17.12.2024 (Caucasian Journal). It's a pleasure for us today to welcome Jens-Hinrich BINDER, Professor of Law at Eberhard Karls University in Tübingen (Germany), where he holds a chair in Private, Commercial and Corporate Law.
It's a rare opportunity to discuss European financial regulation and its relevance to the general public in EU candidate countries.
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Prof. JENS-HINRICH BINDER: “NEW EUROPEAN MEMBER STATES ACCEDE TO A STATE-OF-THE-ART SET OF FINANCIAL REGULATIONS”
Alexander KAFFKA, editor-in-chief of Caucasian Journal: It's a great pleasure to welcome Jens-Hinrich BINDER, Professor of Law at Eberhard Karls University in Tübingen (Germany), where he holds a chair in Private, Commercial and Corporate Law. It's a rare opportunity to discuss important aspects of EU integration, specifically European financial regulation, and its direct relevance to the general public in EU candidate countries.
A simple question to start: Will my life savings be better protected after we enter the European Union?
Jens-Hinrich BINDER: Well, that depends on how your life savings are organized. If you have your savings in a traditional savings account, that might be the case. It depends on the quality of bank regulation and other elements of the “bank safety net”, which are the arrangements designed to protect bank savings. If European law adds to the quality by introducing mandatory financial regulations, that could lead to increased safety and protection.
However, this largely depends on the current situation. But in principle, the European law, especially after the 2007-2009 financial crisis, has reached a rather high level of protective measures and preventive regulations, which can indeed make the whole system safer and thus also protect individual savings.
AK: We know that the Deposit Guarantee Scheme (DGS) protects all bank deposits up to €100,000. Can you tell us more about this mechanism and its effectiveness?
JB: The basic principle of a deposit guarantee scheme is quite simple: it operates like an insurance company. It's a scheme, often run by a state organization or a banking industry organization, that insures deposits held by participating banks. If a bank fails, the scheme pays depositors up to a certain limit, which in Europe is currently €100,000 per depositor per bank.
This is based on the European Deposit Guarantee Scheme Directive, revised in 2014. Each member state has to establish a deposit guarantee scheme that conforms with the requirements stipulated in that directive, so that all banks have to participate and all depositors are guaranteed that level of protection in the event of a bank failure.
AK: Was the DGS difficult to introduce, and is it unique? Are there comparable models in other regions?
JB: Deposit guarantee schemes are now considered essential components of bank safety nets worldwide. For instance, in Germany the first deposit guarantee scheme was established after World War Two. Many jurisdictions have held those principles and those systems in place.
There's a strong association called the International Association of Deposit Insurers, which has lobbied for the introduction of deposit guarantee schemes. And they can be found everywhere in mature economies.
The 100,000 euro level is very high and captures most of the savings held by private individuals.
It is important to bear in mind that the European system is particularly strong because it is prescribed in a piece of legislation that applies mandatorily across the EU. Essentially, the member states have to provide the same high level of protection.
The 100,000 euro level is very high and captures most of the savings held by private individuals. If one individual bank fails at a time (which is the usual state of affairs outside systemic financial crisis), then the system will be strong enough to pay immediately. This is coupled with quite restrictive mandatory payout provisions whereby the repayment to the individual depositor must be made within seven days after the bank failure is declared. Taken together, this is a rather strong scheme - if not unique, at least one of the strongest regimes you can find.
The repayment to the individual depositor must be made within seven days after the bank failure is declared. This is a rather strong scheme.
AK: When a new country joins the EU, does the DGS automatically apply to its banks?
JB: Member states, including new ones, are required to transpose the European Union legal framework as a whole, or the “acquis communautaire”, also in the area of financial law. As a result, any country aspiring to join the EU must adopt legislation to implement the Deposit Guarantee Scheme (DGS) Directive.
So yes, the answer is that indeed it has to be applied. It doesn't apply automatically, because DGS directive is not a piece of legislation that implements itself in each member state. It has to be transposed by member state legislation as a directive. This is a common process for EU directives. And the other alternative is the regulation, which applies directly in all member states. However, the DGS Directive is a directive, requiring national implementation.
If a member state fails to adopt the necessary legislation or if the adopted legislation is insufficient to guarantee the required level of protection for depositors, the member state can be held liable for damages.
A famous case from Germany, that was brought before the European Court of Justice many years ago, demonstrates this point. Germany failed to properly transpose the initial 1994 DGS Directive, resulting in liability for damages to affected depositors.
AK: Can strict EU financial regulations lead to the closure of smaller or weaker banks in new member states? Could they increase the cost of banking services for consumers, or does more competition lead to lower prices?
JB: That very much depends on the circumstances of the individual banking system. It's very difficult to formulate a general abstract answer to that. There is no rule under European law that small banks have to go out of the market.
However, European law comes with a rather complex and detailed set of what we call prudential regulations of banks that apply to their financial condition.
They also apply to the governance of banks and prescribe a broad range of rather restrictive corporate governance regulations. And they provide for sanctions if those conditions are not met.
Member states can be sanctioned if they do not supervise their banks correctly.
So there is a principle that each member state has to supervise its banks. The largest banks and member states are supervised not by the national authorities, but by the European Central Bank. In the Eurozone, you have the European Central Bank as the single supervisory authority.
If there is a problem with a weak bank, it will be liquidated or restructured by the authorities. And of course, there is a certain degree of pressure on the member states to make this happen. Member states can be sanctioned if they do not supervise their banks correctly.
And ultimately, that means that by virtue of European law, failing banks tend to be pushed out of the market or tend to be restructured.
So there will be a cleanup of the national banking system. Now, what does that mean in terms of banking conditions for the individual customers? Can that lead to an increase in the cost of banking services or to the opposite? Again, this is something that depends on the situation in the member states.
There are states with highly diversified banks. For instance, Germany has several thousands of banks of different legal forms. You have banks listed on the stock exchange, banks owned by municipalities, cooperative banks owned by normal people, and small enterprises.
In other member states, you have highly concentrated banking systems. Often as a result of structural crisis, there are consolidated banking systems with few very large banks. If these states are in the Eurozone, they are supervised by ECB.
And the level of costs of bank services is very different across member states. There are efficient systems, other systems that are less efficient. I suppose that there are links between the regulation and the costs, but the direct link is rather blurred. Basically, there is no clear answer to these questions
AK: From your perspective, besides the DGS, what other European financial regulations are most important for consumers in new member states?
JB: You have to distinguish between two types of financial pieces of legislation: directives and regulations. The ones that directly govern the relationship between banks and their customers. There are essentially two very important areas - one is consumer credit(including mortgage credit - loans guaranteed by mortgages on residential property), and the other is payment services.
And you also have two very important legal instruments in the field of consumer credit. That is the Consumer Credit Directive, which lays down very complex protective rules for people taking out bank loans - to buy a new car or to finance holidays or whatever. And there are very restrictive provisions to make sure that banks lend responsibly and that consumers are protected against aggressive and abusive lending practices.
And then there is the Mortgage Credit Directive, which tops this regime up with tailor-made provisions for lending contracts. Obviously, for many people, their house is the most important asset. And this directive ensures adequate levels of protection for house owners, which is used as collateral for a loan.
So this is the range of tools that are focused directly on the relationship between banks and consumers generally. And then you have parts of the Legal Safety Net for banks that work indirectly, that apply between states and banks, but at the same time protect also the individual bank customer by making the bank safer. And here you have two large complex pieces of legislation, one directive and one regulation: the Capital Requirements Directive (CRD), and Bank Capital Requirements Regulation (CRR).
These instruments taken together are the core of the financial safety net for banks designed to make them safer. They are the basis for the ongoing supervision of banks. They also lay down the conditions that must be met if banks want to be licensed as banks in the first place.
And of course, while this does not directly apply as between the individual bank customer and the bank, it does help the customers enormously because it makes the whole banking system safer. I would say these are
macroeconomically more important even than the instruments I mentioned before ( those instruments that apply directly between banks and their customers).
The new member states accede not just to the internal market as such, but they also accede to a state-of-the-art set of financial regulations in the widest sense.
AK: What changes, good or bad, can the public expect in the financial sector after entering the European Union?
JB: Well, this is difficult to predict, and do not make me responsible for wrongful predictions in this regard. But I would say that the new member states accede not just to the internal market as such, but they also accede to state-of-the-art set of financial regulation in the widest sense - which involves not just banking services, but also investment firms, insurance companies, insurance regulation, and other areas of financial law, that is broadly consistent with all the international standards, and that tries to make sure that the financial system as a whole (including banking system) is safer.
It is fair to say that European banking systems are safer than most international peers, because they are well regulated, well supervised; there are mechanisms in place to make sure that financial fraud does not work to the detriment of consumers.
So, very likely, the cost and the regulatory burden in acceding countries are higher than previously.
To understand that, it is important to know that European countries have seen lots of financial crises, failures, and financial fraud over decades since the foundation of the European economic community. Since the late 1970s, European law has worked to remedy those problems by reinforcing regulation and supervision and trying to ensure a higher level of protection for consumers is high in comparison to other standards. And this is something that the acceding countries can look forward to. The downside, of course, is higher levels of costs.
So, very likely, the cost and the regulatory burden that is going to be seen in acceding countries are higher than previously. They have to adjust, to implement all laws and regulations, which increases the need for appropriate legal advice. And that comes with costs, which are ultimately borne by the consumer.
Hopefully, there are also efficiency gains associated with that, which should offset that in due course. So, do look at this not simply through the lens of banking regulation, but take it as part of a far broader picture!
AK: Thank you very much for this excellent interview. You are always welcome at the Caucasian Journal.
JB: Thank you very much for your interest, and if you have any more questions, feel free to reach out.
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