Risk, regulation, supervision and crises in the European Banking Union

This paper aims to analyse risk, regulation, supervision and crises in the framework of the European Banking Union, considering commercial banks and the evolution of the banking business. Identification, measurement and management of all the risks linked with the financial instruments and business areas constitute the premises for a sound management. This is the key and strategic issue for banks and financial intermediaries, involving positive results and therefore profits or negative results and therefore losses. Financial crises, particularly severe in Europe over a long period of time starting in 2007, and related economic crises have given rise to non-performing loans spreading through European banks. This paper underlines the need to deal with and to solve this problem, which still has negative repercussions on the economic growth of the European Union mainly because it has meant fewer loans to the economy and especially to small and medium -sized enterprises. The paper pays particular attention to the introduction and spreading of the so-called ‘bad bank’, which takes the bad assets and at the same time leaves the good assets in the previous bank in a sort of “cleaning up” of the asset side of the banks’ balance sheets. The “cleaning up” and the full return to good banks represent the steps towards better conditions for the financing of the economy and economic growth. The greater the rates of return on investments for the good banks in the European Union the better will be the premises for lending. Regulation and supervision are typical aspects of the complexity and distinctive features of the banks. It is worth pointing out the over implementation of rules and constraints on the banking business and especially on capital levels, which are important from the point of view of covering losses but not from the point of view of a rational and sound management of banking risks and business areas. In this context, the single supervisory mechanism and the single resolution mechanism, which has brought into operation the so-called ‘bail-in’ from the beginning of 2016, are considered focusing weaknesses and critical aspects for the evolution of commercial banks, singling out confidence risks and instability risks. The financial crises have been the cause of many critical points and instability factors, and the application of the ‘bail-in’ can recreate financial instability. In the past years, states did spend a large amount of money for rescue purposes and now there is an incorrect use of state aid according to the European Commission interpretation, which considers many cases as state aid when they are not, in fact, state aid. This is misleading as it tends to increase the financial instability risks arising from the application of the bail-in. This paper examines risk management issues in the context of the bank and evolution of the banking business, by focusing on non-performing loans and bad bank to remove obstacles to economic growth on a European scale and, at the same time, on rules and single supervision for the removal of excessive re-strictions and its inner irrationality on a European scale, identifying critical points and weaknesses. Such circumstances show remarkable importance where banks’ rein-forcement is concerned, as well as their capacity to lending credit to the economy, which represents the point of return to satisfactory rates of economic growth in the European countries, particularly the weaker ones. Therefore, this paper aims to analyse relationships between risk management, non-performing loans, regulation, supervision and banking crises in the framework of the European Banking Union, taking into account the bad bank solution, and the bail-in resolution mechanism and focusing critical remarks and guidelines for the future.