In 2007, United States was suffered from the worst crises began with the mortgage lending markets when the Federal Home Loan Mortgage Corporation announced that it would no longer purchase high-risk mortgages and a leading mortgage lender, New Century Financial Corporation, filed for bankruptcy. In 2008, due to the collapse of large financial institutions of united states it become one of the biggest and worst financial crisis. This crisis affected the economy of various countries. The European Union’s economies were also affected by this crisis.
Several countries have since called for a review of bank supervision and regulation within the European Union. The new policies primarily concern bank liquidity, capital, and corporate structure. This paper discusses these measures while considering the imperative necessity to preserve the economic functions executed by banking and supervisory structures. It also evaluates whether the banking and supervisory structures at European Union prove to be adequate in responding to the debt crisis.
So as to respond to the debt crisis, European Union embraced the need to strengthen the policy coordination between its member states in 2011. As a means to this end, the European parliament and the council adopted “Six-pack”, a legislative package based on economic governance (Govaere, Lannon, Elsuwege & Stanislas, 2013). This package made the prevailing Stability growth and Pact (SGP) stronger, especially in the fiscal policy area. Originally, the main focus of SGP was to monitor compliance with the set targets for deficits in budgets by member states. They have also set up a similar process for their levels of public debts. A new package of legislation dubbed “the two-pack” was also set up in May 2013. According to Olsson (2009), this came into force with two main objectives: to develop budgetary coordination through the overview of a collective timeline for the budgetary process in the euro area and to improve financial and economic reconnaissance in the euro area by enhancing surveillance on member states that encounter serious financial instability.
The financial crisis indicates a serious weakness in the financial sector as the systematic nature of the framework existent before the crisis was unable to respond to the debt crisis. To avoid similar incidences arising in the future, the European Union has formed new authorities to supervise financial institutions. These institutions include (Hofmann, Rowe & Türk, 2011): the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA), the European Insurance and Occupational Pension Authority (EIOPA), and the European Systematic Risk Board for Macro-prudential Supervision (SRBMS). The council has also promised to progress rapidly towards a union of banking in order to combat the fragmentation of financial markets; this fragmentation inhibits adequate monetary policy transmission and bank lending. The union has also adopted some key pillars such as the Capital Requirements Directive (CRD) that sets sturdier sensible requirements for banking institutions and a Single Supervisory Mechanism (SSM) for banks. These pillars are expected to be operational by the end of January, 2014.
Economic stability is a pre-requisite for growth and development in any given state; attempts to enhance economic stability are not an end means in themselves. Therefore, further initiatives to improve growth and development usually supplement the efforts indicated above. As a means to this end, European Union embraced a common goal to boost growth in 2010. The operation was called “Europe 2020 strategy” and its aim was to deliver inclusive, smart and sustainable growth. Furthermore, European Union has embraced an initiative for jobs and growth. This initiative is aimed at re-launching investment, growth and employment (Sharma, 2013). It is also intended to make the European Union more competitive than its neighbours. The council has also come to an agreement to increase youth employment through the European Union’s Youth Empowerment Programme. Eight billion euros have been expended to nurture jobs for young people.
As seen above, the banking and supervisory structures at European Union level have proved adequate in responding to the debt crisis. One of the union’s goals is to put in place more measures to ensure that the debt crisis does not occur again. Govaere et al. (2013) suggest that “for a foreseeable future, growth of the banking union and supervisory structures will remain a key agenda for the European Union” (p. 87). New structures of government are expected to be used continuously to heighten coordinated fiscal and economic policy inside the euro area. In order to find a common position, the European commission will propose a single resolution mechanism to be considered by the member states. The European Union has also promised to fulfil its pledge for jobs and growth. This implementation will be closely checked by the European Commission, which oversees specific situations and the performance of a country.
References
Govaere, I., Lannon, E., Elsuwege, P., & Stanislas, A. (2013). The European Union in the World: Essays in Honour of Marc Maresceau. Boston: Martinus Nijhoff Publishers.
Herbamas, J. (2012). The Crisis of the European Union: A Response.Cambridge: Polity.
Hofmann, C.H., Rowe, G.C., & Türk, A.H. (2011). Administrative Law and Policy of the European Union. Oxford: Oxford University Press.
Olsson, S. (2009). Crisis Management in the European Union: Cooperation in the Face of Emergencies. New York: Springer.
Sharma, S. (2013). Global Financial Contagion: Building a Resilient World Economy after the Subprime Crisis. Cambridge: Cambridge University Press.
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