Regulatory cascading in the aftermath of crisis: reforming EU bank structures

In the aftermath of the 2008 global financial crisis, European Union (EU) policy-makers engaged in protracted negotiations to centralise authority in banking supervision and harmonise regulatory practices across the member states. They conferred greater monitoring and rule-making powers to the three European financial sector supervisory authorities (ESAs), adopted stricter capital adequacy requirements in line with the Basel III international standards, and moved forward with establishing a European Banking Union (EBU). At the same time, regulators, financial industry firms, and stakeholders have struggled to keep abreast of the rapid sequence of policy and institutional reforms adopted at the European and international level.

The proposed EU rules on bank structures exemplify well the challenge of designing coherent policy reforms across different levels of governance. It is important to analyse the interplay of international, (macro-)regional, and domestic measures initiated after 2008. In general, the main goal of banking structural reforms is to streamline and simplify bank structures, thus facilitating the resolution of large internationalised banks in times of crisis and mitigating the policy problem of banks that are ‘too big to fail’.

I put forward the concept of ‘regulatory cascading’ to investigate how European policy-makers have tackled the reform of bank structures. As illustrated in Figure 1, regulatory cascading is characterised by introducing partial solutions to the policy problem in a rapid sequence of reforms in capital adequacy rules, bank supervision, and bank resolution regimes. Yet these partial interrelated reforms have constrained the opportunities to design a coherent EU framework regulating bank structures.RegulatoryIn sum, I argue that the quick accumulation of new regulatory standards and policy instruments poses significant challenges for policy-makers and stakeholders. By necessity, the policy evaluation tools used by the European institutions operate on a slower time scale than the widely-used stakeholder consultation tools. So far, policy evaluation, including ex-ante economic impact assessment, has not captured fully the interactions between different strands of reform and unintended consequences of regulatory cascading.

The case of bank structural reforms shows that while EU policy-makers are still negotiating harmonised EU legislation, member states such as the UK, France, and Germany have already put in place their own domestic measures. In response to the Commission’s proposal for European banking structural reforms, the Council stressed in its position two approaches that closely correspond to the measures adopted in France and Germany, on the one hand, and the UK, on the other hand.

This blog post draws on the following publications:

Spendzharova, A. (2016) ‘Regulatory Cascading: Limitations of Policy Design in European Banking Structural Reforms’, Policy and Society 35(3): 227-237.

Spendzharova, A., Versluis, E., Flöthe, L., Radulova, E. (2016) ‘Too much, too fast? The Sources of Banks’ Opposition to European Banking Structural Reforms’, Journal of Banking Regulation 17(1): 133-145.

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