On April 16th, 2015 the Bretton Woods Committee in partnership with the Italian Banking, Insurance and Finance Federation (FeBAF) and the Embassy of Italy convened a symposium examining the state of economic and financial integration within the European Monetary Union. The event, Enhancing Eurozone Stability: Progress Toward Banking and Capital Market Reforms, featured a diverse group of speakers who addressed topics such as: banking and capital markets regulatory reforms and the implications for private and public sector stakeholders; the role of the IMF in promoting regional financial stability; and the applicability of U.S. experience in financial integration to the Eurozone.
The event began with opening remarks from Minister Luca Franchetti Pardo, Deputy Chief of Mission at the Embassy of Italy, who provided insight on the importance of European countries diversifying capital markets and integrating banking systems in order to achieve a more stable financial system. He also stressed the need for further transatlantic cooperation giving particular importance to the Trans-Atlantic Trade Investment Partnership agreement (T-TIP), which he believes will provide a political stimulus and opportunity to establish and enhance structured and rules-based cooperation on financial services beyond the existing regulatory dialogue.
After Minister Pardo’s remarks, FeBAF Secretary-General and Bretton Woods Committee member, Paolo Garonna, assumed the role of moderator and opened the discussion by reflecting on what Europe can learn from the U.S. balance between government regulation and market freedom, especially in the areas of bank lending and financing structures for small and medium-sized enterprises (SMEs). Garonna stressed that – unlike the United States – the EU is not a fiscal union, so the U.S. regulatory framework cannot be directly applied but parallels can be drawn.
The panel discussion was then opened with remarks from Andrea Enria, Chairman of the European Banking Authority (EBA), who addressed some of the challenges that Europe has faced in its road to greater financial integration. Mr. Enria explained that EU integration started with a minimum harmonization mechanism allowing each country to adapt regional standards to their particular national systems. After the financial crisis, this approach proved to be flawed and the European Central Bank (ECB) and EBA were created to enforce a maximum harmonization mechanism with uniform rules and regulatory definitions. Since then, the EBA alongside other European institutions has helped to create more than 100 standards that are expected to be applied uniformly through the Single Resolution Mechanism (SRM). One of the functions of the SRM is to centralize the supervision of banking and subsequently capital markets to increase risk sharing in the region in order to reduce the impact of asymmetric financial shocks.
Following Enria, American University Professor Randall Henning shared perspectives on Europe’s fiscal integration strategy and the role of the IMF during this period of transition. Due to historical reasons, he explained that Europe has adopted a “bailout and intervene” model for its member States that might not be sustainable and conducive for a regional fiscal union. As a solution, Henning argued that the Eurozone could benefit greatly from adopting the U.S.’s “no bailout” model of fiscal federalism, which decreases moral hazard concerns regarding sovereign fiscal spending and could increase the feasibility of a European fiscal union by not infringing on country sovereignty in times of crisis. Building on this point, Henning also said that banking and capital markets integration relies on fiscal deepening, and views IMF involvement as necessary to achieve this in the short-term until a more robust financial structure is in place. He stressed that the Eurozone should seek to involve the Fund when sovereigns need assistance during financial crises because of the IMF’s well-managed monitoring systems and ability to bring international stakeholders into the discussion.
Next, Sandie O’Connor, Chief Regulatory Affairs Officer at JPMorgan Chase, offered a private sector perspective on European regulatory reforms from the standpoint of a bank operating in several EU countries. She placed a great emphasis on the importance of regional consistency in regulation and the need to divorce sovereign risk from banking risk to achieve a more stable financial market. She explained that when each national jurisdiction can impose fundamental changes on regional regulations, it adds operational risks to financial institutions and encourages market fragmentation. When addressing ways to promote capital markets and banking integration in the EU, she argued that regulators must increase the depth of bond and investment markets by fostering price transparency and adopting similar legislation to the U.S.’s Dodd-Frank Title I and II. Finishing her remarks, Ms. O’Connor noted the important role that the EBA plays in shaping regulatory mechanisms that should be considered for implementation in the non-Eurozone area in order to expand the geographic reach of the capital market union.
The last speaker contributing to the discussion was Jose Manuel González-Páramo, an Executive Board Member of the Banco Bilbao Vizcaya Argentaria (BBVA) SA. Mr. González-Páramo commended the work of the EBA and that of the Single Resolution Mechanism scheduled to be fully applied to the EU banking union in January 2016. Labeling the move towards banking and capital market integration as “EU 2.0,” he noted one of the primary goals of the ECB and the EBA is to create a common financial culture that fosters cross-country collaboration in the region. In order to achieve this objective, banking and capital market unions must address highly controversial issues such as the use of bail-out funds during financial crises. Finally, Mr. González-Páramo acknowledged the collaborative approach that has characterized the creation of the financial architecture in Europe thus far. He called for more of this same approach to ease the transition towards adopting the Single Resolution Mechanism and achieving the next steps in European financial integration.
At the conclusion of the panel discussion, questions were posed by the audience regarding mechanisms to reduce shadow banking and ways to achieve greater communication between securities and prudential regulators. The answers to both of these questions were consistent across the panel: greater regional cooperation is needed to target the financial risks of shadow banking, and regulators must be brought into the policymaking process to increase coordination and reduce liquidity risks.