European Supervision. Enhancing the stability of banking systems and financial markets in Europe needs to start with enhanced risk-bearing capacities of banks themselves. Ultimately, bank risks should be borne by owners and creditors of banks other than depositors – not by the tax payer. This requires, most importantly, significantly increased capital requirements. Higher bank capital not only makes individual banks more stable, it also reduces systemic risk in the banking sector. Higher bank capital (and thus lower leverage) provides, in a much broader sense, for enhanced risk-sharing capabilities in the financial system. Because details of improved micro- and macroprudential regulation have been discussed elsewhere (German Council of Economic Experts, 2012b; Admati and Xxxxxxx, 2013), this section focuses on the implementation and enforcement of stricter banking regulations at the national versus European level. National supervision is in potential conflict with monetary and fiscal policy in Europe. In a single currency area, risks can be shifted onto the central bank’s balance sheet. But the crisis also unveiled conflicts of interest between fiscal policy and supervision. As the experience in Ireland and Spain shows, distressed banks can put a massive strain on government budgets. Seeing these risks, fiscal authorities may have a preference for not disclosing bank risks and rather xxxxxx for resurrection. National supervisors are presumably less able to withstand the resulting pressure from the economic policymakers than their supranational counterparts. Empirical evidence from the United States, for instance, shows that supervisors operating at the federal level use stricter criteria than those at the state level (Agarwal et al., 2012). Moreover, national bank supervisors are probably more likely to tolerate banks holding bonds issued by national governments (financial repression). 4 This section is in part based on German Council of Economic Experts (2012b), Ch. 4. Figure 9 Structure of the Banking Union Supervision Restructuring Financing National restructuring authorities National supervisory authorities European supervisory authority European restructuring authority European restructuring fund European level Microprudential supervision – Issuance of banking licences – Ongoing supervision – Early intervention Macroprudential supervision Restructuring and resolution if the stability of the European financial system is at risk Financing of bank restructuring and re...
