Report from the European Central Bank - Failures of the European system of financial services

As I promised to do more research on the national rescue measures adopted in 2008/2009 and the rules of deposit guarantee schemess and the principle of non-discrimination in EU law....

I would like to share with you this interesting document from the European Central Bank. It is entitled:

NATIONAL RESCUE MEASURES IN RESPONSE TO THE CURRENT FINANCIALCRISIS

http://www.ecb.int/pub/pdf/scplps/ecblwp8.pdf

Not only it explains the European context, it confirms that national authorities adopted measures aiming to protect the survival of their financial systems, exactly what Iceland had to do.

For all of you, some homework too. Read very well all countries that adopted nationalisation measures and try to make legislation pass the test of non-discrimination. 

Sentences like, for instance, the State can nationalise solvent institutions.....

Nationalisation of banks and institutions operating in the national territory..... etc

I am reaching interesting conclusions concerning this point but I will think about them a couple of days more, just to be sure.

Meanwhile, I encourage you to learn about the gaps and lacunæ of the financial system the EU created for all of us (remember I am never saying that Iceland is free from responsibility but rather that this issue is to be examined very carefully in the light of all factors involved) 

------------------------- Enjoy this reading

The report says very clearly in page 8:

 [.....]

The current financial crisis is unprecedented and has dramatically shown the weaknesses of global interconnected financial markets, especially concerning the underestimation and underpricing of risk. These weaknesses have been and remain to be addressed by European legislators, both in the short term and in the long term.

With regard to long-term measures to counter the crisis, a review of the regulatory and supervisory framework for the financial sector is vital. It has become obvious that better coordination of supervision at a European level is required. Here, both macro- and microprudential supervision must be addressed.

With regard to macro-prudential supervision, i.e. supervision of the financial system as a whole, the report of the de Larosière group envisages that the ECB will play a central role.

Indeed, the ECB is at the heart of the ESCB, collecting, pooling and analysing all the information crucial for the assessment of the banking sector, which is an essential element for decision-making in the supply of liquidity to the euro markets. Becoming macro-supervisor is, therefore, a natural development of its monetary functions, which requires an enhancement of its means and tools, and a clear and legally sound stability mandate.

As a macro-supervisor, the ECB will need to interact in a cooperative way and in both directions with the micro-supervisors, whose EU-wide dimension needs an important overhaul of existing structures.

This paper deals with the short-term measures taken by EU Member States to counter the immediate effects of the crisis, as adopted from October 2008 onwards. The intention is to provide a detailed overview of such rescue measures.

With regard to the measures adopted in response to the crisis, the ECB has played a guiding role, for example, through the adoption of its Recommendations on guarantee and recapitalisation schemes and the Guiding principles on bank asset support schemes. The ECB’s Directorate-General Legal Services has also provided guidance in assessing the legal implications of the crisis measures, in particular, by taking the lead role in preparing the ECB’s opinions issued in response to consultation requests from the Member States.

With regard to the challenges identified above, reform of worldwide financial sector legislation has only yet started. This paper is intended to serve as a useful tool for prospective legislative activities in this field.

On page 6

By way of background, there are a number of factors considered to be inherently responsible for the current financial crisis. These include: (i) macroeconomic issues such as low interest rates in the United States that helped create a widespread housing bubble filled by insufficiently regulated mortgage lending and securitisation financing techniques; (ii) poor risk management by issuers of structured financial products; (iii) the underestimation by credit rating agencies of the credit default risks of instruments collateralised by subprime mortgages; (iv) corporate governance failures in financial firms, where the complex nature of financial products was not understood properly; and (v) regulatory, supervisory and crisis management failures3.

One of the main reasons for the crisis has been the rapid deterioration of the US financial sector and its subsequent effects in Europe. This crisis has led to the significant weakening of the financial situation of a number of financial institutions and is being felt throughout the world as a result of the increasingly interconnected global economy. Financial institutions have faced a crisis of confidence that has led to strong disturbances on the interbank market and a severe drop in stock and commodity markets. The crisis of confidence dramatically worsened in September 2008 on account of the insolvency of Lehman Brothers, as a result of which banks practically ceased lending to each other. In October 2008, even fundamentally sound financial institutions were facing serious difficulties in accessing liquidity. The sheer depth of the crisis reached by this event required unprecedented intervention on the European and national level.

European measures to combat the crisis

The Member States reacted to this crisis by introducing a number of emergency measures ranging from State guarantee schemes to nationalisation provisions. The guarantee schemes are aimed at ensuring the supply of liquidity to the financial system and increasing the level of guarantees for bank deposits (or temporarily providing guarantees for all deposits) in order to prevent ‘bank runs’. The recapitalisation measures were introduced to strengthen the capital base of fundamentally sound financial institutions, improve the functioning and stability of the banking system as a whole and ensure proper financing to the wider economy.

In addition, liquidity positions of these financial institutions have been enhanced through the provision of loans. A number of Member States have introduced measures aimed at relieving financial institutions of impaired assets, whereby the State directly takes over the risks inherent in the assets or transfers them to ‘bad banks’. Finally, a number of Member States have resorted to nationalisation of distressed financial institutions, with a view to restructuring and re-entry into the market.

On page 7

It is estimated that the EU governments have committed more than EUR 3 trillion to bail out credit institutions with guarantees or cash injections in the wake of the global financial crisis.

The role of the EU

The measures taken by the Member States to support the financial sector and to ensure financial stability were subject to close coordination on the European level. Here, the Council of the European Union, the European Commission and the ECB played a prominent role.

At the Economic and Financial Affairs Council (Ecofin) meeting on 7 October 2008, common principles to guide governmental actions were adopted. According to these principles:

– interventions should be timely and the support should in principle be temporary;

– the interests of taxpayers should be protected;

– existing shareholders should bear the due consequences of the intervention;

– governments should be in a position to bring about a change of management;

– management should not retain undue benefits;

– governments may have, inter alia, the power to intervene in remuneration;

– legitimate interests of competitors must be protected, in particular through the State aid rules;

– negative spillover effects should be avoided.

[PLEASE ALL OF YOU NOTE HOW THE PRINCIPLE OF NON-DISCRIMINATION IS ABSENT FROM THIS LIST OF CONDITIONS]

On 12 October 2008, the Heads of State of the euro area issued a ‘Declaration on a concerted European action plan of the euro area countries’4 (hereinafter the ‘Declaration’), in which they agreed on common principles to be followed by the EU and euro area governments, central banks and supervisors to avoid national measures adversely affecting the functioning of the single market and other Member States. This coordinated approach includes initiatives aimed at ensuring appropriate liquidity, facilitating the funding of banks by various means, providing additional capital resources to financial institutions and recapitalising distressed banks. The European Council endorsed these principles for all Member States on 16 October 2008.

The Commission, in the absence of a comprehensive pan-European supervisory, regulatory and legal framework for the financial sector, provided for coordinating principles by issuing guidance on compliance by financial sector support schemes with State aid rules, the subsequent Commission Communications specifically targeting recapitalisation measures5 and the treatment of impaired assets6, and support to the real economy7. Further, the Commission examined, under State aid rules, the national rescue packages introduced by the Member States, as well as national rescue measures with regard to specific financial sector entities and issued individual decisions.

It continues on page 8.....

The Member States

The individual Member States were affected by the crisis in different ways, depending on their banking system structure and economic situation. Therefore, apart from reforming their deposit-guarantee schemes11, not all of the Member States put in place measures countering the crisis, and remarkable differences exist among the Member States that introduced such measures, both with regard to the instruments made available, the amounts released and whether any of the measures have actually been used. Most Member States reacted already in October 2008 with a set of measures; other Member States responded only thereafter.

However, there are also some common points; by far the majority of the Member States introduced a guarantee scheme in order to enhance confidence in the lending sector. Also, recapitalisation measures were introduced by a large number of Member States in order to help credit institutions overcome the crisis. As regards the acquisition of impaired assets, a number of the Member States have put in place measures to relieve credit institutions of such assets.

Conclusion and way forward in page 8

"The crisis also revealed regulatory shortcomings on the European and national level with regard to the financial sector. The de Larosière report presents ways to overcome the crisis. These ways forward include a new regulatory agenda, stronger coordinated supervision and effective risk management procedures."

Conclusion:

You can all read that the problems of the internal market of financial services are European problems. The Ice-save dispute relates to the failure of the internal market.

Challenge:

While I research all the 27 sets of national measures adopted in the crisis and submit them to the non-discrimination test in EU law, I have a question for all of you: why does the EU still pretends that EU institutions are unrelated to the Ice-save dispute? Would not that be that all efforts are directed against us questioning the (extra-contractual) liability of the EU in the Ice-save negotiations like Professor Stefán Már has held? I leave this for you to think. In other words, the EU might be responsible as well.

 

Athugasemdir

[Jón Steinar Ragnarsson, 13.1.2010 kl. 17:34]

Are you saying that the consensus is that we are not obliged to pay this?  That the fault is the regulatory system of the EU?  This is all to academic to sort out, if you excuse my ignorance.  Does this even say that the EU would compensate Iceland if we agree on these murderous claims?  Pleace explainin common language.

[Jenný Stefanía Jensdóttir, 14.1.2010 kl. 07:36]

Not having read through this report, only the Appendix, which outlines the amount covered by each country, what is covered by the scheme, and who the eligible depositors are, I find it very interesting to learn the big differences between the member states. 

By nature and "saga" our source of all laws  lies somehow to, from and through Denmark.  Therefore I was particularly interested in their "guarantee shceme".

Excluded from eligible depositers are: members of the board of directors and the board of management, companies which are part of the same group, and depositors which own more than 10% or more of the equity.

Most of the countries specify as eligible depositors:  Natural persons, and in many cases they exclude large enterprises, related parties (relatives and spouses), and those who are in fault of the Bank's default, not to mention any connection with money laundry.

With the "emergency law" early October 2008, where Icelandic authorities declared: all national deposits secured unconditionally and regardless of the nature of depositor:  in your opinion,  didn´t  this unconditional declaration perhaps trigger this whole 'fiasco' which turned this Icesave issue into this mess.

Unfortunately the 'mantra' those days, was not to personalize anything, and now when the corruption starts to unfold, authorities are viewed  as idiots.   

Thank you sincerely for all your hard work, and presenting your opinion on behalf of the Icelandic public.

[Einar Björn Bjarnason, 14.1.2010 kl. 12:29]

Maðurinn sem Ísland þarf á að halda - fundinn. Alþjóðlegur sérfræðingur í skuldaskilum ríkja, tjáir sig um vanda Íslands, og er harðorður!

Ég er að tala um frábæra grein, Prófessors Sweder van Wijnbergen, við háskólann við Amsterdam, í NRC Handelsblad. Sá maður er einmitt, sérfræðingur í skuldaskilum ríkja. "Sweder van Wijnbergen - worked for 13 years at the World Bank, and was lead economist for Mexico and Central America during the negotiations on Mexican debt."

Svo þessi maður, veit allt sem vita þarf, um afleiðingar skuldakreppu! Hann þekkir þessi mál út og inn, fyrst hann var starfandi hjá Heimsbankanum, einmitt á þeim árum, er mörg lönd í 3. heiminum, gengu í gegnum fræga skuldakreppu

Sjá grein:  Iceland needs international debt management

Þetta er að mínum dómi, merkilegasti einstaklingurinn sem tjáð sig hefur opinberlega um málið, og fullyrðing hans "A debt of three or four times GDP cannot be repaid, and therefore will not be repaid" - skal skoðast sem hreinn sannleikur máls, fyrst það kemur frá honum.

Prófill Sweder van Wijnbergen

Fáum þennann mann til landsins!!!

Kv.

[Maria Elvira Méndez Pinedo, 14.1.2010 kl. 12:35]

Very good article and idea indeed! Thank you!

Elvira

[Sigurður Þórðarson, 14.1.2010 kl. 13:23]

Takk kærlega Elvira.

Ég veit að þú skilur vel íslensku og mig langar að biðja þig að leiðrétta ef ég fer efnislega rangt með eftirfarandi.

Ég man eftir því að á stórum fundi í Iðnó þar sem Svavarssamningurinn var ræddur og þú skýrðir lagalega stöðu málsins. Þú fluttir mál þitt á ensku en ég held samt að það hafi farið fram hjá fáum að þú hafðir yfirburðaþekkingu á viðfangsefninu og var Steingrímur því  spurður eftirfarandi:  Hvernig stendur á því að Elviru var ekki boðið að taka sæti í samninganefndinni?

Steingrímur svaraði: "Það er enginn skortur á einhverjum sérfræðingum sem vilja bjóða fram krafta sína gegn háu gjaldi"

Þá svaraði Elvira: "Ég bý á Íslandi og mér þykir vænt um landið og fólkið. Ég hef boðið fram aðstoð mína og ég hefði sannarlega verið tilbúin til að gera þetta í sálboðavinnu og lít á það sem skyldu mína að leggja mitt besta fram"