European Prudential Banking Regulation and Supervision: The Legal Dimension (Routledge Research in Finance and Banking Law)

445 Pages·2010·2.85 MB·English

by  Larisa Dragomir

European Prudential Banking
Regulation and Supervision
The financial market events in 2007–9 have spurred renewed interest and
controversy in debates regarding financial regulation and supervision.
This book takes stock of the developments in EU legislation, case-law and
institutional structures with regards to banking regulation and supervision,
which preceded and followed the recent financial crisis. It does not merely
provide an update, but anchors these developments in the broader EU law
context, challenging past paradigms and anticipating possible develop-
ments. The author provides a systematic analysis of the interactions
between the content of prudential rules and the mechanisms behind their
production and application.
European Prudential Banking Regulation and Supervision includes
discussions of the European banking market structure and of regulatory
theory that both aim to circumscribe prudential concerns. It scrutinises
the content of prudential norms, proposes a qualification of these norms
and an assessment of their interaction with other types of norms
(corporate, auditing and accounting, consumer protection, competition
rules). It also features an analysis of the underpinning institutional set- up

and its envisaged reforms, focusing on the typical EU concerns related to
checks and balances. Finally, the book attempts to revive the debate on
supervisory liability, in light of the developments discussed.
This book will be of great value to all those interested in financial
stability matters (practitioners, policy- makers, students, academics), as well
as to EU law scholars.
Larisa Dragomir completed her PhD at the EUI and Master of Arts at the
College of Europe. She is an expert in EU banking law and supervisory
issues. She has worked with the European Savings Banks Group (Brussels)
and the European Central Bank (Frankfurt).
Routledge research in finance and banking law
Forthcoming titles in this series include:
International Secured Transactions Law
Facilitation of credit and international conventions and instruments
Orkun Akseli
The Legal and Regulatory Aspects of Islamic Banking
A comparative look at the United Kingdom and Malaysia
Abdul Karim Aldohni
European Prudential
Banking Regulation and
Supervision
The legal dimension
Larisa Dragomir
First published 2010
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
Simultaneously published in the USA and Canada
by Routledge
270 Madison Avenue, New York, NY 10016
This edition published in the Taylor & Francis e-Library, 2010.
To purchase your own copy of this or any of Taylor & Francis or Routledge’s
collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2010 Larisa Dragomir
All rights reserved. No part of this book may be reprinted or
reproduced or utilised in any form or by any electronic, mechanical,
or other means, now known or hereafter invented, including
photocopying and recording, or in any information storage or
retrieval system, without permission in writing from the publishers.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging in Publication Data
Dragomir, Larisa.
European prudential banking regulation and supervision : the legal
dimension / Larisa Dragomir.
p. cm.
Includes bibliographical references and index.
1. Banking law--European Union countries. I. Title.
KJE2188.D73 2010
346.24'082--dc22 2009038570
ISBN 0-203-85641-4 Master e-book ISBN
ISBN13: 978-0-415-49656-8 (hbk)
ISBN13: 978-0-203-85641-3 (ebk)
To my parents
Quidquid agis, prudenter agas, et respice finem

Contents
List of abbreviations xiii
Table of cases xvi
Preface xxi
Foreword xxiii
Introduction 1
PART I
European banking at the beginning of the third millennium 9
1 Banking and market structures 11
1 Structural developments 12
1.1 The underlying forces of change and related bank strategies 12
1.2 The crisis and its aftermath 18
1.3 The European banking sector 21
2 Banks are still specia l 25
2.1 Insights from financial intermediation theory 25
2.2 Banks in economic theory 26
2.3 The definition of banks in European law 30
3 Is there a single European banking market? 32
3.1 The European regulatory framework 33
3.2 The impact of the euro on banking 36
2 Insights from regulatory theory 38
1 The rationale for banking regulation in economic theory 38
1.1 The rationale for the economic regulation of banks 39
1.2 The rationale for the social regulation of banks 41
2 Policy objectives of banking regulation 48
2.1 The public interest approach 48
2.2 The self-interest theory of regulation 49
2.3 Incentive–conflict theories of regulation 51
viii Contents
3 Typology of banking regulation 53
3.1 Categories of banking regulation by objective 53
3.2 Types of regulation by effect 56
4 The case for market discipline 59
4.1 Stimulating market pressure 60
4.2 Market endogenous mechanisms – rating agencies 60
PART II
The normative analysis of prudential issues 63
3 An evolutionary perspective on prudential rules 65
1 The European corpus of prudential norms 65
2 Early prudential concerns 66
3 The First Banking Directive 68
4 Post-FBD regulatory measures 71
5 The 1985 White Paper approach 73
6 The Second Banking Directive 76
7 The complementary body of technical prudential rules 78
7.1 Own funds 79
7.2 Solvency ratio 80
7.3 Large exposures 81
7.4 Consolidated supervision 82
7.5 Capital adequacy 83
7.6 Investment services 84
8 Financial markets regulation – the Financial Services Action
Plan (FSAP) 85

9 The post-FSAP strategy – the 2005 White Paper on Financial
Services Policy 88
10 Regulatory reactions prompted by the crisis 91
4 The multiple layers of prudential rules 94
1 The EU and the Basel Committee 94
1.1 The specific features of the Basel Committee and its work 95
1.2 The participation of the EU/EC in the Basel Committee 100
2 The Lamfalussy framework 105
2.1 Essential versus non-essential implementing measures 108
3 The multi-layered character of prudential regulation 111
4 Coordination of conflicting prudential norms 113
5 The interaction of prudential regulation with other categories of
norms 114
5.1 Prudential regulation and corporate law 115
Contents ix
5.2 Prudential norms and accounting rules 118
5.3 Prudential regulation and auditing 119
5.4 Prudential norms and consumer protection law 120
5.5 Prudential norms and competition law 121
5 Substantive aspects of prudential regulation 124
1 The 2006 capital requirements framework for banks and
investment firms 126
1.1 The general approach of Basel II/CRD 127
1.2 Some preliminary remarks 128
2 Definitions and general prudential principles 131
3 Credit risk – the revised standardised approach 133
4 The internal ratings based (IRB) approach for credit risk 135
5 Market risk and operational risk 138
6 The supervisory review process 139
7 Market discipline 145
8 The home–host issue 147
9 The review of the CRD 149
6 The principles characterising the European prudential
regulatory regime 152
1 Harmonisation of prudential banking regulation 152
1.1 The harmonisation paradigm – from minimum towards
maximum harmonisation 153
1.2 The scope of European prudential harmonisation 156
1.3 European prudential regulation between the public–private
domains 158
1.4 Prudential regu lation between EU and Member States’
competence 160
2 The home-country control principle 165
2.1 The scope of the home-country control principle 165
2.2 Host-country competences provided in EU legislation 167
2.3 The general good clause and prudential regulation 170
2.4 Assessing the home-country control principle 175
PART III
Institutional aspects of prudential regulation and supervision 183
7 The institutional framework – general aspects 185
1 Setting the context 185
2 Preliminary remarks concerning the European regulatory
framework 189