Part 2 - Overview of Regulation in Financial Markets

List and explain the 5 key elements of the Regulatory Framework

5 components that define how regulation operates in financial markets:

• Authorising: Deciding who can enter and operate within the financial system

• Regulating: Setting the rules and standards for financial behaviour and practices

• Supervising: Monitoring compliance with those rules on an ongoing basis

• Financial markets: The platforms where assets are traded, and prices are formed

• Financial institutions: The actors that participate in and support the functioning of those markets

What are the banking authorities authorising and controlling banks in Europe? (2024)

Authorising: Deciding who can enter and operate within the financial system

Controlling / Supervising: Ongoing process of overseeing financial institutions to ensure they remain sound and compliant with applicable regulations

• European Central Bank (ECB) = directly supervises the 130 largest banks in the Eurozone

• National authorities = supervise smaller Eurozone banks, but ECB has the right to take over supervision at any time

List the authorities authorising, supervising, regulating, in charge of the resolution and coordination of banks in Europe. (2025)

• Authorisation: National Competent Authorities (NCAs) / European Central Bank for significant institutions under the Single Supervisory Mechanism (SSM)

• Regulation: European Commission proposes financial legislation, Council of Ministers and European Parliament jointly decide and European Supervisory Authorities (ESA) advise on technical aspects and draft regulatory standards

• Supervision: European Central Bank (ECB) supervises the 130 largest banks in the Eurozone & National Competent Authorities (NCAs) supervise smaller Eurozone banks, but ECB retains the right to take over at any time. ESA contribute to improving convergence of supervisons

• Resolution: Single Resolution Bank (SRB) take the decision for large banks & NCAs take the decision for smaller banks, but thy consult + inform the SRB

• Coordination: ESAs promote EU-wide consistency

Explain ESAs role

ESA consists of 3 bodies:

• European Banking Authority (EBA) = regulatory body, issues technical standards + guidelines

• European Securities and Markets Authority (ESMA) = supervises specific capital market entities ( credit rating agencies, trade repositories, etc.)

• European Insurance and Occupational Pensions Authority (EIOPA) = covers insurance / pensions

Vital role in promoting EU-wide consistency:

• Advising EU institutions during legislative process

• Developing regulatory and technical standards (EBA)

• Coordinating national supervisors to ensure uniform implementation of rules)

What is the difference between functional and institutional regulation? (2022)

• Functional regulation: regulation is based on the activity / function performed of the entity, the type of the entity does not matter → applies the same rules to the same financial activity across all entities

• Institutional regulation: regulation is based on the legal status / type of the entity → set the same rules across the same type of entity

What is the difference between national and international regulation?

• National regulation: rules set and enforced by domestic authorities within a single jurisdiction → each country has its own regulatory framework

• International regulation: rules developed through cooperation between countries (Basel Committee, G20, etc.) → typically known as gentlemen’s agreements (non-binding standards, principles, recommendations)

Give and briefly explain the typology of risks (5 types) that regulations aim to tackle in relation to banks. (2022, 2023, 2024 + 2025)

• Credit risk (counterparty risk): Risk that a borrower doesn’t pay back the loan

• Market risk: Risk of losses due to changes in financial markets (equity prices, exchange rates, interest rates)

• Liquidity risk:

- Trading liquidity risk: Risk that bank cannot sell assets fast enough at a reasonable price (ex. subprime crisis)

- Funding liquidity risk: Risk that bank cannot raise sufficient funds to meet its obligations at a reasonable cost (ex. 2007 banking crisis)

• Operational risk: Risk of losses from failed systems, processes, external events or human errors

• Systemic risk: Risk that the failure of 1 institution triggers are broader colleges of the financial system (contagion effect)

• Environmental (ESG) risk: Risk of losses from climate change or green transition

List the positive consequences of regulating the financial system and the negative consequences. (2025)

Positive consequences of regulation:

• Investor / depositor protection

• Financial stability (reducing systemic risk)

• Market integrity and confidence

• Prevention of financial crime (AML / CFT)

• Level playing field among competitors

Negative consequences of regulation:

• Compliance costs for institutions

• Reduced competition / barriers to entry

• Risk of regulatory arbitrage (firms relocate to less regulated jurisdictions)

• Over-regulation can stifle innovation and credit supply

• Regulatory capture (regulators influenced by industry)

Is the approach in the US and Europe the same today? What are the consequences of a divergence of policy? (2025)

US vs. Europe today: NO, approach ≠ same

→ Post-2008 both converged toward stricter regulation (Basel III, Dodd-Frank in the US, CRD/CRR in Europe). However, since then there has been divergence, particularly under US administrations favouring deregulation while Europe risks overregulation.

Consequences of divergence:

• Regulatory arbitrage — firms shift activities to the less regulated jurisdiction

• Gaps in oversight of cross-border institutions

• Risk that deregulatory trends reduce oversight and increase systemic risk

• Competitive disadvantage for European banks vs. US peers

• Risk of financial instability if globally active banks face inconsistent capital/liquidity requirements

Who are the main regulators in the US and in Europe for financial markets and banking? (2022)

Europe: use of a centralised system and national authorities under a unified framework

• Regulation: European Commission (proposes legislation); Council of Ministers + European Parliament (adopt); ESAs — EBA (banking), ESMA (securities/markets), EIOPA (insurance/pensions) — advise and draft technical standards

• Supervision: ECB supervises ~130 largest Eurozone banks directly; NCAs supervise smaller banks; ESMA has direct supervisory powers over credit rating agencies and trade repositories

• Resolution: Single Resolution Board (SRB) for large banks; national resolution authorities for smaller ones

US: multiple federal and state regulators oversee financial markets

• Fed (Federal Reserve): monetary policy, supervises bank holding companies

• OCC: supervises national banks and federal savings associations

• FDIC: deposit insurance, supervises state-chartered banks not in the Fed system

• State Banking Authorities: supervise state-chartered banks

• SEC: capital markets, investment firms, mutual funds, public companies

• CFTC: derivatives and futures markets

• CFPB: consumer financial protection

• FINRA: self-regulatory body for broker-dealers