Law on Trial 2016: Can the EU Regulate a Financial Crisis?

This post was contributed by Daniele D’Alvia, MPhil Law student in Birkbeck’s School of Law. Here, Daniele considers the central question of a Law on Trial 2016 event being held on Thursday 16 June: “Can the EU Regulate a Financial Crisis?”

This year, Law on Trial – the School of Law’s l week-long programme of free-to-attend public lectures and panel discussions – will focus on the EU referendum. The annual showcase will run from Monday 13 to Friday 17 June 2016 and will bring together academic staff, recognised internationally as authorities in their field. Find out more

Law on Trial 2016

On the 23rd of May 2016 the international credit rating agency Moody’s downgraded – for the second time this year – Deutsche Bank’s ratings for unsecured senior debt to Baa2 two notches above junk status, and it has also cut the long-term deposit rating one notch from A2 to A3. The cut has occurred after the heavy loss that the German Bank has faced last year and its impossibility to guarantee internal capital generation by 2018.

In addition, since the 1st of January 2016 Europe has seen the implementation of a new ‘bail-in’ regime for banks (namely, the new rules are a result of the EU Bank Recovery and Resolution Directive), which requires the writing down of senior debt (bond instruments in particular) in case of a possible default or financial distress of banks. This circumstance has surely affected those assessments provided by Moody’s too.

Furthermore, the German Council of Economic Experts has recently proposed a new sovereign insolvency mechanism in order to overturn the financial principles of the post-war order in Europe. The proposal is centred on new ‘haircuts’ on holders of Eurozone sovereign debt and aims at matching the new-implemented rules enacted for banks under the EU Bank Recovery and Resolution Directive that have been mentioned above.

This has been done to restore the credibility of the ‘no-bailout’ clause in the Maastricht Treaty. The tax-payer does not have to suffer any loss under the new ‘bail-in’ culture, but what about the markets and the senior creditors? Indeed, under the new scheme bondholders will suffer losses in any future sovereign debt crisis before there can be any bail-out of the Eurozone by the European Stability Mechanism. The negative effects of such reforms have just manifested this year in January 2016 when the bondholders (i.e. senior debt) of the Portuguese bank Novo Banco have been written down under the new implemented scheme of ‘bail-in’ for banks in distress.

Indeed, these reforms are contributing to a ‘bond-running’ effect because the senior debt under these regimes is the first one to be written down. To this end, a new possible aggressive speculation by investors and economic crisis is just ready to start in Europe.

It really seems that currently in Europe the real question has shifted from how to stay in Europe to how to stay in the market. In other words, nowadays it is the politics of financial markets that governs politics at national governments level and not the other way round.

Hence, the rhetoric but essential question that Prof Michelle Everson has posed for the panel discussion that will be held this year at Law on Trial: “Can the EU Regulate a Financial Crisis?” Indeed, the panel discussion is focused on providing a possible answer by taking into account the global nature of financial risk, the limits of financial regulation as well as its effects in relation to both the management of risk (i.e. the sovereign and bank insolvency mechanisms) and its pricing (i.e. a bank in default).

Law on Trial 2016: The European Union at the Crossroads, runs at Birkbeck from Monday 13 to Friday 17 June. Book a free place here.

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