Tag Archives: Banking Union

European regulatory perspectives: Less is more!

Maxime Bablon, 9 September 2016

Post originally published on SAB

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Jonathan Hill, former European Commissioner, took stock of his achievements on July 12, during a speech at the Bruegel Institute. He drew up the work carried out during his mandate as Commissioner for Financial Stability, Financial Services, and Capital Markets (FISMA) and detailed upcoming challenges for the institution.

Strong supporter of ‘smart regulation’ taking into account the financial sector’s specificities, the former Commissioner stressed the possibilities to enhance the regulation by stepping back and to harmonize the multiple texts issued in recent years.

Here are five key take-home messages from his speech, providing a good overview of ongoing challenges regarding EU financial regulations:

  • Growth and risk dilemma: In holding that ‘without risk there is no growth’, the British has put a cat among the pigeons. Main target: the aggregation of individual risk aversion which may cause a market risk and impact negatively the financial stability as a whole. This argument correlates with the analysis carried out by a consulting firm, estimating the decrease of the net banking income from -1.64% to -1.93%[1] for major banks subject to the Tax on Systemic Risk over the next decade. For the Commission, the decrease of the European growth domestic product (GDP) shall reach around -0.15% for each percentage points increase of the common capital ratios (CET1). Negative impact should remain cyclical and be cleared after 2019[2].
  • Keep it simple to rule: For the former Commissioner, the current regulation is so complicated that only a handful of lawyers and compliance officers can fully understand it. This constitutes a strong challenge for the long-term sustainability of the banking union. The lack of clarity in textual reference feeds the reluctances of national compliance officers in charge of the implementation of these regulations (for example financial reporting (FINREP) refers to a whole variety of texts to fill out the templates, some of which go back as far as 1978[3]).
  • Streamline and create synergies: Several regulations can conflict in their scopes and objectives. For instance, the leverage ratio has increased the cost of clearing, in contradiction with European Market Infrastructure Regulation (EMIR) requirements which aims to… increase the number of transactions going through central counterparty clearing houses (CCPs)! On these points, Jonathan Hill called for capitalizing on direct consultations to avoid crossfire between regulations and seize the opportunity to review existing regulations. For further flexibility, he also proposed to exempt certain players from clearing obligations (non-financial counterparties, pension funds and some small non-systemic financial companies, etc.).
  • Differentiation and proportionality principles: It occurs that enforced regulations do not take sufficiently into account the diversity of players, whether in terms of business model, risk profile and entity size. The capital requirement regulation review should focus on this point, especially regarding prudential requirements. The former Commissioner has mentioned the standard approach taken to define the credit risk and the margin for systemic risk. He implied that these factors impact negatively on the competitive advantage of small and medium banks. The simplification of the capital requirement calculation or the introduction of a specific exemption for smaller players – such as the credit unions – could be carried out to better take into account each actor’s specific characteristics.
  • Reduce the reporting burden: In accordance with the consultation carried out last year by DG FISMA, several entities have complained about information overlapping between the reports displayed (ex. EMIR, Markets in Financial Instruments Directive II (MIFID II) and the Securities Financing Transactions Regulation). For instance, Jonathan Hill mentioned the possibility to review EMIR to “avoid ‘dual reporting’ obligation, at least for non-financial firms”. Moreover, if the Commissioner welcomes the increase of data exchange between the national and European regulator, he wonders if “it [data exchanged] is all essential”. This quote also reflects the need to clarify tasks between the multiple regulatory layers (National authority, European Central Bank (ECB), European Banking Authority (EBA) etc.).

In the wake of the crisis, the banking union was set up within a very short time. It permitted to harmonize the prudential and resolution standards over a set of heterogonous countries, which was anything but easy. Given that the framework is now defined, regulators can start focusing on quality, in particular, by taking into account feedbacks given by financial services’ professionals (inter-text synergy, proportionality, optimization of the reporting scope, subsidiarity principle, etc.).

Valdis Dombrovskis (the new Vice-President of DG FISMA) has declared his will to pursue the work building upon the guidelines set up by his predecessor. However, other challenges are looming ahead, in particular the complex issues of the European deposit insurance scheme or the implementation of the capital markets union. Eventually, the main recommendation granted by the former Commissioner is to regulate less but better.

To go further:

[1] Banks reviewed are BNPP, CASA, SG and BPCE (see here)

[2] Capital Requirements – CRD IV/CRR – Frequently Asked Questions (see here)

[3] This is the case in particular with 4th council directive (78/660/CEE)

 

 

Maxime Bablon – Marie Sklodowska-Curie promotion (2012) – works as bank regulatory compliance consultant between Paris and the Maghreb in a French FinTech (Sab IT).

European banking regulation: treat the cause, not the symptoms

by Olivier Colin, 11 September 2014

Remember Nassim Nicholas Taleb’s turkey story? A butcher feeds a turkey on a day-to-day basis in order to eat it at Christmas. By repeating this behaviour, the butcher confirms to the turkey the statement that he will continue to feed it every day, as predicted by the previous days, bringing more confidence every day to that belief. But one knows however that the situation is not to last and one day, there will be a surprise for the turkey…

The famous author of the Black Swan tries to explain that lots of beliefs are built on past behaviour, without even reconsidering them as being wrong. The world of banking is full of statements, concepts and beliefs taken for granted. However, only few of them have been reconsidered after the crisis. In line with the past, a crisis period is always followed by increased regulatory constraints. Despite recent changes in European Regulation as a response to concerns raised by the banking crisis, the new regulatory framework introduced by Basel III and the Banking Union are unfortunately only part of the answer.

www.cliffkule.com

Source: cliffkule.com

Excessive leverage ratio in banking has been highlighted as a crucial factor in the development of the crisis. While banks used to operate with high level of equity (near to 50%) in the 19th century, this percentage has consistently decreased to an average level of roughly 5%. Despite the well-known and recognized risk associated to excessive leverage, banks continue to operate with extremely high leverage level, sometimes even higher than before the crisis. It seems that nothing has been learned from the past.  Continue reading

What’s new in Europe in 2014?

 If 2013 was the European Year of Citizens, 2014 is the year where over 500 millions of European citizens will elect our representatives in the European Parliament and, for the first time, also the President of the European Commission. However, we will see new developments in Europe before the elections of May.

What’s new from 1 January 2014?

Already from the first day of 2014, the Eurozone welcomes Latvia, whose national currency is replaced by the Euro.

Also since the beginning of the year, restrictions to Romanian and Bulgarian citizens expire after a period with transitory measures imposed by some Member States after their EU accession in 2007.

In the field of education, the Erasmus+ programme entries into force, with a budget of 14.000 million euros for the period 2014-2020, allowing four million young Europeans to study abroad.

Greece will be protagonist during the first semester of 2014, not only due to the difficult economic situation of the country and the social unrest, but also because Greece takes over the Presidency of the Council of the EU between January and July, the last country of the trio of Presidencies (Ireland, Lithuania and Greece). Italy will take over the Presidency from July to December.

European agenda in 2014

From January to June, the Greek Presidency will not only meet the objectives of growth, employment, cohesion and other topics concerning the Eurozone. Migrations management, mobility and sea policies will also be some priorities. Relaunching the EU Maritime Policy in all its aspects, and without being confined to issues of growth and development, is an important aim of the Presidency in order to adopt in the European Council of June a EU Maritime Strategy, and highlighting the dimensions of security and growth.

In January, the EU will start the EU accession negotiations with Serbia after having obtained the status of candidate in 2012. Albania might receive the status of candidate in June. In that case, Albania would join other candidates which are already negotiating (Iceland, Montenegro and Turkey) or are waiting for the beginning of the negotiations (Macedonia and Serbia). Moreover, 2014 marks the tenth anniversary of the biggest enlargement of the EU, the enlargement to ten States of Central and Eastern Europe.

The European Union will continue dealing with issues that, even if they are not always present in the media, they directly affect the daily life of Europeans. I refer to issues such as the right of ensuring mobility through all Member States to study or to work abroad; the protection of our rights as European citizens against the airlines abuse when we travel by plane; the protection of our privacy when we use internet; the fight against criminal actions; among many other issues that will be present in the European Parliament in 2014.

From 1 November 2014, the new “dual majority” system is established in the Council of the EU for adopting decisions, abolishing the old system of vote weighting. From then on, a qualified majority is achieved with the 55% of  Member States representing at least 65% of the population of the EU. If the Council does not act on a proposal from the Commission, the majority should cover at least 72% of Member States representing at least 65% of the population. In any case, until 31 March 2017, any State may request that a decision is taken according to the previous system of vote weighting adopted in Nice.

Also in November, the new single supervisory mechanism (SSM) enters into force, and the European Central Bank (ECB), instead of the national authorities, will supervise the biggest 130 banks of the Eurozone. This is the first step towards the banking union, but there is still a long way to achieve it. The adoption of a single resolution mechanism and a deposit guarantee system are also needed for the banking union. The Presidency of the Council will negotiate with the European Parliament the regulation of this single resolution mechanism with the aim of adopting it by the end of this legislative term in May.

It is necessary to highlight the institutional changes in the EU in 2014. In addition to the European Parliament and the European Commission, including the High Representative of the Union for Foreign Affairs and Security Policy, also the President of the European Council will be renewed.

Why these European Parliament elections are different?

Why the European Parliament elections of 2014 are more important than ever? In addition to the election of the Members of the EP, for the first time in history each European political party will put forward a candidate for President of the European Commission, who will be directly elected through the vote of all European citizens. Therefore, the EU does not only increase its democratic legitimacy, but also becomes more politicized. This should allow the discussion about the diverse European issues and candidates will be able to take part of debates to explain their projects for Europe.

The elections will also be different because all Europeans will elect our representatives in a European Parliament more powerful than ever after the entry into force of the Treaty of Lisbon, with more competences and more responsibility.

But I would like to highlight a fundamental challenge that the EU must face in 2014 and, above all, regarding the 2014 elections: facing the increase of euroscepticism and populism, a consequence of the growing citizens’ unrest. In 2014, we have to inform more and better about Europe, to bring the debate on Europe to the media that we follow every day,  and to make understand that European issues affect all of us. Summing up, we have to explain the reality of Europe. However, this is not only the task of the European institutions or the Member States. It is also our responsibility, of all Europeans, because the European Union is not something we can leave aside. The EU is always moving and it depends on us to shape it. There are lots of thing to do in 2014. Let’s start right now.