THE EVOLUTION OF EUROPE’S FINANCIAL STABILITY AGENDA George William Pendrill Maggs A thesis submitted in partial fulfilment of the requirements of the University of the West of England (Bristol), for the degree of Doctor of Philosophy (PhD), Political Economy Faculty of Business and Law University of the West of England (Bristol) July 2019 Abstract This thesis applies insights from Historical (HI) and Discursive Institutionalism (DI) to analyse the evolution of Europe’s financial stability agenda from the signing of the Maastricht Treaty (1992) to the completion of Banking Union (BU) (2014). It aims to discover when and under what circumstances ideas have enabled and constrained important policy shifts within the Eurosystem, and to what extent structural rigidities have prevented change. The thesis fills three gaps in the literature: i) no previous research has attempted to analyse the importance of ideas and structures on the development of financial stability policy within the Eurosystem. ii) it provides an ideational explanation for the growing supranationalisation of financial policy within the European Union (EU). In line with monetarist ideas, financial integration was promoted by the EU Commission and ECB as a means of harmonising financial conditions and improving monetary policy transmission within an increasingly ‘market-based’ financial environment. Yet as a result of this enhanced interconnection, it soon became clear that the ECB would need to become concerned not only with the delivery of price stability, but of financial stability too; iii) at the national level, little research has been produced on the relationship between national economic ideas, the regulation of domestic financial sectors, and how member-states prepared for EMU. This thesis shows why Spanish and German banks managed market-based financial trends dissimilarly, why the financial crisis affected the two countries differently, and why they subsequently expressed different policy preferences at the EU-level. ‘Process tracing’ is used as the overarching methodological framework, attributing causation to specific events and trends. Using this framework, the thesis adopts a comparative analysis of the Spanish and German financial systems. In total, 19 qualitative interviews were conducted with Spanish, German and European policymakers to gain a deeper understanding of the ideational and structural issues at play within each jurisdiction, as well as a thorough analysis of important speeches and policy documents drafted by national and European central bankers. Critical Discourse Analysis (CDA) was then used in conjunction with process tracing to examine text and data and to scrutinise policy-makers justifications for action or inaction. The thesis uncovers clear examples of where ideas have acted both as enablers and constrainers of change, and where structures have dominated outcomes. One of the most important findings is that ideational contradictions or failures can lead to substantial institutional change. This occurred most notably during the 2010-12 sovereign debt crisis which revealed the inherent contradictions of the Maastricht framework. As the crisis intensified, the ECB realised that if price stability was to be maintained, interventionist financial policies would become necessary, leading to considerable conceptual stretching over what should constitute ECB monetary policy. Ideas were also shown to have influenced the structure of the German and Spanish financial systems and the way they were impacted by the crash. In Germany, Deutsche Bundesbank (DB) non-interventionist policy ideas allowed financial institutions to accumulate asset-side risk, resulting in the crisis hitting Germany early in 2007. However, the liberalisation of German debt markets in the 1990s meant German sovereign bonds became viewed as ‘safe assets’ during the downturn, allowing the German state to borrow to bail-out its financial sector. In Spain meanwhile, BdE interventionist financial policy ideas facilitated important countercyclical practices which cushioned the initial crisis. But because Spanish banks relied on the production of Asset-Backed Securities (ABS) rather than inter-bank ‘repo’ markets for funding, Spanish bonds were not considered to have the same pedigree as German debt. Consequently, once the sovereign debt crisis took hold, Spain was forced to turn to Europe for support. Different financial ideas and regulatory practices within the DB and BdE thus had a considerable influence on the severity and timing of the crisis in each country. This research also reveals that ideas acted as powerful constraints. From the ‘institutional formation’ of EMU at Maastricht which established price stability as the raison d'être for the existence of the ECB, the banks legitimacy and credibility became entwined with the successful implementation of monetarist policies. This restricted the scope of policy ideas aimed at improving financial stability, particularly before 2012. Abbreviations ABCP Asset Back Commercial Paper ABS Asset-Backed Securities AEB Association of Spanish Private Banks (Asociación Española de Banca Privada) BAC Banking Advisory Committee BaFin Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) BBVA Banco Bilbao Vizcaya Argentaria BdE Banco de España BFA Banco Financiero y de Ahorros BIS Bank for International Settlements BSC Banking Supervision Committee BU Banking Union BVR The National Association of German Cooperative Banks (Bundesverband der Deutschen Volksbanken und Raiffeisenbanken) CAM Caja de Ahorros del Mediterráneo CBPP Covered Bond Purchase Program CDA Critical Discourse Analysis CDU Christian Democratic Union of Germany (Christlich Demokratische Union Deutschlands) CEBS Committee of European Banking Supervisors CECA Confederation of Spanish Cajas (Confederacion Española de Cajas de Ahorros) CMBS Commercial Mortgage-Backed Securities CPE Comparative Political Economy CQS Credit Quality Steps CRD Capital Requirements Directive CSU Christian Social Union in Bavaria (Christlich-Soziale Union in Bayern) DG ECFIN Directorate-General for Economic and Financial Affairs DG FISMA Directorate-General for Financial Stability, Financial Services and Capital Markets Union DGS Deposit Guarantee Scheme DI Discursive Institutionalism DPS Deposit Protection Scheme DSGV German Savings Banks Association (Deutscher Sparkassen und Giroverband) EBA European Banking Authority EC European Community ECB European Central Bank ECJ European Court of Justice ECSB European System of Central Banks EEC European Economic Community ELA Emergency Liquidity Assistance ERM European Exchange-Rate Mechanism EMI European Monetary Institute EMS European Monetary System EMU Economic and Monetary Union ECOFIN Economic and Financial Affairs Council ECSP Enhanced Credit Support Program EFSF European Financial Stability Facility EFSM European Financial Stabilisation Mechanism EIOPA European Insurance and Occupation Pensions Authority ELA Emergency Liquidity Assistance ESFS European System of Financial Supervision ESM European Stability Mechanism ESMA European Securities and Markets Authority ESRB European Systemic Risk Board FCD Financial Collateral Directive FROB Fund for the Orderly Restructuring of Banks (Fondo de Reestructuración Ordenada Bancaria) FSAP Financial Services Action Plan GDP Gross Domestic Product GIIPS Greece, Italy, Ireland, Portugal and Spain HGAA Hypo Group Alpe Adria HI Historical Institutionalism HICP Harmonised Index of Consumer Prices HRE Hypo Real Estate ICMA International Capital Market Association IFRS International Financial Reporting Standards IMF International Monetary Fund IPE International Political Economy IPS Institutional Protection Scheme KWG German Banking Act (Gesetz über das Kreditwesen) LOLR Lender of Last Resort LTRO Long-Term Refinancing Operation LTV Loan-to-Value (ratio) MBS Mortgage-Backed Securities MEP Member of the European Parliament MoU Memorandum of Understanding MPR Macro-Prudential Regulation MRO Main Refinancing Operations MRQ Main Research Question NCB National Central Bank NKM New Keynesian Model NPL Non-Performing Loan OMT Outright Monetary Transactions OECD Organisation for Cooperation and Development PP Popular Party (Partido Popular) PSI Private Sector Involvement QE Quantitative Easing SDP Social Democratic Party (Sozialdemokratische Partei Deutschlands) SEA Single European Act SGP Stability and Growth Pact SIV Structured Investment Vehicle SME Small Medium-sized Enterprises SMP Securities Markets Program SoFFin Financial Market Stabilization Institution (Finanzmarktstabilisierungsanstalt) SPV Special Purpose Vehicle SRF Single Resolution Fund SRM Single Resolution Mechanism SRQ Subsidiary Research Question SSM Single Supervisory Mechanism TEFU Treaty of the Functioning of the European Union TEU Treaty of the European Union TSCG Treaty on Stability, Coordination and Governance in the Economic and Monetary Union ToA Treaty of Amsterdam VoC Varieties of Capitalism UN United Nations UNACC National Union of Cooperatives (Union Nacionale de Cooperativas de Credit) USA United States of America Technical Financial Terms ABCP A security backed by the expected cash flows from the interest on corporate debt ABCP conduits Institutions which buy debt from companies and then issue investors with commercial paper and act as middle-man between firms and the holders of ABCP Asset-Backed Securities Securities which derive their value from an underlying asset Bad bank A state backed Special