Governing financial market regulation: a cascade from intergovernmental bank resolution, to prudential regulation, to conduct regulation

Abstract

SCOPE AND INTRODUCTION What forms of governance characterise financial market regulation? This chapter looks mostly at European, particularly Eurozone financial market regulation, with some comparative glances. Bank resolution, prudential regulation and market conduct regulation are discussed. The longest part of the text discusses the new Eurozone ‘mechanisms’ of banking union, with special attention to the European Stability Mechanism (ESM) and to the relationship between this and prudential and conduct regulation. The chapter aims to construct a perspective on the dynamics of governance between these three aspects of financial market regulation. The European Stability Mechanism (ESM) has a quite specific governance structure, differing from those of prudential and conduct regulation. The ESM is an intergovernmental mechanism outside (but articulated with) the legal framework of the European Union. The ESM was initially set up to offer conditional assistance to sovereign states, however it has been accorded an important role vis-a-vis banks. It is argued here that the ESM is becoming the ‘big brother’ of prudential regulation, with interesting political and legal consequences. For example, the ECB and its Single Supervisory Mechanism must have regard, when supervising banks and assessing their condition, to whatever view might be taken by the Governors of the ESM, who are finance ministers, regarding the availability and applicability of funding for restructuring or orderly winding up of certain banks. For the foreseeable future it is the ESM, not the EU's Single Resolution Mechanism (SRM), which has funds adequate for such purposes. The chapter starts with a discussion of market conduct regulation, looking first, in an empirical and comparative manner, at US state Attorney Generals, particularly in New York. Locally elected Attorney Generals provide a contrast with appointed market conduct regulators at national level in both the EU and US. The activism of appointees has been lower, historically. Some aspects of cross-jurisdictional conduct regulation by appointee-led agencies are briefly and critically discussed. Overall, the new architecture of financial market regulation – with its feet variously in EU and national administrative and criminal legislation, in ‘independent’ prudential bank regulation, and in intergovernmental decision making – amounts to a novel and complex governance design.