Creating a Single Market for Banking Institutions in EU - Coursework Example

Steps taken in the EU to create a single market for banking Institutions Creating a single market for banking Institutions is a resolution for the banking crisis that the European Union has taken. The first steps made are towards constructing the economic and monetary union. The steps involve single supervision of the banks in avoidance of the discount of new financial crisis at the expense of the state members of the EU. The 2008 economic crisis had a global effect on all the member states of European Union. The results of the crisis are significant and have consequences on all levels of the economy. The crisis highly influences the priorities and decisions that the EU makes (Boitan 2013). Introduction of single markets in banking institutions was a result of economic integration process. Theories promote the use of market in achieving economic and monetary union. It is assumed that the stages of the union eliminate achievement of previous stages and that gradual achievement of the new stages adds common elements. The monetary policy is centralized by the ECB (European central bank) the European Union has attempted different approaches to economic integration in the banking institutions. The approaches leave the fiscal policy instruments to the disposal of the governments of European Union member states. The decision that resulted from discrepancies in economic development made it possible for policy makers to react to changes in the economic trend within various stages of the business cycle. The aim of minimizing the discrepancies in economic development is one purpose for the EU and a condition to deepen integration processes (Bradley 2014). The European commission presented a proposal of methods that member states of the EU could use to support the real economy while enhancing confidence. The methods support the economic and social integration. The aim was to ensure that the banking institution attain smart growth through development of knowledge based on innovations and sustainable growth that supports initiatives for low emission economy. The aim was also to attain inclusive growth that facilitates social inclusion and support of the economy. Inclusive growth is characterized by high employment levels and the economic, social, and territorial cohesion is ensured (Quaglia 2013). The economic crisis made preparation of new regulatory frameworks a necessity to increase stability within the financial sector. The EU took a step in restructuring the banking sector so that its long-term profitability could be restored to ensure functioning of credit activities. The forecast of the European commission the economic growth of the EU will grow if there is intense control and resilience in the banking sector. The resilience will adverse shocks through strengthening of the capital base. For more economic development and improving of the EU economy within the banking institutions, it was necessary to change the public spending approach. The economic crisis made the EU an essential player to restore the trust in the financial sector and prevent states from falling into sovereign debt. Implementing financial consolidation is very important for the future of EU banking institutions. The main idea is increasing public spending and keeping it below a level of medium term (Howarth 2014). Another step that the EU took in creating a single market for banking Institutions is introduction of a patent system. The European patent makes it possible to protect the technological expertise as well as the intellectual property rights. The European patent increases the competitiveness in the economy and reduces the possible losses from trade of the counterfeight products. The European patent will support financing of innovations by creation of EU project bonds. The legal frameworks will encourage the venture of capital funds to invest in the EU thus encouraging e-commerce (Wróblewski 2012). Use of a single rulebook for financial services is also another step taken in EU to create a single market for banking Institutions. A single rulebook means a set of EU rules that are fully harmonized and are applied across the member states. The EU financial legislation comprises of directives that should be implemented by the member states. The directives contain several national discretions that are open to the national options possibility. A maximum harmonization is applicable directly to the member states thus leaving little room for any national transposition. The logic that lies behind the deposit guarantee schemes that reimburse part of the deposits to the clients of failed banks prevents banks run. EU legislation stands on deposit guarantee schemes so that the distorting effect towards the single market created is decreased. The pan-European schemes have full harmonization of the national schemes and they are allowed into the force after a minimum fund of 1.5 percent eligible bank deposits. The most common provisions in the commission was the mandatory borrowing facility. The mutual borrowing facility would have been the first step to deposit guarantee and this was considered as an establishment of a single pan-European scheme (Quaglia 2014). Another step in EU to create a single market for banking Institutions was the establishment of the single supervisory mechanism. The single supervisory mechanism was the biggest step that was taken in the EU. Establishing a body that conducts supervising across all banks in EU is the rational thing to do economically. The body ensures that there are minimized non-tariff trade restrictions experienced in the banking sector. The body should reduce the cooperation costs in the supervisory community and enable swift and efficient actions when crises occur. The financial stability is boosted thus reduction of the likelihood of financial crises and output costs. The EU reinforced cooperation of the national supervisory authorities, which is responsible for the supervision of the micro prudential through establishing the European system of financial supervision (Dietz 2014). National authorities directly supervise the small deposit taking banks and credit institutions but the single supervisory mechanism is supposed to give the guidelines on how the activities should be conducted. The European central bank is required to hire people and establish joint supervisory teams that comprises of the staff and supervisors from various European countries. This approach helps in reducing cooperation costs of the supervisory communities. The joint supervisory teams will also reduce future crisis costs. The regulatory framework that was created in the EU for openness and management of financial stability was another step in management of financial services in the single markets. The framework was built on common rules principles that are commonly applied on mutual recognition. To maintain financial stability in the banking institutions, the member states must be confident in strength and in applying prudential regulations. The national authorities are held into account if things go wrong, as there is need for flexibility within EU. Balance can be achieved among capital requirements, recovery and resolution, and the EU supervisory authorities. The step change in the market base financing in EU in achieving capital markets union is a marathon. It involves careful planning, detailed effort that is sustained in a wide range of areas (Gheorghe 2013). There are several issues that concern banking union and creation of a single market for banking Institutions. The proposals and agreements side stepped operational details of SSM (Single Supervisory Mechanism) and the relationship between ECB and EBA (European Banking Authority). The future of the national supervisory authorities is questioned. The relationship among national authorities in operating the banking union is not clear amongst the authorities in EU member states. The increasing scale of capital flows in Europe brings benefits but it is also possible that when things go wrong they can amplify. The recommendation is that the objectives should be put in order of importance. The first is putting European savings into better use by diversifying sources of finance; the second is enabling greater risk sharing in EU by enabling deeper cross border markets (Lambert 2014). The steps taken in the EU to create single markets for banking institutions have been successful in several ways. The regulatory loopholes have all been closed and effective functioning of the single markets has been ensured. The European banking legislation is now based on directives that leave room for divergences in the national rules. A regulatory patchwork is created that leads to legal uncertainty and the institutions are able to exploit regulatory loopholes while distorting the competition. Operating across the single markets has become easy for the banking institutions with implementation of the various steps in EU. Divergences can have disruptive effects and when there is minimum harmonization, the impact can easily be spread in the EU single market. It is crucial to use regulatory aggregates and methodologies to keep the banking institutions in single markets. The steps have helped in attainment of a banking system that is resilient in EU. Prudential safeguards are applied across EU and the member states economies get interconnects. Moreover, the European banking sector has become more transparent with application of the steps. The institutions financial situations are more transparent and become more comparable for supervisors. Lack of openness and transparency was a major cause of the financial instability as it is an obstacle to achieving effective supervision. The banking sector has also become more efficient as the institutions comply with the set rules. The steps allow for national flexibility that is synchronized in the EU (Leyshon 1992). Bibliography Boitan, IA 2013, 'Implications of the single supervisory mechanism on ECB's functions and on credit institutions' activity', Theoretical & Applied Economics, vol. 20, no. 3, pp. 103-120. Bradley, C 2014, 'Breaking Up Is Hard to Do: The Interconnection Problem in Financial Markets and Financial Regulation, a European (Banking) Union Perspective', Texas International Law Journal, 49, 2, pp. 271-295. Dietz, TM 2014, 'On the single supervisory mechanism', Journal of Risk Management in Financial Institutions, 7, 3, pp. 221-225 Gheorghe, CA 2013, 'Single Banking Supervision And The Single Supervisory Mechanism', Bulletin Of The Transilvania University Of Brasov. Series V: Economic Sciences, 6, 1, pp. 223-228. Howarth, K 2014, 'One Step Ahead Toward The European Single Market -- Eba Publishes Final Draft For Risk Retention Framework In Securitizations', 2014, Venulex Legal Summaries, pp. 1-5. Lambert, C 2014, 'Banking Union and Bank Regulation: Banking Sector Stability in Europe', DIW Economic Bulletin, 4, 9, pp. 29-3 Leyshon, A 1992, 'Liberalisation and consolidation: the Single European Market and theremaking of European financial capital', Environment & Planning A, 24, 1, p. 49 Quaglia, L 2013, 'Banking Union as Holy Grail: Rebuilding the Single Market in Financial Services, Stabilizing Europe's Banks and 'Completing' Economic and Monetary Union', Journal of Common Market Studies, vol. 51, pp. 103-123. Quaglia, L 2014, 'The Steep Road to European Banking Union: Constructing the Single Resolution Mechanism', Journal Of Common Market Studies, 52, pp. 125-140 Wróblewski, Ł 2012, 'The strengthening of the Single European Market vs. the crisis', Poznan University Of Economics Review, 12, 2, pp. 74-105. Read More