Table Of ContentL U C A A M O R E L L O r u d e n t i a ls i o n
M a c r o p S u p e r v i y
k i n g P o l i c
B a n a r y
t
e
n
o
M
& n
o
L e g a l I n tuer roa pc teia n U n i o n
e E
h
n t
i
Macroprudential Banking Supervision
& Monetary Policy
Luca Amorello
Macroprudential
Banking Supervision
& Monetary Policy
Legal Interaction in the European Union
Luca Amorello
Cleary Gottlieb Steen & Hamilton LLP
London, UK
ISBN 978-3-319-94155-4 ISBN 978-3-319-94156-1 (eBook)
https://doi.org/10.1007/978-3-319-94156-1
Library of Congress Control Number: 2018948902
© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer
International Publishing AG, part of Springer Nature 2018
This work is subject to copyright. All rights are solely and exclusively licensed by the
Publisher, whether the whole or part of the material is concerned, specifically the rights of
translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on
microfilms or in any other physical way, and transmission or information storage and retrieval,
electronic adaptation, computer software, or by similar or dissimilar methodology now
known or hereafter developed.
The use of general descriptive names, registered names, trademarks, service marks, etc. in this
publication does not imply, even in the absence of a specific statement, that such names are
exempt from the relevant protective laws and regulations and therefore free for general use.
The publisher, the authors, and the editors are safe to assume that the advice and information
in this book are believed to be true and accurate at the date of publication. Neither the
publisher nor the authors or the editors give a warranty, express or implied, with respect to
the material contained herein or for any errors or omissions that may have been made. The
publisher remains neutral with regard to jurisdictional claims in published maps and
institutional affiliations.
Cover illustration: Achim Thomae / Getty Images
Cover design by Akihiro Nakay
This Palgrave Macmillan imprint is published by the registered company Springer Nature
Switzerland AG
The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland
A
cknowledgments
This book is dedicated to my mentor Prof. Mauro Bussani (University of
Trieste and University of Macau), whom I greatly admire.
Throughout the process of writing this book, many law and economics
scholars and practitioners have taken time out to help me. Special thanks
go to my supervisor, Prof. Helmut Siekmann (Goethe University of
Frankfurt), for his patience and guidance. In addition, I would like to give
a special thanks to Dr. Francesco Papadia (Bruegel), and Dr. Francesco
Mazzaferro (ESRB Secretariat), for providing precious feedback and con-
tributions to this book. For valuable comments and inputs, I also thank
Avv. Giuseppe Napoletano (Banca d’Italia), Prof. Isabel Feichtner (Goethe
University of Frankfurt), Prof. Brigitte Haar (Goethe University of
Frankfurt), Prof. Rosa Lastra (Queen Mary Law School), Prof. Katerina
Pistor (Columbia Law School), Olaf Weeken (ESRB Secretariat), Dr.
Norbert Metiu (Deutsche Bundesbank), Frank Dierick (ESRB Secretariat),
Mario Marangoni (Banca d’Italia), Kosmas Kaprinis (Oxford University),
Jurgita Abisalaite (ESRB Secretariat), and Giovanni Di Balsamo (ESRB
Secretariat). I would also like to thank all my colleagues in the PhD/
Doctoral Program in Law and Economics of Money and Finance for their
help and encouragement. I would like to thank Banca d’Italia for the
financial support provided through the ‘Menichella Scholarship Award’,
which helped me finance my doctoral program, and the ESRB Secretariat
for the theoretical and practical teachings in in the field of macropruden-
tial policy and regulation. Finally, very special thanks to my parents, Paolo
and Rosamaria, for their love, understanding, and financial support during
these years abroad.
v
c
ontents
1 I ntroduction 1
1.1 Reasons for a Research 1
1.2 T he Problem at Issue 4
1.3 T he ‘Legal Interaction’ in a Nutshell 6
References 8
2 Law and Economics of Macroprudential Banking
Supervision 11
2.1 Defining Macroprudential Policy 11
2.2 L egal Components of the Macroprudential Policy Definition 28
2.3 T he EU Regulatory Archipelago 47
2.4 A European Institutional Overview 65
References 90
3 A Legal Approach to Monetary Policy 109
3.1 P ast Experiences and Main Developments in Monetary
Policy 109
3.2 T he Monetary Policy Transmission Channels in a Nutshell 124
3.3 P rice Stability, Instruments, and Monetary Transmission
Mechanisms Under a Legal Perspective 139
3.4 M onetary Policy in the Institutional Framework of the EU 165
References 182
vii
viii CONTENTS
4 P olicy Interactions and Conflicts 205
4.1 I nteractions Between Monetary Policy and Financial
Stability 205
4.2 I nteractions Between Macroprudential Policy and Price
Stability 220
4.3 P olicy Complementarities and Risk of Conflicts 230
4.4 Addressing the Conflicts 239
References 254
5 The Legal Interaction in the EU Institutional Framework 265
5.1 Defining the Legal Interaction 265
5.2 T he Legal Interaction in the EU Regulatory Architecture 276
5.3 P ossible Conflict of Policies as a Problem of Rules? 301
5.4 T he Legal Limits of the ESRB 314
References 328
6 Some Concluding Remarks 337
6.1 Rethinking the Interaction Between Macroprudential
Supervision and Monetary Policy 338
6.2 E xpanding the Array of Policy Instruments by Exploiting
the Legal Interaction 341
6.3 A Cornerstone for a ‘Law and Macroeconomic’ Analysis 342
Reference 344
Glossary 345
References 349
Index 405
l t
ist of Ables
Table 2.1 Example of indicators for typology of systemic risk 41
Table 2.2 Lists of macroprudential tools classified by systemic risk
typology and strategy 44
Table 3.1 Main legal features of ECB monetary policy instruments 153
Table 5.1 National authorities entrusted with macroprudential powers 295
ix
CHAPTER 1
Introduction
1.1 Reasons foR a ReseaRch
It is not a revelation that the 2008 global financial crash considerably dis-
tressed the European Union and its members leading to the worst reces-
sion in Europe since World War II. A fundamental lack of understanding
of system-wide risk and the failure to appreciate the threat posed by
aggressive risk-taking behaviors of financial institutions led to underesti-
mate the consequence of excessive accumulation of growing debt and
leverage which resulted from booming credit and asset prices.1
Defaulting loans secured by mortgages2 and securities mispricing3 in
a deregulated environment played a key role in catalyzing the eruption
of the banking system’s failure that ultimately resulted in an impairment
of the real and financial transmission channels.4 Further, the soft touch
supervision helped amplifying the externalities related to financial
shocks.5 Attempts made by some European governments to bail out the
banking system eventually triggered a dramatic increase of public debt
1 Galati and Moessner (2013), p. 846.
2 For a better understanding on the role of mortgages defaults in 2007 crisis, see Mayer,
Pence, and Sherlund (2008).
3 See Levitin and Wachter (2012), pp. 1177–1258. See also Ball (2009).
4 For a better insight of the real and financial transmission channels, see BCBS (2011).
5 Enoch, Everaert, Tressel, and Zhou (2013), p. 8.
© The Author(s) 2018 1
L. Amorello, Macroprudential Banking Supervision & Monetary
Policy, https://doi.org/10.1007/978-3-319-94156-1_1
2 L. AMORELLO
across many EU countries, leading to the outbreak of the Eurozone
Debt Crisis.6
Among different views upon the reasons behind the European financial
turmoil, the law & economics literature acknowledges that a prominent
fraction of responsibilities lies on the institutional features and compe-
tences of the European Monetary Union and, more broadly, of the
European Union as a whole.7 As a result, the European debt crisis brought
about not only a change in the EU statutory framework8 but also a shift in
the institutional competences of the European institutions with the estab-
lishment of new supervisory authorities and institutional powers.9
One of the key attributes of the institutional response against the finan-
cial turmoil lies in the unconventional reaction of both monetary and pru-
dential authorities seeking to restore the sustainability of the financial
markets. For decades mainstream central banking has been dominated by
the target of price stability, and conventional operating instruments have
been implemented rather straightforward.10
The struggle for price stability (and/or full employment) through the
influence of the short-term interest rate represented the ultimate objective
of monetary policy, while open market operations were the artillery used
to meet the desired interest rate target. Simultaneously, separate pruden-
tial agencies have relied mainly on microprudential regulatory instruments
aimed at protecting the soundness and prudent management of private
6 Inter alia, see on the issue: Reinhart and Rogoff (2011), pp. 1676–1706; Mody and
Sandri (2011). More generally, about the transmission from banking sector stress to sover-
eigns, see Correa and Sapriza (2014).
7 On this topic, see Dabrowski (2009); Avgouleas and Arner (2013); Vourloumis (2012).
Besides, see also the Communication from the Commission—From financial crisis to recov-
ery: A European framework for action, COM/2008/0706 final, Brussels, 29 October 2008
where the Commission stated the ‘need to redefine the regulatory and supervisory model of
the EU financial sector, particularly for the large cross border financial institutions’.
8 We refer, in particular, to the approval of the ‘EU Stability and Growth Pack’, designed
to ensure that countries in the European Union pursue sound public finances and coordinate
their fiscal policies, and the following ‘EU Six Pack’, containing five regulations and one
directive intended to tighten economic coordination and macroeconomic surveillance
among Eurozone countries.
9 For example, we refer to the establishment of the European Stability Mechanism (ESM),
and of the European System of Financial Supervision (ESFS) comprising the European
Supervisory Authorities (ESAs) and the European Systemic Risk Board (ESRB). See also the
creation of the Single Supervisory Mechanism (SSM), the Single Resolution Mechanism
(SRM), and the Single Resolution Fund (SRF).
10 For details, see Wachtel (2011).
