Proposed changes in EU banking sector

(Source articles: EU shakes up bank takeover rules - theparliament.com; EU bank bail-outs proposal defeated - FT.com)

Two developments affecting the banking industry are coming out of the European Union (EU). First, Britain and Germany blocked EU efforts to develop a formula for using public funds to bail out failed financial institutions. The plan had been proposed to help prevent a banking crises from spreading across Europe—a legitimate concern in light of the continent’s integrated markets. This measure was defeated out of fear it would send the wrong signal about the availability of emergency public money and because a formulaic response to unique financial crises is inappropriate. Nevertheless, EU finance ministers agree that European nations must work closely to share information, analyze risk, and communicate with the market in order to contain future financial crises.

At the same time, the EU internal market commissioner, Charlie McCreevy, proposed new rules that could further integrate financial markets. The new rules would reduce the power of regulators and national authorities to block cross-border banking mergers. Current EU rules allow authorities to block bank mergers on grounds of “suitability of the proposed acquirer,” but provide no guidance for measuring “suitability.” The proposed rules provide an exclusive list of relevant factors: reputation and experience of acquirers or their CEOs, financial soundness, extent of legal compliance, and risk of money laundering or terror financing. By defining standards for reviewing proposed mergers, Mr. McCreevy hopes to avoid a repeat of recent incidents where Italy and Poland tried to block foreign bids for domestic banks. Europe’s finance ministers and the European parliament must approve the new rules before they could go into effect.

Questions to think about

1. What prophylactic steps should EU countries take to keep financial crises from spreading? How can the EU take such steps without creating an incentive for financial institutions to take unwarranted risks, knowing that the EU will use public funds to rescue failed institutions?

2. Should individual EU nations be allowed greater say in the acquisition or merger of its financial institutions? Does a nation’s banking system face risks from foreign acquirers that are not addressed under the proposed rules?