Tag Archives: European Economics

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).

An account of how the European Central Bank managed to keep the Eurozone together

Gibran Watfe, 14 September 2015

It was an unusual Monday morning on May 10th, 2010 in Frankfurt. During the weekend, the heads of state, the president of the European Commission and the president of the European Central Bank were hastily looking for a solution to the imminent euro crisis, before markets would open on Monday morning. It must have been a stressful morning for the ECB staff in DG Market Operations, because it was the day when the ECB announced that it would buy large amounts of government bonds from troubled Eurozone countries in the framework of the Securities Markets Programme. Continue reading

Did the ECB lower borrowing costs for banks and governments?

WATFE Gibran, 1 February 2015

Last week, the European Central Bank (ECB) announced the launch of a massive program to buy sovereign bonds of euro area member states. Although this decision has already received considerable public attention, it is not the first time that the ECB buys sovereign bonds. What is new is the scale on which the ECB will buy securities. In fact, 60 billion Euro worth of sovereign (public) and covered (private) bonds will be purchased per month between March 2015 and at least until September 2016.

Source: ECB, own calculations

Source: ECB, own calculations

Continue reading

Development goes behavioural – The WB WDR 2015 calls for behavioural-informed policy-making

The World Bank World Development Report 2015 calls for behavioural-informed policy-making. The EC-JRC leads the change for EU affairs. This post tries to answer to the following: 1. Why should we care about Behavioural Sciences? 2. Why Behavioural issues in Development affairs? 3. Is it time for including behavioural insights into EU and domestic policies?

David Rinaldi, Brussels, 27 January 2015.

The recently launched World Bank’s flagship publication, the World Development Report 2015, was presented on Monday 26 January in Brussels, as one of the first events of the European Year for Development.

WDR 2015 Inforgraphic

Differently from previous reports, which focused on hot topics in development economics or on specific sectors, the 2015 World Development Report (WDR) digs into methodology. The caption explains quite clearly the new approach: “Mind, Society and Behavior”. Continue reading