension

Both theory (game theory) and practice (recent financial crisis) indicate that national interests prevail in cross-border resolution. National authorities aim for the least-cost solution for domestic taxpayers. This results in an undersupply of the public good of global financial stability. International banks are increasingly run on national lines, as national supervisors force stand-alone subsidiaries to maintain separate liquidity and capital buffers in each jurisdiction.To preserve the Internal Market in Banking, this paper proposes a supranational approach to banking supervision and resolution in Europe. The large cross-border banks would then be supervised directly by the European Banking Authority, and in case of liquidity and solvency problems, have access to the ECB and the newly proposed European Resolution Authority. The European Resolution Authority needs a fiscal backstop and a strong legal framework to be credible. The access to government funds could be based on ex ante burden sharing between participating countries. The legal regime could be provided by a new special resolution regime embedded in a EU Regulation giving powers to liquidate or resolve ailing banks in a timely and orderly manner on a EU-wide scale.

The Reform of Wholesale Payment Systems and its Impact on Financial Markets

This paper reviews the ongoing efforts to reduce the risks inherent in the world`s principal wholesale payment systems. The paper assesses the major policy proposals to contain the growth in intraday credit exposures that arises in net settlement wholesale payment systems and in the real-time gross systems in which the central bank provides daylight overdrafts. It also discusses the benefits of these risk-management policies, and we assess the adverse impact of applying interest charges for intraday central-bank credit or of collateralizing such credit on liquidity in financial markets.

European Financial Markets and Institutions: The Role of Institutional Investors

OVERVIEW Over the last decades, the intermediation of financial assets has gradually shifted from banks towards institutional investors, such as pension funds, insurance companies, and mutual funds. In this process of re-intermediation, the assets of institutional investors of the EU-15 countries tripled from 49 per cent of GDP in 1990 to 165 per cent in 2012. This chapter starts off with an overview of the growth of institutional investors over the last two decades. The development of the main types of institutional investors is documented. There is a small group of countries with large-scale funded pensions (Denmark, Ireland, the Netherlands, and the United Kingdom). Other countries rely more on life insurance and mutual funds. New types of institutional investment, such as hedge funds and private equity, are also discussed. Both the demand side (growing investments by pension funds to cater for ageing, and by mutual funds to accommodate wealth accumulation of households) and the supply side (shift from bank- financing to market- financing) point to further growth of institutional investment. There is no substantial institutional investment yet in the new EU Member States, but institutional investors in these countries are expected to grow in line with economic development. This chapter also analyses the impact of institutional investors on the functioning of the financial system. Institutional investors are pooling funds and transferring economic resources over different asset classes and countries. They also transfer resources over time. Moreover, they increase the efficiency of the financial system. One would expect institutional investors to invest according to the principles of finance theory as implied by the international version of the Capital Asset Pricing Model (CAPM). This theory shows the gains of international diversification. However, there is a home bias in investments of institutional investors. Still, this bias declined from 1997 to 2012, especially in the countries in the euro area, a trend which can be attributed to the introduction of the euro.

Central Banks and Financial Authorities in Europe: What Prospects?

Analyzing ongoing changes in the design of regulatory and supervisory authorities over the banking and financial industry in Europe, this comprehensive Handbook pays particular attention to the role of national central banks, the new financial supervisory authorities and the European Central Bank (ECB).

The ECB, Financial Supervision, and Financial Stability Management

After more than 10 years of monetary stability, it is time for the European Central Bank (ECB) to develop its financial stability role as well. The recent financial crisis has highlighted the need for the ECB to take a role in maintaining financial stability. In this chapter, I first make the case that financial stability needs to be managed at the European level. Next, I indicate that the ECB has set a first step towards maintaining financial stability with the publication of a Financial Stability Review since 2004. In addition, during several bouts of financial instability over the last ten years, such as the financial turmoil in the aftermath of terrorist attack in 2001 and the current financial crisis, the ECB has proven to be an effective general lender of last resort (LOLR), providing adequate liquidity when needed.