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Responding to the financial crisis

Responding to the financial crisis

To prevent a complete collapse of the banking system, European governments came to the rescue of their banks with urgent support of an unprecedented scale. 1.6 trillion euros, the equivalent of 13 % of the EU’s annual GDP were committed between 2008 and 2011.

The EU also launched a Europe-wide recovery programme to safeguard jobs and social protection levels and to support economic investment. In this way, bank runs were avoided and European savings were protected.

The euro broadly maintained its value and successfully shielded euro zone countries from the worst effect of the economic crisis by providing EU companies with a stable playing field for international trade and investment. But this effort took its toll, especially because most of this money had to be borrowed.

The economic and financial crisis has demonstrated that the EU’s banking system is vulnerable to shocks. A problem at one bank can spread quickly to others, affecting depositors, investment and the overall economy. In response, the EU and its member countries have been strengthening financial sector supervision.

As part of the reforms, 3 European supervisory bodies were set up to help coordinate the work of national regulators and ensure EU-level rules are applied consistently.

  • The European Banking Authority (EBA), which deals with bank supervision, including the supervision of the recapitalisation of banks;
  • the European Securities and Markets Authority (ESMA), which deals with the supervision of capital markets and carries out direct supervision with regard to credit rating agencies and trade repositories,
  • and the European Insurance and Occupational Pensions Authority (EIOPA), which deals with insurance supervision.

European financial supervision is being stepped up to ensure that banks are better capitalised, behave responsibly and are able to lend money to households and businesses. This paves the ways for Banking Union to make sure that people’s deposits are protected and taxpayers are not forced to pay for the failure of banks.

The Banking Union is a natural complement to the Economic and Monetary Union. It addresses the weaknesses that were revealed by the crisis. Soon banks in every country that uses the euro will report to a common supervisor, the European Central Bank. Moreover, decisions on how to handle a failing bank will be taken centrally, according to a common set of rules that have been designed to minimise the cost to tax payers.

Depositors across Europe will also be better protected. Through these measures nearly 30 more, the EU is working to build a more effective financial sector based on stronger, more resilient banks and sounder regulation and supervision.

As the euro area’s independent monetary policy authority, the European Central Bank (ECB) played an important role in containing the crisis with innovative policies. The institution’s decision to lend banks as much as they needed at low rates and for as long as three years, helped to calm markets by ensuring that banks would be able to cover their short term needs.

When financial markets became so dysfunctional that they were demanding unreasonably high returns for lending to governments, the ECB devised the Outright Monetary Transactions (OMT) programme, under which it promised to buy the bonds of struggling government to ensure a reasonable rate, provided that they also commit to a programme of economic reforms with the euro area’s assistance fund, the European Stability Mechanism.

Although no country has ever requested the OMT programme to be used, its mere fact of its existence helped to calm financial markets.

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