Conference: The Banking Union and the Creation of Duties - Department of Law, Robert Schuman Centre for Advanced Studies, European University Institute By: Tobias Tröger, SAFE Chair of Private Law, Trade and Business Law, Jurisprudence / Goethe University Frankfurt

1. Banking Union and Governance of
Individual Clients/Actors Relationships
The Banking Union and the Creation of Individual Duties
EUI, March 19 & 20, 2015

2. Motivation
Goal of macro-prudential policy (supervision)
narrow: systemic stability of banks
broad: stable economy and financial system through the cycle
Target is to influence specific conditions for lenders/borrowers
(not general financial conditions for real economy)
Indirectly, yet intendedly affects banks’ services via-à-vis clients
Public governance of bank-client relationship that influences
resource allocation in decentralized decisions (contracting)
determines framework parameters of specific transactions
seeks to promote common good (prima vista heteronomous)
In its mode of operation akin to monetary policy
(also linked in objectives)
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3. Transmission of monetary and macro-prudential policies
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Risk free interest
rate
(price of leverage)
Macro-
prudential
policy
Financial
stability
balance sheet
(portfolio choice,
buffers)
Financial sector
(subset, individual
institution)
Monetary
policy
Price
stability
Non-financial
sector
Macro-prudential
tool
(price and
quantity of risk)
Expectations
(inter-temporal
allocation)
Mutual
re-enforcement

4. The importance of macro-pru in times of QE
QE (ECB‘s PSPP) is supposed to work through portfolio
rebalancing
increased liquidity raises asset prices of other FI
has welfare effects
boosts demand (and thus achieves price stability)
but also breads potential for bubble and crash (financial instability)
(unconventional) monetary policy measure requires macro-
prudential policy counterweight
Note: if QE operates instead only via exchange-rate as a
beggar-thy-neighbor policy macro-prudential counterbalance is
of less immediate importance
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5. Real estate mortgage markets as a particular example
Excessive credit-growth, unsustainable developments in real
estate markets and built-up of leverage in private sector,
Reinhart & Rogoff (2009), Borio & Drehmann (2009)
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Schularick et al., 2014

6. Macro-prudential tools targeting excessive credit growth
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(macro-prudential) instrument legal basis objective
CCB CRD IV arts. 130,
135-140
Enhance banks‘ loss absorption
capacity (higher resilience) and
increase funding costs to slow
down credit growth/moderate
financial cycle (lower
vulnerability)
Sectoral requirements for specific
exposures (e.g. increased risk
weights, minimum LGD values)
CRR arts. 124, 164,
pillar 2 (SREP), CRR
458
SRB CRD arts. 133, 134
Own funds, capital conservation
buffer requirements
pillar 2 (SREP), CRR
art. 458
LTV cap
LTI/DSTI cap
National law direct restriction of lending to
decrease banks‘ LGD and
borrower‘s PD
Leverage ratio National law Limit banks‘ leverage (failsafe
for risk-based capital buffers)

7. Cooling-down overheated real-estate markets
Capital buffers not very effective in highly collateralized markets
CCB (≤ 2,5% CET1), SRB (≤ 5% CET1), national macro flexibility
(≤ 2% CET1) can reach sizeable proportions
extra capital has to be held against risk-weighted assets, i.e.
highly collateralized real estate loan (risk weight of approx. 10%)
Even if (common) buffer rates were maxed out, less than one
percent of loan would have to be held in additional CET1 (0.095 x
0.10)
Arguably caps (LTV, LTI, DSTI) and leverage ratio work better
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8. The role of the ESRB within the SSM
ESRB is supranational macro-prudential authority (EU 28) also
vis-à-vis ECB (Secretariat located at ECB, Regulation
1096/2010, arts. 2, 3)
voluntary information flow from ECB to ESRB, ESRB Reg. art.
15(2); SSM Reg. art. 27(2)
information request from ESRB to ECB, ESRB Reg. art. 15(5)-(7);
SSM Reg. art. 3(1)
ESRB recommendations and warnings directed to ECB (ESRB
Reg. arts. 16(2), 1(3)(f): ECB as supervisory authority, cf. e.g.
EBA Reg. art. 2(2)(f) as amended
ESRB recommendations and warnings “enforced” through act or
explain mechanism (ESRB Reg. art. 17) and public pressure
(ESRB Reg. art. 18)
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9. The banking union angle
ECB to top-up national macro-prudential measures, SSM-Reg.
art. 5(2)
can push through inconvenient policies (supra-nationalization was
intended to reduce forbearance of NCAs, Tröger, 2014)
has comprehensive view including interaction with monetary
policy measures (Smets, 2014)
NB: separation of monetary policy and supervisory function that
allows for adequate flow of information is key
ECB competence limited to (macro-prudential) instruments “in
accordance with relevant Union law…subject to the procedures
set out in the Regulation (EU) No 575/2013 and Directive
2013/36/EU in the cases specifically set out in relevant
Union law”
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10. Macro-prudential supervision in the banking union
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ESRB bank client
flow of information
(voluntary and requested)
ECB
flow of information
(voluntary and requested)
recommendations
and warnings
recommendations
and warnings
top-up of CRD IV/CRR
macro-prudential tool
NCA
CRD IV/CRR
macro-prudential tool
national law
macro-prudential tool

11. Conclusion
Macro-prudential instruments constitute tool of public
governance of (newly established) bank-client relationships
Do not allow to intervene directly in existing contracts
Banking union establishes ECB to safeguard impartial and non-
forbearing enforcement of supervisory framework also with
regard to macro-prudential measures
Objective seems somewhat insufficiently implemented when it
comes to limit excessive credit growth in overheated real estate
markets
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