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Juridical and financial considerations on the public recapitalisation and rescue of financial institutions during periods of financial crises (Part II)

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  • Ojo, Marianne

Abstract

In response to the recent Financial Crisis - after it had been widely accepted that “a serious disturbance in the economy of Member States” had occurred, and that several measures were required to remedy this disturbance, various Commission communications were adopted. The Communications include: The first Communication which (initially), was the only one that the Commission adopted intentionally: the Communication on the application of State aid rules to measures taken in relation to financial institutions in the context of the current global financial crisis (hereinafter "the Banking Communication"). However, faced with the pressure to issue more guidelines (such pressure being exerted by Member States), the Commission adopted three further Communications: the Communication on the re capitalisation of financial institutions in the current financial crisis: limitation of aid to the minimum necessary and safeguards against undue distortions of competition (hereinafter "the Recapitalisation Communication"); the Communication “On the treatment of impaired assets in the Community banking sector” (hereinafter, “the Toxic Assets Comunication”) and finally, the Communication on the return to viability and the assessment of restructuring measures in the financial sector in the current crisis under the State aid rules (hereinafter "the Restructuring Communication").” Whilst the Banking and Re capitalisation Communications constituted the focus of study in Part I to this paper, this paper will focus on the impact of shadow banking and Basel III on regulatory arbitrage, the corresponding need for greater transparency and disclosure within financial markets – particularly within OTC markets, and impediments to the successful implementation of capital requirements which are aimed at fostering financial stability, coordination and harmonisation. Further, it will consider the extent to which regulators are prepared to deviate from regulations during the implementation of stress-testing and rescue programmes which are aimed at restoring stability to the financial system. The redefinition of quantitative and qualitative standards for capital, in implementing the Supervisory Capital Assessment Programme (SCAP), as illustrated in the paper, should demonstrate the extent to which regulators, independent of shadow banking practices, are prepared to deviate from capital regulations under adverse scenarios where certain regulations prove to be unduly stringent.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 33265.

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Date of creation: 09 Sep 2011
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Handle: RePEc:pra:mprapa:33265

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Keywords: Financial Crisis; state aids; recapitalisation; regulatory arbitrage; shadow banking; Basel III; supervision; financial stability; OTC markets; counter party risks; stress testing; Supervisory Capital Assessment Program (SCAP); market discipline;

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  1. Ojo, Marianne, 2010. "Liquidity assistance and the provision of state aid to financial institutions," MPRA Paper 23523, University Library of Munich, Germany.
  2. Hoshi, Takeo & Kashyap, Anil K, 2010. "Will the U.S. bank recapitalization succeed? Eight lessons from Japan," Journal of Financial Economics, Elsevier, vol. 97(3), pages 398-417, September.
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