“Fit and proper” regulations in the banking industry: What we have learnt in the post-crisis years

Abstract

In a highly influential paper, Bradford (2015) coined the term “Brussels effect” to describe the way the EU regulatory power is externalized to third countries via consumer markets. In this paper, we analyze whether there is a Brussels effect in the finance industry as well. To do so, we study the evolution and regulatory changes put in place in Europe after the financial crisis to ensure that directors in the banking industry are adequately qualified and competent to meet the expertise and education requirements (the “fit and proper” criteria). We find that, as a result of the latest financial crisis, stricter board requirements were paired with stricter controls from the banking supervisory authorities in Europe. We describe the post-crisis regulatory framework as being characterized by 1) a strong commitment to regulation of risk management, 2) a multilayered control system and 3) a harmonized system with a strong presence of national regulatory authorities. We conclude that the European Union – through European Banking Authority (EBA) and the European Single Supervisory Mechanism (SSM) – has become a standard setter for the banking industry promoting international financial standards and “hardening” the soft law recommendations with directives and binding technical standards as regulatory instruments.