III. The Extension of Areas of Supervision and Regulation and New Methods after the Crisis

A. New areas

After the financial crisis had reached its climax in 2008, a number of changes to the existing state of financial supervision and regulation were suggested. Some of them have already been adopted.

Delbruck (ed), International Law of Cooperation and State Sovereignty (Berlin: Veroffentlichungen des Walther-Schucking-Instituts fur Internationales Recht an der Universitat Kiel Nr. 139, 2002) 45-65.

  • 24 Creating a central supervisory authority on a supranational level proves difficult, even in the European Union. For details on the status quo and the current reform debate, see Matthias Herdegen, Banking Supervision within the European Union (Berlin/New York: de Gruyter, 2010).
  • 25 See e.g. Kern Alexander, Rahul Dhumale and John Eatwell, Global Governance of Financial Systems: The International Regulation of Systemic Risk (Oxford: Oxford University Press, 2006).

One central change is to bring previously unregulated financial intermediaries under supervisory control. This applies, for instance, to hedge funds and private equity funds. It is often said that they constitute a ‘shadow banking system’ next to the traditional—supervised and regulated—banking system.[1] Although no direct causal link between these funds and the outbreak of the financial crisis has been demonstrated, in both the US and the EU efforts are being made to require registration by fund managers, to impose capital requirements, and to prescribe or prohibit certain fund activities.[2]

Other players in the new financial architecture that will be subject to tighter regulation are the credit rating agencies. The EU has adopted a regulation that requires them, inter alia, to register with the authorities of the Member States.[3] In the USA, measures to improve the accountability and transparency of nationally recognized statistical rating organizations have been taken.[4]

Furthermore, states seek to render financial supervision more efficient. In the USA, an effort was made to concentrate the supervisory function, which previously had been very fragmented.[5] Nonetheless, a new agency in the form of a Bureau of Consumer Financial Protection has been added.[6] In the EU, besides reform efforts in the Member States, the main direction is to strengthen the supervisory function at the Union level.[7]

It is remarkable that on both sides of the Atlantic, the traditional control of financial intermediaries will be supplemented by macro-prudential supervision.[8] In the USA, the Federal Stability Oversight Council was created by the Dodd-Frank Act.[9] In the EU, the Commission suggested installing a ‘European Systemic Risk Board’.[10] This implies that the traditional focus on the individual institutions will be supplemented by a concern for systemic stability. The institutional setting of this macro-prudential supervision and its interaction with the other supervisors is not yet fully elaborated. In the USA, for instance, much will depend on the regulations that are yet to be enacted.

As to the reform of the substantive requirements of banking regulations, discussions are under way. They mostly concern enhanced capital adequacy and/or liquidity requirements.[11] So far, transatlantic agreement on these reforms has not been reached. What is clear, however, is that micro-prudential standards will be changed in such a way as to take into account macro-prudential concerns: more anti-cyclicality shall be obtained by requiring banks to build up buffers of resources during good times, which they can draw on when economic conditions deteriorate.[12]

One new area that has appeared on the political agenda since the crisis, and seems set to stay, is the regulation of bankers’ remuneration. The former Financial Stability Forum (FSF, now Financial Stability Board) asked for changes in its ‘Principles for Sound Compensation Practices’.[13] Underlying the changes is the idea that the current remuneration scheme has induced short-term thinking and risk-prone behaviour of bank managers. Efforts to regulate the problem are being made on the national level.[14] However, it is hard to tell whether they are really inspired by the FSF’s principles or—which seems at least equally probable—by the public outrage over huge bonuses.

A further area that has attracted the interest of legislators since the crisis is the restructuring of credit institutions. It is a well-known aphorism that ‘banks live globally and die nationally’. Bail-outs have required taxpayers to put up staggering amounts in guarantees and cash. No wonder that governments are increasingly looking for alternatives. Although it is still totally unclear whether and how the ‘too big to fail’ logic and moral hazards can be escaped, there is an apparent endeavour for the ‘juridification’ of bail-outs.[15] The goal is to remove the topic from the political scene and bring it under a legal framework.

States are also resolved to reform accounting. At a meeting in Washington, DC, in April 2010, finance ministers and central bank governors agreed that a single set of high-quality global accounting standards shall be reached.[16] The aim is to increase transparency for investors and supervisors.

Impending regulations increasingly impinge upon the activities that financial institutions may undertake. The Volcker rule as contained in the Dodd-Frank Act prohibits proprietary trading and other capital market activities for banks.[17] Restrictions are also foreseen for other new techniques. Take, for example, securitizations: the Group of 30 demanded that banks shall keep a ‘meaningful’ part of the credit risk on their books in order to align their interests with those of the purchasers of collateralized debt obligations (CDOs) or other asset-backed secur- ities.[18] This so-called minimum risk retention, or ‘skin in the game’, has been fixed on both sides of the Atlantic at 5 per cent.[19]

The infrastructure of the financial system is under equally enhanced scrutiny. Particular attention is being paid to the way that credit default swaps (CDS) are traded. While traditionally they have been sold over the counter, an international consensus has emerged that they shall be brought to exchanges and electronic platforms and cleared through central counter-parties.[20] Moreover, individual transactions shall be reported to trade repositories.[21] The goals are to prevent counter-party risk from concentrating in a few private institutions and to bring more transparency to the market. National plans exist to put these agreements into practice.[22]

  • [1] See e.g. Financial Services Authority, ‘The Turner Review: A Regulatory Response to the GlobalBanking Crisis’, March 2009, at 21; The High Level Group on Financial Supervision in the EU (‘deLarosiere Report’), 2009, at 8.
  • [2] See, for the USA: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010,Public L. 111-203 (Dodd-Frank Act), Title IV, Sections 401 ff. For the EU: see Draft AlternativeInvestment Fund Managers Directive, COM(2009) 207 final.
  • [3] European Parliament and Council Regulation (EC) No 1060/2009 on credit rating agencies, OJ2009 L 302/1.
  • [4] See Dodd-Frank Act, Title IX, Subtitle C, Sections 931 ff.
  • [5] See the improvements to supervision and regulation of federal depository institutions proposedby the Dodd-Frank Act, Title III, Sections 300 ff.
  • [6] Dodd-Frank Act, Title X, Sections 1001 ff.
  • [7] See the European Commission’s drafts suggesting the establishment of ‘European SupervisoryAuthorities’ for banks, insurance companies, and securities firms: COM(2009), 501, 502 and 503final.
  • [8] For further details on the micro/macro perspective, see Section III:C below.
  • [9] See Dodd-Frank Act, Title I, Subtitle A, Sections 111 ff.
  • [10] See European Commission, Proposal for a Regulation of the European Parliament and of theCouncil on Community macro prudential oversight of the financial system and establishing aEuropean Systemic Risk Board, COM(2009) 499 final.
  • [11] See Chapter 12 by Hal S. Scott, in this volume.
  • [12] See G20, above n 1.
  • [13] Financial Stability Forum, ‘Principles for Sound Compensation Practices’, 2 April 2009, (visited 10 October 2010).
  • [14] See e.g. the draft for a Management Remuneration Act by the German Federal Government,‘Entwurf eines Gesetzes uber die aufsichtsrechtlichen Anforderungen an die Vergutungssysteme vonInstituten und Versicherungsunternehmen’, 31 March 2010, BT-Drucks. 17/1291.
  • [15] See e.g. Dodd-Frank Act, Title II, Sections 201 ff. See Gesetz zur Einfuhrung eines Reorgani-sationsplanverfahrens fur systemrelevante Kreditinstitute und zur Abwehr von Gefahren fur dieStabilitot des Finanzsystems (German Reorganization Procedure and Financial Stability ProtectionBill), 26 August 2009, published in WM (Wertpapier-Mitteilungen) 2009, p. 913.
  • [16] See G20, ‘Communique: Meeting of Finance Ministers and Central Bank Governors’, Washington, DC, 23 April 2010, para 4.
  • [17] See Dodd-Frank Act, Section 619.
  • [18] Group of 30, ‘Financial Reform—A Framework for Financial Stability’, 15 January 2009, at 8,Core Recommendation I, Recommendation 1 b.
  • [19] See for the USA: Securities Exchange Act 1934, above n 9, Section 15G(c)(1)(B) as amended bythe Dodd—Frank Act, Section 941; for the EU: Directive 2009/111/EC, OJ 2009 L 302/97, art 1,No 30.
  • [20] See G20, ‘Leaders’ Statement: The Pittsburgh Summit’, Pittsburgh, 24—25 September 2009,at 9, para 13.
  • [21] Ibid.
  • [22] See for the USA: Dodd—Frank Act, Titles VII and VIII, Sections 701 ff; for the EU: Communication from the Commission, Ensuring efficient, safe and sound derivatives markets, COM(2009) 332final; Future policy actions, COM(2009) 563 final.
 
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