Introduction




© Springer International Publishing Switzerland 2015
Alexander WellerdtOrganisation of Banking RegulationSpringerBriefs in Law10.1007/978-3-319-17638-3_1


1. Introduction



Alexander Wellerdt 


(1)
Hamburg, Germany

 



 

Alexander Wellerdt



Keywords
Global financial market crisisCollapse of financial institutionsStandard-SettingSupervisionResolutionRegulatory actorsRelevance of organisation


Does organization matter?

Scharpf, Does Organization Matter? Task Structure and Interaction in the Ministerial Bureaucracy, Organization and Administrative Sciences (1977), 149.


In the European Composite Administration, the density of material rules increased in many economic sectors. The application and enforcement of these rules ought to be administered by formal organisations. “Does organisation matter?” can be clearly answered favourable. In fact, organisations begin to receive the attention they deserve.

Administrative organisation is no end in itself. In fact it is required for each administrative action. In a multi polar, supranational and administrative surrounding the administrative organisation grows in importance in several economic sectors and life areas. Administrative organisation is regarded as being static and boring—the opposite is the case. Administrative organisations are influential. They take in external influences to react flexible to changes in time. Administrative organisations help to fulfil public services at its best.

Thus, this thesis studies the administration and its organisation. The thesis is based on the “reference area”1 of banking regulation at national, European and international level. Regulation is one of the youngest dogmatic and most creative tasks of administration and increasingly presents administrative action. Regulation leads to a greater need of information to meet diverse consulting and decision-making situations of administration. This particularly applies to areas of asymmetric information between the administration of regulation and regulated economic sectors. Thereby, administration and its previous organisation are challenged to develop. Organisation matters!


1.1 Subject of the Study


Regulation includes any sovereign interference of administration in an economic sector. Regulation is especially important in the financial markets. Only in October 2008 the business behaviour of financial institutions lead to a global collapse of the market. The causes and consequences are diverse and still present.


1.1.1 Introduction


So far, the regulation of the financial markets followed a strategy of self-regulation. States agreed on non-binding standards and thus provided a framework which was put into practice by the financial sector with less government control and without government valuation. As a result, financial institutions set a focus on returns and neglected risks. This particular business behaviour of financial institutions was endeavoured by an expansionary monetary policy of the U.S. Federal Reserve. Cheap money at low interest rates was supposed to boost bank lending to private clients. Through a lack of market discipline, while granting credits against securities (mortgage), a bubble in the housing market emerged. The creditworthiness or liquidity of clients and the value of real estate as collateral were overestimated.2 Long-dated loans were bundled by banks and then resold (to regional banks, life insurance companies, pension funds and investment banks).3 So-called Asset-Backed-Securities were structured with graded default risks and varying interest rates were rated positive (AAA-Rating) by rating agencies. Default or liability risks could not be measured reliably,4 and loan securitisations were laid with less equity than securities in the balance sheets.5 This business behaviour was particularly favoured by commercial and investment banks. They provided false incentives to run risky financial activities and also paid large bonuses to employees.6

Increasing defaults in payment by borrowers led to price reductions of credit securitisation. Rating agencies downgraded the ratings and revealed an inadequate availability of capital and liquidity constraints in the financial institutions. The collapse of single financial institutions led, on the one hand, to a huge loss of confidence in the soundness of the banking system and, on the other hand, to a liquidity crisis.7 Large or specialised credit institutions were about to become insolvent. However, these institutions were deemed to be too big to fail.8

Governmental assistance was required to preserve the functioning of the economy.9 This idea enjoyed politically a broad consensus but was economically not without controversy. In a market economy, governmental interventions are an exception. If government agencies provide financial assistance to rescue banks, these banks are no longer forced to leave the market, even if they operated poorly. Governmental assistance favours single institutions rather than bringing economic resources to their best use by free market forces. Thus, the competition is distorted and damaged. Supply and demand are no longer allocated efficiently. Market failures occur which were accompanied by insufficient supervision and a lack of regulations to execute bank resolutions and insolvencies. These deficits in regulation and supervision had a systemic effect and lead to government failure.10 The self-regulation of financial markets failed. Financial institutions are operating across borders at the European internal market. Nevertheless, the supervision of business behaviour takes place at a national level and is subject of widely varying regulations between the Member States.11 The banking crisis has shown that financial institutions engaged in risky speculation while trusting that the government and therefore the taxpayers will give, if necessary, a helping hand. Incentives like taking a higher risk than economically efficient (moral hazard)12 have a macroeconomic impact and burden the acceptance of the market economy system. In response to the shortcomings and failures of the financial sector a more consistent and comprehensive state regulation developed. Based on the structural causes of the crisis, the Banking Regulation Law tightened the substantive rules at a supranational level. First, the capital adequacy requirements were increased to underpin high-risk positions, also liquidity principles were specified and their implementation monitored by stress tests.13 In this way, the risks of a bank solvency are reduced, a new confidence between banks can be created and the interbank market is stimulated. Moreover, the formally established independent supervisory structure provides sanctions, and combines the supervision at both macroeconomic and microeconomic level.14 Especially here, the administrative organisation grows in importance.


1.1.2 Framing of the Problem


The administrative organisation creates the structural requirements for the administration.15 Particularly, the design of organisational units enables a context control. The control of administrative actions by organisations happens within a standardised framework. These frameworks affect the decision-making processes of administrative units, which affect in return the ability to make certain types of administrative actions or decisions.16 Administrative organisation is attached to a growing importance not only formally, but also materially. The Administrative Organisation Law creates structures in which regulatory decisions are controlled.

The organisational law of the administration of regulation is not recognised appropriately in jurisprudential discussion. It rather runs out in the mere descriptions that only superficially describe its appearance in practice. Due to the Administrative Organisation Law, jurisprudential knowledge of state regulation and the economic approaches of the New Institutional Economics can be related methodologically.17 Thus, the influence of organisations on decisions of the banking regulation is examined with the aid of approaches from the Institutional Economics. Organisations are all national public regulators, European associations of public regulators and plural regulation actors. They pursue the regulation of markets to secure the common good. The organisation of the actors is done by the appropriate configuration of institutions.18 Institutions are formal and informal rules (norms); combined they form a system through which the behaviour of organisations can be controlled.19 The economic concept of institutions means the legal bases (including laws, regulations, contracts, rules of procedures) of players in the banking regulation. They determine who is responsible for decisions in a particular area and which procedures need to be followed.20 Douglass C. North establishes a link between organisation and institution, after which the development of the organisation depends on institutional frameworks, while organisations themselves affect the development of the institutional framework.21

The regulation of financial institutions is based on uncertainties, since the business of the financial sector has to deal with risks which may affect private investors and the economy as a whole. Aim of the banking regulation is both, to reduce information asymmetries between banks as providers and private clients as buyers, and to generate confidence in the financial market. Particularly, economic uncertainties are difficult to regulate. Which institutions are considered systemically relevant? How much capital is needed to cover the risk? What minimum liquidity is required to ensure the solvency of credit institutions? The administration of regulation requires comprehensive information to reduce factual uncertainties22 in the banking regulation. This dilemma is less resolved through a substantive and procedural programme control as through the institutional arrangements of the organisations that programme methods and control decisions.


1.1.3 Overview of the Legal Basis of Banking Regulation


Terminologically this study deals with the administrative organisation of banking regulation. The focus is set on all administrative actors who are entrusted with the supervision, recovery and management of financial institutions. The rules made for the supervision and the rules made for the recovery and resolution of financial institutions deserve special attention. Fundamental impulses emerged at an international level. These impulses embraced directives and regulations at a European level before they were transposed in national law or were applied directly.

With the Declaration on Strengthening the Financial System23 of the Heads of State and Government (Group of Twenty in April 2009), the Financial Stability Board was established. The board was, among other things, given the tasks to evaluate the stability of the global financial system, to identify systemically important and cross-border financial institutions, and to promote the cooperation and exchange of information between the Financial Supervisory Authorities to implement regulatory and supervisory measures.

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