European Union: Towards A Banking Union?

Last Updated: 6 October 2017
Article by Mihai Dudoiu

At the level of the European Union (EU) and in particular in the European financial sector, this year we should see further steps towards integration, with the final goal of realising a union of the European financial markets. The European Securities and Markets Authority (ESMA) has published its 2017 Supervisory Convergence Work Programme which promotes "sound, efficient and consistent supervision across the EU".

According to the programme, ESMA and competent national authorities will focus their supervisory convergence work on several priorities such as (i) the implementation of MiFID II1/MiFIR; (ii) investors' protection in the context of cross-border provision of services; and (iii) convergence in the supervision of European Union CCPs (Central Counterparties).

In parallel, the European Commission has undertaken further steps towards the realisation of the banking union, by announcing certain reforms to the rules (at the level of the EU legal system) which apply to the existing pillars of the banking union: the Single Supervisory Mechanism and Single Resolution Mechanism2.

Inevitably, all of the above should lead not only to legislative changes at the national level of each of the Member States but also to further transactions with banking assets, as banks would have to continue to adapt their businesses and balance sheets to the new capital requirements.

None of this sounds very different from the headlines of previous years, reflecting a process started by the European regulatory bodies in 2012, in response to the financial crisis. But when thinking of all these matters, it is impossible to ignore recent changes in the international context. For example, the Brexit referendum and subsequent steps3 have created the prospect of the UK leaving the EU (although not a member of the euro area, the UK leaving the Union is likely to have major consequences on the financial markets). Along the same lines, elections in some of the largest Member States, scheduled to take place throughout the year, could further disrupt the moves towards a banking union.

On the local market, as the election year is behind us, we hope for a more predictable legislative environment than in 2016. A particular focus of last year's legislative initiatives was consumer protection vis-ŕ-vis borrowing and other financial transactions. As we detail in the sections below, there is a new regime applicable to mortgage lending, reflecting the corresponding European directive but also including supplementary provisions, referring to the transfer and management of non-performing loans. Also, the Constitutional Court ruled on two legislative initiatives which, prior to the rulings, were subject to intense media coverage and public debate. Following the rulings, the impact of such legislation is expected to be limited, without threatening the financial stability.

All the above (and more besides) creates the possibility of the further transformation of the local banking system. We hope that the trades with bank shares and banking assets (both performing and non-performing) will continue at a good pace. To our knowledge, there is interest both on the vendors' and on the buyers' side in discussing potential trades, as several banks are being prepared for sale while others are taking steps towards cleaning up their balance sheets.

The transactions completed in the last few years should translate into better capitalisation and an increased appetite for lending, both to corporate and retail borrowers. This, in combination with enhanced liquidity and access to cheap money (although there are signs that extremely accommodative monetary policies are coming to an end) should support the growth in lending activity. Recent financing transactions, in particular club deals, are arguments in favour of this view. Further good news is that this growth comes not only in the area of real estate finance, but also in transactions that require more complicated structures, such as acquisition finance.

A final thought is related to the development of fintech companies and the alternatives they provide to traditional lending. Although this domain is still very much incipient compared with traditional banking, including in the Anglo-Saxon markets where it originates, promising technologies are being developed (such as block chain and direct payment systems) and there is a certain entrepreneurial interest in the area, in particular in crowd-funding platforms. From a legislative perspective, it is worth noting that the European Commission has announced that, for the moment, it does not intend to come up with legislative measures to regulate such crowd-founding activities4.

Footnotes

1 MIFID II must be transposed into national legislation by 3 July 2017 and must come into effect no later than 3 January 2018. In parallel, Regulation (EU) No. 1286/2014 of the European Parliament and of the Council on key information documents for packaged retail and insurance-based investment products will apply directly in each Member State from 1 January 2018.

2 http://europa.eu/rapid/press-release_IP-16-3731_en.htm

3 For example, the UK Parliament vote which granted the British government the authority to invoke Article 50 of the Lisbon Treaty, starting the formal process of leaving the EU.

4 https://www.esma.europa.eu/sites/default/files/library/2015/11/2014-smsg-010.pdf

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