Critical Appraisal of Regulatory Response by European Union to the Crises of 2008 in Ireland

Introduction

Financial crises refer to the situations when large the part of the assets lose their nominal value resulting in a loss in the market. Financial crises are considered as the major issues that restrict the growth of the economy. Financial crises are related to the lower growth of the economy due to the reduction in the flow of the money in the markets (Charlier and Valceschini, 2008). The term financial crises are also referring to the banking panics and recessions in the market. Financial crises have been faced by the several countries in the world due to which their whole financial and economic stability have altered. In terms of Ireland, the financial crises have been a significant phase of the country due to which whole economic scenario of the country has been changed.

There were several causes that led to the financial crises in the country such as series of banking scams. There was the initial slowdown in economic growth of the country within the financial crisis of 2007–08 internationally. This has intensified in late 2008 in Ireland due to which the country fell into recession and financial instability for the first time in the 1980s. The scenario of the unemployment in the construction sector also intensified and heightened to levels in the history of the country (Cotula, 2012). The economy of the Republic of Ireland expanded instantly during the Celtic Tiger years from 1995–2007 caused due to the low corporate tax rate, systemic factors such as soft surveillance of banking supervision and low ECB interest rates. The underdeveloped systems for public financial management and anti-corruption activities also added to the crises faced by the country during 2008. The adoption of poor policies including an ineffective corporate tax system that reduced the production and marketing of goods and services through the construction industry.

Critical appraisal of Regulatory response by the European Union to the crises of 2008

The European Union understood the financial crises faced by Ireland applied several measures to eradicate the issue of financial crises from the country. The European Union imposed financial rules and regulations on the member countries in order to apply them significantly in their business models so that banks and other financial institutions can get sustainability in the market. The European Union also passed laws to implement measures for ensuring sustainability in the systems. The financial disputes and directives were also addressed due to the correct implementation of directives by The European Court of Justice (Charlier and Valceschini, 2008).

The legislative basis that is adopted by the European Union to address the EU crisis was related to the management mechanisms such as the Financial Conglomerate Directives (FCD) and Capital Requirement Directive (CRD) as they were considered as the significant parts of the EU’s Financial Action Plan (Sabel and Zeitlin, 2008). This assisted to the country in overcoming from the effects of financial crises. The EU’s successful financial regulations were enforced mainly under the guidance of national governments, and they were also managed by EU’s supervisory institutions including the Committee of European Banking Supervisors (CEBS) and the European Central Bank (ECB) for the optimisation of the banking functions (Mizen, 2008).

In six member countries, several services related to the banking, securities and insurance were supervised by the regulatory authorities so that they can be controlled easily without any interruptions by the secondary agencies. The countries that came under this supervision were Austria, Ireland, Sweden, Denmark, Germany and the United Kingdom. In this context, the banking supervision in all these countries was regulated by multiple regulatory agencies. The services related to the securities and insurance were supervised by multiple agencies such as one agency in Belgium, the Netherlands, Finland and Luxemburg (Fritzon, Ljungkvist and Rhinard, 2007). Two agencies in Greece, Spain, Italy and Portugal along with the three agencies in collaboration with the Ministry of Finance, in France. In this manner, all the financial operations within the country were managed and controlled by the authoritative governmental institutions (Papaikonomou, 2010).

In addition to the development of financial directives and policies, the financial regulatory structures were also developed for the countries included in the Eurozone. Eurozone referred to the zone when most of the countries in the European Union opted Euro as their national currency (Jones, Clark and Cameron, 2010). This became the significant and important part of the economically developed directives to overcome the challenges created due to financial crises in Ireland. Ireland is considered among the biggest economies of the European Union as it has a significant part in the development of whole Europe. Despite the single currency regulation, the 16 countries within the Eurozone possess more than 40 financial supervisory authorities due to the weak and ineffective coordination among them. This drawback slowed the EU’s response to the financial crisis in Ireland (Quaglia, De Francesco and Radaelli, 2008).

The supervision provided by the European Union for effective financial services are based on the ethics and principles of mutual recognition of home country control. The coordination and the cooperation among the national regulatory agencies and authorities were legally bound through a sustained network of bilateral memoranda of understanding (Turner, 2009). Accompanying such kind of memoranda are accomplished successfully by functional multilateral committees including the Committee of European Banking Supervisors (CEBS) that were assigned the functions of banking supervision.

All these tasks were significantly performed by the committees responsible for the sustainability and management of the tasks. These committees played a significant role in responding to the financial crises occurred in Ireland in the year 2008. However, there were some issues faced by the European Union during the response to the financial crises. In this context, a criticism regarding the existing EU regulatory framework was made which was related to the 2007-2009 financial crisis in Ireland (Habermas, 2012). This criticism was observed as the country’s financial supervisors illegally allowed and benefited their supervised institutions to operate under the originate to distribute business model that helped them in gaining competitive advantage in comparison to European Union banks. These financially institutions are large, but it is analysed that poorly supervised institutions possess the ability to develop profitability (Hodson and Quaglia, 2009). There are chances when took risky assets get off their stability sheets without setting and arranging the significant amount of required capital to get stability against risk exposure for the institutions.

The institutions got in involved in the undercapitalised activities due to which Ireland faced and suffered most of the losses in the year 2008. There was a major credit crunch in case of the disappearance of short-term liquidity. In spite of these tasks, the countries’ central banks taken back their allegations against the institutions (Peters, Pierre and Randma-Liiv, 2011). The European Central Bank and other central banks suffered the penalties of the supervisory failures of losses in and out of the euro area. In addition to this, the fiscal responsibilities and abilities of the institutions ultimately accompanied such bailouts as they were paid by EU taxpayers. These payments were made through higher interest on the finance of the bailouts.

The European Union and Dodd-Franck Act

In addition to the financial reforms in the country, there were some other reforms and changes that were made by the financial institutions of the country. One of the significant act that was developed and implemented to address the challenges from the financial crises was the Dodd-Frank Act that included many of the provisions for financial stability and reforms (Charlier and Valceschini, 2008). This act has been implemented by the EU and its member countries including. For instance, the European Parliament Committee for Economic and Monetary Affairs also developed and signified the latest version of the bill that could strengthen the services related to the regulatory authorities for insurance, pension sectors, banking and securities would have the ability to overrule the issues of financial crises (Peters, Pierre and Randma-Liiv, 2011). The Parliament of Europe plans for addressing the losses due to financial instability and in order to accomplish these tasks the large and cross-border financial institutions have to support and contribute in gaining financial stability (Hodson and Quaglia, 2009).

It is also observed from financial reforms made under the provisions of Dodd-Franck Act that the risk assessment would also create a sustained system of crises evaluation controlled by the board such as European Systemic Risks Board (ESRB).  In this manner, the issues related to financial crises in Ireland were significantly managed and addressed in an effective manner. However, the provision made by the European Union and Dodd-Franck Act are not same, but they simultaneously work to eradicate the issues related to the financial crises in the country (Charlier and Valceschini, 2008). The application of the reforms made under these systems helped the country significantly in approaching towards the sustained economic system for the development of the country from all the aspects.

Reforms to address the Future Financial Issues

In order to prevent the issues of financial crises in the country, the country has set up other methods also such as corporate governance, hedge funds and private equity regulation, bank tax to set up resolution fund, credit rating agencies and naked shorts. These were some of the future aspects and reforms that were implemented the Republic of Ireland to fight the financial crises in the country again. In order to prevent the future crises to the country, the European Commission has developed a process of adopting a set of policies and regulations to enhance stakeholder rights by imposing an effective and stricter corporate governance policies and requirements on the financial institutions and corporations operating in Ireland and other countries of the EU (Quaglia, De Francesco and Radaelli, 2008). The effective corporate governance could be beneficial for the banking institutions to operate with complete transparency. In terms of hedge funds, both the EU member countries and European Parliament simultaneously approved and applied different versions crises sustainability reform plan to require hedge funds. In addition to this, the private equity corporations will also seek government authorisation to hold adequate and operate capital and make disclosures to investors and regulators. However, a controversial difference between the proposals is related to the exemption clauses and treatment of the third country.

In terms of the bank tax, the tax can be used as a method to resolute the issues related to the financial crises. In addition to this, the European Commission also called for a series of national funds in the 27 countries with an aim to make future transitions. The European Union also made it clear that the taxes and the revenues generated will not be utilised for the purpose of recapitalisation of troubled banking institutions and it will also not be part of the general revenues. In context to the European Commission proposal that was brought forward in June 2010, the credit rating agencies (CRAs) that were operating in the European Union have to get registered under the listings of central supervision office. They also have to follow a systemised set of new rules to enhance the transparency and credibility among companies requesting ratings (Quaglia, De Francesco and Radaelli, 2008).

Conclusion

The overall discussion reflected that financial crises have become prevalent in the countries due to which countries are facing significant losses in economic stability. The major issues related to the financial crises have been significantly addressed by the reform acts made by the European Union and governmental authorities. The provisions made under Dodd-Franck Act also started implementing a new set of rules for regaining the tactics used for maintaining financial sustainability. In this manner, the financial regulatory changes made by EU member countries have been significantly optimising and recapitalising the undercapitalised financial service institutions. The financial stability in Ireland has been improved from 2008 and sustained its position in the global economy due to which it has gained a significant name in the market. Along with these aspects, the future measures have also been implemented to address the financial crises in the future. It is also reflected that the future measures can be beneficial for the overall stability of the financial institutions in the country.