A critical assessment of the European approach to financial reforms


  • Elisabetta Montanaro
  • Mario Tonveronachi




financial reforms, European Union, Basel 3, Vickers Commission, ring-fencing.


The paper offers a critical assessment of the financial reforms adopted or proposed at the European level. The reshaping of the EU institutional architecture and the adoption of the new Basel 3 rules should reduce the national margins of discretion that have up to now characterised supervisory practices, often leading to light touch supervision, and restrain the growth of bankarisation, hence excessive systemic leveraging. However, the limitations of a purely prudential approach to regulation may not be overcome by setting up new institutions and make prudential requirements more stringent. In addition, given unavoidable national banking specificities, more severe rulebooks homogenously applied across the EU countries could further worsen the inconsistencies of a one-size-fits-all rule. The criticisms directed at the new regulatory framework assume particular relevance in the EU, whose peculiar construction requires that the financial sector should not be permitted to jeopardise its critical fiscal equilibrium. This opens the way to the adoption of structural measures, as the one presented by the Vickers Commission on ring-fencing. Looking at the financial system as a whole, we argue that even these measures do not offer effective protection for the economy and tax-payers, and that much more radical interventions are needed.



JEL Codes: G21, G28, E6


ADMATI A., DEMARZO P., HELLWIG M. and PFLEIDERER P. (2010), “Fallacies, irrelevant facts, and myths in the discussion of capital regulation: why bank equity is not expensive”, Stanford GSB Research Paper, n. 2063, and Working Paper Series, n. 86, The Rock Center for Corporate Governance at Stanford University.

BASEL COMMITTEE (2011), “Measures for global systemically important banks agreed by the Group of Governors and Heads of Supervision”, Press release, 25 June.

BANK FOR INTERNATIONAL SETTLEMENTS (2010), Annual report 2009/10, Basel.

COUNCIL OF THE EUROPEAN UNION (2009), Lessons from the financial crisis for European financial stability arrangements, EFC High-level working Group on cross-border financial stability arrangements, Brussels, 27 October.

DE LAROSIÈRE J. (2009), Report of the High-level Group on financial supervision, Brussels, 25 February.

DEMIRGŰÇ-KUNT A. and HUIZINGA H. (2009), “Bank activity and funding strategies: the impact on risk and return”, European Banking Center Discussion Paper, n. 2009- 01, Tilburg University.

EUROPEAN BANKING AUTHORITY (2011), EU-wide stress test disclosure template.xls, July.

EUROPEAN CENTRAL BANK (2006), EU banking structures, October, Frankfurt am Main.

EUROPEAN CENTRAL BANK (2009), EU banks’ funding structures and policies, May, Frankfurt am Main.

ENRIA A. and TEIXERA P. (2011), A new institutional framework for financial regulation and supervision, mimeo, April.

EUROPEAN COMMISSION (2007), European financial integration report 2006, Brussels, December.

EUROPEAN COMMISSION (2009), European financial integration report 2008, Brussels, January.

EUROPEAN COMMISSION (2009), “The EU’s response to support the real economy during the economic crisis: an overview of Member States’ recovery measures”, Occasional Paper, n. 51, July.

EUROPEAN COMMISSION (2009), European financial supervision, COM (2009) 252 final, 27 May.

EUROPEAN COMMISSION (2009), “Accompanying document to the proposal on Community macro prudential oversight of the financial system and establishing a European Systemic Risk Board, Impact Assessment”, Commission Staff Working Document, SEC (2009) 1234, 23 September.

EUROPEAN COMMISSION (2010), “Facts and figures on State-aid in the Member States”, Commission Staff Working Document, SEC (2010) 1462, Provisional Version, 1 December.

EUROPEAN COMMISSION (2010), “Regulating financial services for a sustainable growth”, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the European Central Bank, COM (2010) 301 final, 2 June.

EUROPEAN COMMISSION (2010), “An EU framework for crisis management in the financial sector”, Communication from the Commission to the European Parliament, the Council, the European and Social Committee, the Committee of the Regions and the European Central Bank, COM (2010) 579 final, 20 October.

FISHER R. (2011), “Containing (or restraining) systemic risk: the need to not fail on ‘too big to fail’”, Speeches, Federal Reserve Bank of Dallas, 6 June.

FITZGERALD S. (2009), The reform of financial supervision in Europe, Institute of International and European Affairs, Dublin, November.

GOODHART C.A.E. and SCHOENMAKER D. (2006), “Burden sharing in a banking crisis in Europe”, Special Paper, n. 164, LSE Financial Market Group.

HOCHE DBB LAW (2010), Study on the feasibility of reducing obstacles to the transfer of assets within a cross-border banking group during a financial crises. Final Report to the European Commission.

IMF (2011), “Europe. Strengthening the recovery”, World Economic and Financial Surveys, Regional Economic Outlook, May.

IMF (2011), “Subsidiaries or branches: Does one size fit all?”, IMF Staff Discussion Note, n.11/04, March 7.

KING M. (2010), “Banking: from Bagehot to Basel, and back again”, The Second Bagehot Lecture, Buttonnwood Gathering, New York City, 25 October.

KREGEL J. (2010), “Can a return to Glass-Steagall provide financial stability in the US financial system?”, PSL Quarterly Review, vol. 63, n. 252, pp. 30-76.

LAEVEN L. and VALENCIA F. (2010), “Resolution of banking crises: the good, the bad, and the ugly”, IMF Working Paper, n. WP/10/146, Washington (DC).

MOODY’S (2011), “Banks’ implied ratings and CDS still show concern with banks in Europe and Middle East”, Capital Market Research, 2 June.

MORELLI P. (2011), “The stabilising ROA in the Basel 3 scenario”, Bancaria, April, pp. 44-48.

MÖRTTINEN L., POLONI P., SANDARS P. and VESALA J. (2005), “Analysing banking sector conditions. How to use macro-prudential indicators”, ECB Occasional Paper Series, n. 26, April.

PRINGLE R. and SANDEMAN H. (2010), Comments on possible reform option: structural separability of deposit banking in the UK, November.

SABATINI G. (2011), “The Italian banking sector and the impact of the new Basel framework”, presentation at the conference organised by the University of Siena and the Ford Foundation on European financial systems: in and out of the crisis, Siena, April 1-2.

TONVERONACHI M. (2010), “Financial innovation and system design”, PSL Quarterly Review, vol. 63, n. 253, pp. 131-144.

TONVERONACHI M. (2010), “Empowering supervisors with more principles and discretion to implement them will not reduce the dangers of the prudential approach to financial regulation”, PSL Quarterly Review, vol. 63, n. 255, pp. 361-376.

TONVERONACHI M. and MONTANARO E. (2010), “Restructuring the financial system: A synthetic presentation of an alternative approach to financial regulation”, mimeo.

UNICREDIT (2009), Cross-border banking in Europe: what regulation and supervision?, March, Discussion Paper, n. 1.

VICKERS COMMISSION (2011), Interim report. Consultation on reform options, April, London.




How to Cite

Montanaro, E., & Tonveronachi, M. (2011). A critical assessment of the European approach to financial reforms. PSL Quarterly Review, 64(258). https://doi.org/10.13133/2037-3643/9409




Most read articles by the same author(s)

1 2 > >>