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Article by Director Elisa Ferreira in the magazine of the Eurofi conference in Malta: "Financial Reform in the EU and Challenges still ahead"

The financial crisis that unfolded in 2007 and 2008 paved the way for significant reforms of the regulatory framework at EU level with the purpose of making the banking sector more resilient, with the ultimate goal of enhancing financial stability.

One of the challenges faced by the EU legislators is how to strike the right balance between an increase in institutions’ resilience and the possible costs to economic growth resulting from new requirements, in particular when their impact flows through the lending channel. This requires a proper and well-substantiated calibration of the policies to be adopted.

In this context, bearing in mind that Basel standards are originally designed to be applied to internationally active banks, it is of utmost importance that in their adoption at EU level the diversity of both the institutions for which policies are intended and the markets where they act is not overlooked, but never at the expense of fragmentation of the EU internal market.

In this vein, proportionality appears as a principle of Better Regulation, placing responsibility on legislators to design proper frameworks with simpler rules to be applied to smaller, less complex and non-systemic institutions without compromising the robustness of the prudential regime and without creating different tiers of institutions competing in the single market. This can go beyond simpler reporting and disclosure requirements. This challenging task should not only fall to the EU legislators. The ESAs ought to be ready to leverage their experience and continue to advise on this matter.

Additionally, while recognising that supervisors’ tasks require some degree of flexibility, the experience acquired with CRR/CRD IV has shown that discretion should be clearly framed in order to increase predictability for institutions and other stakeholders. This implies requiring supervisors’ judgment to follow transparent criteria leading to a consistent application of rules, considering not only the impact of decisions on institutions but also more broadly on the financial stability of a Member State or of the EU as a whole.

In its recent proposal amending the CRR/CRD IV, the Commission suggests some important options to address these issues, such as the possibility of using simplified methods for computing certain capital requirements and, as regards Pillar 2, introducing proposals to better frame supervisors’ practices across the EU. The legislative process should aim at improving those proposals. This is an important step towards making international standards more commensurate to the EU’s current diversity without compromising resilience and integration in the internal market. 

However, a resilient EU banking sector should also rely on other Pillars apart from a robust prudential framework. A fully-fledged banking union is yet to become a reality. The EDIS proposal was put forward by the Commission in 2015 and no agreement has been reached so far. The CRR/CRD IV legislative proposal should give a new impetus to this negotiation and allow it to come to a successful conclusion.

Also, there is a clear need to strengthen the current EU safety nets as a last backstop resource. This goal should be achieved by giving more flexibility to existing instruments to be used within a resolution context. In order to provide resolution authorities with the necessary flexibility to ensure the successful implementation of a resolution strategy and the pursuit of the resolution objectives, the financing of resolution action, particularly the conditions for the use of resolution funds, must be revised at EU level.

Lastly, a word on the Basel Committee’s work to finalise its post-crisis reforms, focusing on reducing the excessive variability in risk-weighted assets and on increasing comparability between institutions. It is crucial to ensure that this work is successfully completed and properly implemented in the EU in order to prevent attempts to weaken the achievements made in recent years. 

Ultimately, the merits of these reforms should be assessed, but a period of regulatory certainty and stability would then be necessary to allow these reforms to be properly implemented.