Jonathan Hill, former European Commissioner, took stock of his achievements on 12 July, 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 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% 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.
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).
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:
- The impact of the EU regulatory framework for financial services, Jonathan Hill, Bruegel Institute, July 2016
- L’Union bancaire européenne: quel coût pour les banques françaises? – (Finance & strategy by Siapartners 2016)
- European Commission Capital Requirements – CRD IV/CRR – Frequently Asked Questions, 2013
- L’Union bancaire : « un mariage de raison et après ? » – Sénat, Juin 2016
 Banks reviewed are BNPP, CASA, SG and BPCE
 Capital Requirements – CRD IV/CRR – Frequently Asked Questions
 This is the case in particular with 4th council directive (78/660/CEE)