FINAL EXAM

BANKING AND FINANCIAL MARKETS LAW

3rd of June 2053, 11.00-13.00

Information

1. This exam consists of 4 open questions and will take two hours..

2. Please switch off and put away your mobile phone.

3. Please write your name and student number on the exam sheets.
Write with a black or blue pen only!

4. During the exam you are allowed to use only:

- the material provided by the instructor
- a (non-legal) dictionary

It is only permitted to:

- underline texts
- write down numbers of Articles
- write down numbers and the names of case-law
Any other notes, comments, etc. will be considered fraud.

5. Answer clearly, succinctly and in a structured manner. Write legibly! Start your answers
with relevant general remarks and work towards the specific answer.
Do not use more space than the boxes below provide! Everything that is written outside the
boxes will be ignored..

6. Please check whether all pages of your exam are present. The examination should consist
of 8 pages.

Best of luck!!!
Question 1 ESRB and Danish Competent Authority

On the 2nd of January 2017 the ESRB has serious concerns relating to the situation of the
insurance sector in Denmark. It reaches out to the Danish Competent Authority,
Finanstilsynet, as to bring up this issue. The ESRB decides to adopt a recommendation asking
that some measures will be taken by the Danish Authority to fix the situation. The
recommendation is awkwardly straightforward, and it reads as follow
“ After careful consideration of the economic data and further analysis in the insurance sector
we do ask by means of a recommendation to take policy action. In fact, the ESRB does
foresee potential risks in the cross sectional dimension ” .
You work at the Danish Authority and you are asked whether and how to react to this
recommendation.

A. Was the ESRB entitled to act ? Do you think that the Recommendation issued by
the ESRB is valid ?
not a eurozone country,
- Yes, ESRB is entitled to act because the ESRB has within macro prudential
supervision as a main objective the oversight of systemic risk within the union.
macro over all financial sectors: Cf. regulation 1092/2010 Art. 3 “it shall
contribute to the smooth functioning of the internal market and thereby ensure a
sustainable contribution of the financial sector to economic growth”

The issued recommendation is within warranted scope of regulation 1092/2010 Art. 3. 2d cf.
art. 16 (2) but it is not valid because there is no timeline and “the cross-sectional dimension”
is very vague.

B. Assume that your answer is yes in the previous question, what happens if the
Danish Authority does not comply with such recommendation?
- If the ESRB According to Article 17 (1) does not find the justification from
Finanstilsynet adequate has to inform the council or if Finanstilsynet fails to
comply with the recommendation it shall address the Council according to article
17 (2)
- Furthermore the ESRB can publicice confer article 18(1)

C. What kind of policy interventions are possible to cope with the cross-sectional
dimension of systemic risk?
-

-  Monetary policies to control asset booms )=(via controlling the money supply and thus
the cost of credit)
- Specific buffers (conservation buffer, countercyclical, G-SIB buffer)
- Time-varying risk weights, loan-to-value ratios as to restrict bank lending into particular
types of assets
-
Question 2 – “PSD2 and European Banking Authority”

The payments market in the EU has been rapidly developing in the last few years, with the
development of innovative payment services and instruments, including mobile payments,
instant payments and contactless solutions. To adapt to this innovative environment, the
European bodies (Commission, Parliament and Council) enacted the revised Payment
Services Directive (PSD2). Among other things, article 79 PSD2 sets out the following

“1. By 13 January 2019 the EBA shall develop draft regulatory technical standards
addressed to banks specifying:
(a)
the requirements of the customer authentication;

(b)
the requirements with which security measures have to comply in order to protect the
confidentiality and the integrity of the payment service users’ personalised security
credentials;

(c)
Some information

2. The draft regulatory technical standards referred to in paragraph 1 shall be developed by

EBA in order to:

(a)
ensure an appropriate level of security for payments;

(b)
ensure the safety of payment service users’ funds and personal data”.

The EBA on 5th January 2019, releases the regulatory technical standards that read as follow

- 1 Banks shall develop and require a system of generation of an authentication code to

enable customers to make payments over internet and safely use credit cards.

- 2 Banks shall ensure the confidentiality and integrity of the personalized security
credentials of the payment service user, including authentication codes, during all
phases of authentication including display, transmission and storage.

- 3 Banks shall promote competition and develop user-friendly, accessible and

innovative means of payment.

- 4 Banks shall develop documents to advertise their payment products, as to make clear
the interest rates and any other economic conditions.
You are asked to analyse the Directive and the EBA’s regulatory standards commenting
on whether or not the technical standards have been properly drafted by the EBA

Nr. 3The EBA should have added in the word “..means of secure payments” from this sentence
“Banks shall promote competition and develop user-friendly, accessible and innovative means of
payment.”

Nr. 2 should specify personal data, and mention personal data in the draft.

Some information is very vague

The technical standards draft is missing / vague and therefore the conclusion must be that the draft
has not been properly drafted according to the technical standards.

The directive never mentioned any power of promoting competition or developing user-friendly
beyondthe delegation of power.

Start with the delegation and how the eba can exercise its powers
This is level 1 vs level 2. Maroni and romano.
No reference to the European commission
Question 3 – Essays question

Explain what the “public interest” is in the context of the second pillar of the banking
union and the resolution procedure

The public interest of the second pillar is to prevent social cost of banking failures, by
ensuring that if a bank goes down, it goes down in an orderly manner, ensuring that it has as
little negative impact on the rest of the financial market as possible. It does however also give
the opportunity to bail out a bank if needed, however this should be done with caution as this
might result in moral hazards from the banks management, taking more risky decisions,
because they feel safe that they’ll get bailed out if things go bad. It’s also in the public
interest to prepare for a crisis and should it happen be prepared to handle them, once again to
relieve the negative impact such a crisis could have on the financial market as a whole.
Before resolution can commence, it must first be attempted to rescue the bank, in order to
prepare for this, the Bank must have prepared recovery plans in accordance with the Art. 5
BRRD, which states that the bank must draw up measures to be taken by the bank to restore
its financial position following a significant deterioration of its financial position. This plan
must also be assessed by the competent authority supervising the bank, in accordance with
Art. 6 BRRD. If all options have failed, including implementing the recovery plan, removing
the management, changing business strategy etc. Then resolution can commence, once there
is also public interest for resolution, for this, the resolution authority will draw up a plan for
the individual bank. Upon which actions they should take when the bank enters resolution, in
accordance with Art. 10-11 BRRD. The resolution authority, can then choose one out of
several tools in order to fulfill the banks resolution, they can sell the bank, all its parts, shares,
assets, rights and liabilities and transfer these over to a private purchaser, in accordance with
art. 38-39 BRRD. They can bridge the bank, transferring all of the above to a temporary
institution; however, the bank must be publicly controlled and be sold within two years
unless extended, art. 40-41 BRRD. They can also choose to clean up the bank through asset
separation, carving out all the bad assets and thereby cleaning up the bank, this should
however only be used in combination with other tools, art 42 BRRD. Lastly they can choose
to “Bail-In” the bank, by writing down the banks equity and debt or converting it into funds.
This will put the primary burden on the shareholders and creditors rather than the public and
thereby absorb the banks losses and recapitalizing it, BRRD art. 43-55.
Question 4 – Essay question

Explain the tasks of the Bank for International Settlements (BIS) and of the Basel
Committee for Banking Supervision (BCBS)
Who: International financial organisation owned by 60 member central banks, representing countries
from around the world that together make up about 95% of world GDP. Its head office is in Basel,
Switzerland 
What: Global standard setter for the prudential regulation of banks

Central bank of central banks

Place for discussion and collaboration among central banks

• Support dialogue between authorities responsible for promoting financial stability
• Research on policy issues for central banks and financial supervisory authorities
• Counterparty for central banks’ financial transactions
• Agent or trustee for international financial operations
Legal foundations: established by means of a Convention and Charter
Output: Develop and review the implementation of its standards

Though the Basel standards are not legally binding, the BCBS still monitors both the timeliness and
the substance of the subsequent legislative process, seeking to ensure that the standards are
implemented with no or little deviation
1. It checks whether Basel standards are timely adopted
2. It assesses the consistency and completeness of the domestic regulations, also judging the
significance of any deviations
The whole process is set out in the Regulatory Consistency Assessment Program (RCAP) – Formally
adopted in 2012
The RCAP’s grading system uses four categories: the regulatory framework can be judged to be
compliant, largely compliant, materially non-compliant, or non-compliant.