1

September 2013 - 5 years after the collapse of Lehman:

What the EU has done to learn the lessons from the crisis,
and what still needs to be done

On 15 September 2008, US investment bank Lehman Brothers filed for bankruptcy a watershed in
the financial crisis. In the following months, the crisis unfolded spreading to European banks. The
European economy fell into recession followed by serious budgetary crises and economic
adjustments in several Member States, and a negative spiral between banks and public finances. Five
years on, the crisis is not over. But a lot has been done to create the conditions for Europe to grow
again. This document highlights what the EU has accomplished since 2008 to put the European
financial sector back on its feet and allow it to finance growth once more.
Lehman's collapse highlighted the risk that financial institutions exploit regulatory divergences
between different jurisdictions. The ensuing financial crisis was of international scale.
The European Union's response had to be a collective one, firmly anchored in international
cooperation.
The EU and its Member States have been instrumental in forging consensus within the G20, involving
all major financial centres around the world, on a set of regulatory reforms to strengthen the
regulation and supervision of all actors and products within the international financial system. The
EU has been faithfully implementing this agenda, the key elements of which were agreed in various
summits in 2008 and 2009.
The EU has also taken additional steps necessary to address specific issues within the European
financial system, and to ensure the financial system provides the European economy with financial
resources necessary to support its path back to growth. [Table listing all measures taken:
http://ec.europa.eu/internal_market/publications/docs/financial-reform-for-growth_en.pdf ]
The EU has also adapted its response to respond to the evolving nature of the financial crisis,
including the Eurozone debt crisis which highlighted the vicious links between sovereigns and their
banks. This has led to the creation of the banking union (http://europa.eu/rapid/press-
release_MEMO-13-679_en.htm).

1. First step: a stronger supervision of the European financial sector
The first big step to create the institutional underpinning for closer European cooperation on
regulatory and supervisory matters was the creation of the European System of Financial
Supervision, including three new European Supervisory Authorities in early 2011 (MEMO/10/434):
2

European Banking Authority (EBA) in London for banks
1
, European Insurance and Occupational
Pensions Authority (EIOPA) in Frankfurt for insurance and occupational pensions
2
, and European
Securities and Markets Authority (ESMA)
3
in Paris for securities markets as well as a European
Systemic Risk Board (ESRB)
4
in Frankfurt to monitor financial stability risks.
2. Second step, prevention: Making banks and financial markets stronger to prevent future crises
When Lehman collapsed in 2008, the ensuing deepening of the financial crisis revealed that banks
did not have sufficient cushions of capital and liquidity to withstand times of crisis. In 2011, major
EU banks were requested to significantly boost their capital. Since then, a full set of new rules
requiring banks to hold more and better capital cushions to absorb losses, the so called CRD IV
package (http://europa.eu/rapid/press-release_MEMO-13-690_en.htm) with additional
requirements for the most important banks to maintain sufficient liquidity to bridge crisis situations,
and to limit their leverage (CRD IV/CRR) have entered into force and will gradually apply as of 1
January 2014, making the EU a frontrunner in the implementation of the international Basel III
standards. Today, European banks are as capitalised as American banks.
Before the financial crisis, banks' remuneration incentivised excessive risk-taking while their
governance was often unsuitable to manage those risks. In order to reduce incentives for excessive
risk-taking and ensure banks understand and manage risks properly, bankers' bonuses are now to be
capped and banks' risk governance has been strengthened, for example by ensuring independent risk
management and compliance functions (also a part of the CRD IV/CRR package).
The downturn in property markets in 2008 and the ensuing losses in complex financial vehicles
composed of repackaged mortgages revealed that Investors had relied excessively on credit rating
agencies' recommendations which were often too optimistic and not subject to any public
supervision. Since 2010, Credit Rating Agencies have been subject to supervision within the EU, and
since 2011, this supervision has been directly carried out by ESMA. Further rules addressing
remaining conflicts of interest and other concerns were in 2011 and entered into force in June 2013
(http://europa.eu/rapid/press-release_MEMO-13-571_en.htm ). The Commission will also shortly
propose high standards to ensure the integrity and supervision for financial benchmarks, such as
LIBOR or EURIBOR in order to avoid that those benchmarks are rigged or manipulated to the
detriment of consumers and market participants
Derivatives markets were a major channel of contagion following Lehman's bankruptcy quickly
spreading uncertainty across financial markets, as they were largely opaque and unregulated. Since
early 2013 and in line with G20 commitments, Over-The-Counter (OTC) derivatives markets have
been subject to EMiR (http://europa.eu/rapid/press-release_MEMO-12-232_en.htm ), the first
comprehensive European market infrastructure regulation requiring to make markets transparent for

1
http://www.eba.europa.eu/
2
https://eiopa.europa.eu/
3
http://www.esma.europa.eu/
4
http://www.esrb.europa.eu/home/html/index.en.html
3

supervisors and operators, simplifying markets by obliging standardised OTC derivatives contracts to
be cleared on Central Counterparties (CCPs), and establishing comprehensive risk management
strategies both for CCPs and for bespoke derivatives. In order to ensure proper regulation of
international derivatives markets and avoid duplication, inconsistencies and overlaps which can give
rise to international regulatory arbitrage and cross-border uncertainty, the Commission has recently
reached an agreement with US regulators to implement EU and US rules in full consistency with each
other (MEMO/13/682). The Commission proposal for MiFID in 2011 (IP/11/1219), still under
discussion by the co-legislators, will further enhance market transparency for derivatives and other
asset classes, in particular by requiring standardised derivatives to be traded only on regulated
venues, rather than over the counter between parties.
The financial crisis also showed that non-bank actors, such as hedge funds or money market funds,
often provided banking-type services in some cases posing significant risks to financial stability. The
European Commission recently made proposals to regulate and supervise actors in the so-called
shadow banking sector to ensure that all sources of risk across the financial sector are appropriately
dealt with (http://europa.eu/rapid/press-release_IP-13-812_en.htm ). As of 2014, hedge funds and
private equity funds in all Member States will also be regulated and supervised to ensure
transparency and appropriate risk management and to monitor and address the financial stability
risks they pose (http://europa.eu/rapid/press-release_MEMO-10-572_en.htm ).

3. Third step, resolution: Managing financial crises more effectively
Despite stronger supervision and action taken to make the financial sector stronger thus hopefully
preventing future financial crises, these may of course still arise and measures have been taken to
manage such a crisis more effectively. Indeed, the opening of normal bankruptcy proceedings for
Lehman sent major shocks through financial markets. Court proceedings are still ongoing, leaving
markets subject to continued uncertainty. Authorities had no appropriate means to resolve banks
like Lehman quickly without negative impacts on financial stability. The consequences of Lehmans
were such that authorities decided to use taxpayers' money to save other banks to avoid further
damage to the economy - banks turned out to be too big to fail.
In order to address these weaknesses, the European Commission proposed new procedures in June
2012 empowering resolution authorities in all Member States to resolve banks quickly without
having a negative impact on financial stability, and to coordinate cross-border resolution
(http://europa.eu/rapid/press-release_MEMO-13-675_en.htm ). Banks and resolution authorities are
required to plan for their possible recovery or resolution in case of failure. In order to avoid the use
of taxpayers' money, the Commission proposals enable authorities to require banks' owners and
creditors to share the burden of a banks' restructuring, and require Member States to set up
resolution funds financed in advance by the banking sector. The Commission proposal should
hopefully be agreed in Council and the European Parliament by December 2012. The Commission is
also considering options for the most appropriate resolution tools for non-bank market
infrastructures (in particular central counterparties).
4

In a further effort to address the too-big-to-fail issue, an expert group chaired by the Central bank
governor of Finland, Erkki Liikanen, was asked in 2012 to assess whether the planned reforms were
sufficient to deal with "too big to fail" and whether additional reforms addressing banks' structure
were necessary. Based on the group's recommendations (IP/12/1048), the Commission will make
appropriate proposals to address any outstanding issues in November 2013.
4. Restoring trust in the financial sector: enhancing consumer protection
Lehman's bankruptcy hit thousands of retail clients around Europe, who had been sold investments
which were much more risky than they thought. In the ensuing financial crisis, many more customers
turned out to have taken excessive risks due to insufficient information, poor advice, or fraudulent
practices on derivatives, bank debt or investment funds. When banks failed, cross-border deposit-
holders did not always receive full compensation from deposit guarantee schemes. As a result, many
citizens have lost confidence in banks and the financial system at large.
In order to restore lost trust and to create a safe environment for cross-border financial services
within the single market, the Commission proposed new rules to ensure retail customers receive full
information in understandable terms, proper advice, and advisors act in the best interest of clients
(IP/12/736).
In order to ensure investment funds are managed in the interest of investors, the Commission also
proposed safer rules for retail investment funds (UCITS http://europa.eu/rapid/press-
release_MEMO-12-515_en.htm ).
The Commission has also proposed strengthening national deposit guarantee schemes in order to
strengthen them and ensure depositors have full access to their money in case of a bank crisis
(IP/10/918), and proposed similar rules for investor compensation (IP/10/918).
Finally, the Commission has made proposals make bank accounts cheaper, more transparent and
accessible to all (http://europa.eu/rapid/press-release_IP-13-415_en.htm).

5. Creating a banking union to break the link between the strengthen the Euro
In addition to the regulatory and supervisory framework applicable in the whole EU, the shared
responsibilities and cross-border links within the euro area require specific measures to sustain
confidence in the single currency. In particular, a banking union is necessary to break the harmful
connections between sovereign debt markets and banks. This deeper integration, compulsory for the
euro area, and open to all Member States, will build on the single rule book of prudential
requirements, crisis prevention, management and resolution and deposit guarantees for all banks in
the EU [ http://europa.eu/rapid/press-release_MEMO-13-679_en.htm ].
In September 2012, the Commission proposed that responsibility for banking supervision will move
from the national to the European level through a Single Supervisory Mechanism, under the
European Central Bank (IP/12/953). The structure will ensure strict and objective supervision across
5

participating Member States and allow for efficient supervision of cross-border banking activities.
The single supervisor is therefore key to breaking the link between sovereign and banking risks.
In July 2013, the Commission also proposed a Single Resolution Mechanism to complement the
Single Supervisory Mechanism (SSM) and ensure that not withstanding stronger supervision - if a
bank subject to the SSM faced serious difficulties, its resolution could be managed efficiently with
minimal costs to taxpayers and the real economy. The Single Resolution Mechanism would consist of
a Single Resolution Board and a Single Bank Resolution Fund (IP/13/674).
Creating a banking union is an essential part of the Commissions efforts towards a deeper economic
and monetary union. In addition to an integrated financial framework, the other building blocks are
integrated budgetary and economic policy frameworks, and further improvements to the EUs
democratic accountability.

6. Supporting the growth-enhancing functions of financial markets
In the past five years s, Europe's economy has seen a serious recession, which despite some recent
more positive signs, is not over. The financial crisis has affected the ability of the financial sector in
Europe to channel savings to investment needs. Above all, the financial crisis and the current weak
macroeconomic situation have created a climate of uncertainty and risk aversion, particularly in
those Member States under financial pressure and for SMEs. The financial crisis has impaired banks'
ability to lend at long maturities, as they need to deleverage correcting the excesses of the past. At
the same time, the crisis has had a negative impact on the confidence and risk appetite of borrowers
and institutional investors.
By putting Europe's financial sector on a more resilient basis and overcoming market fragmentation,
the EU initiatives above will contribute to ensure the financial sector can also deliver financing for
growth. In addition, the Commission has made several proposals specifically targeted at unlocking
the single market's growth potentials by removing barriers.
Cross-border business will be facilitated by a Single Euro Payments Area
5

[http://europa.eu/rapid/press-release_MEMO-11-936_en.htm ] which will be created by 1 February
2014, and by proposed rules for innovative payments services & the interbank fees paid on card
transactions (IP/13/730).
As a complement to the reforms of the European banking sector, the Commission has also made
proposals to facilitate alternative sources of venture capital, social entrepreneurship and long-term
finance (IP/11/1513).
Taken together, these measures offer a comprehensive response to the crisis which kicked off with
Lehmans collapse 5 years ago. Europe is both learning the lessons from that crisis and putting place
measures so mistakes are not repeated, and creating a stronger financial sector at the service of the
real economy and growth.

5
http://ec.europa.eu/internal_market/payments/sepa/