The European Failure to Tackle ‘Too-Big-to-Fail’ Banks

Abstract

This chapter evaluates the reach of post-crisis banking regulation adopted in the United Kingdom (UK), France, Germany, the Netherlands, and at the European Union (EU) level, with specific focus upon its effectiveness in addressing issues connected to too-big-to-fail (TBTF) universal banks: notably, incentives for excessive risk-taking and the potential financial burden imposed upon the public sector. Examining capital requirements, liquidity rules, resolution and structural reform, and contrasting European experiences with those of the United States (US), we highlight the inability of all adopted regulations except for UK and US structural reforms to effectively tackle TBTF. At national and supranational levels, domestic and European sectoral ‘specificities’ and worries over competitiveness led to significant derogations from Basel III capital and liquidity requirements, shaped a politically unreliable resolution regime and contributed to a failed structural reform package. The inadequacy and uncertainty of European banking regulation, together with the unstable nature of finance, demonstrate the usefulness of the concept of ‘permacrisis.’