Banks, EU – Baltic States, Financial Services, Investments, Legislation, Round Table

Photo by J. Zhitluhin.

The article was prepared for the International roundtable-seminar “Latvian banks: what lies ahead?” held in the Baltic International Academy on 18 May 2016. Its organizers: Baltic International Academy (BIA), Employers’ Confederation of Latvia (LDDK), Diplomatic Economic Club (DEC) and online magazine baltic-course.com.

The single rulebook for the banking sector was at the heart of the EU’s response to the crisis, and the European Banking Authority (EBA) has helped deliver a consistent rules’ application across the single market. Due to the new regulatory framework, the Europe’s banks are now stronger and better capitalised. They hold higher levels of liquidity, and the disclosure of data has gone a long way to restore confidence across the banking sector.

In November 2015, the EBA published detailed information on over a hundred banks from twenty-one EU countries. The results confirmed that Europe’s banks are increasingly resilient. This greater transparency, which the EBA has helped to bring, has been a central part of the EU’s response to the financial crisis. However, some problems still exist, e.g. non-performing loans that weigh on some parts of the banking sector.

Among most important part of EBA’s legislation are, e.g. the Capital Requirements Regulation and the Bank Resolution and Recovery Directive, which helped to create the EU banking union, a Single Supervisor and a Single Resolution Authority.

This approach fits into the Commission's broader objective of regulating better and regulating less. In 2016 the Commission will proposed 80% fewer laws than was usual each year under the last Commission. Besides, the Commission is reviewing two and half times as much legislation as in previous years to check whether it is working as intended.

Simple rules for banks and businesses

In the financial services the idea was to keep rules as simple as possible: the more complex they are, the more are regulatory risks, which can make it harder for managers to take responsibility.

Good law making commands respect: that means that rules have to be proportionate, related to risk, and drawn up in way that reflects different business models and sizes. Striving for financial stability, the Commission is keeping an eye on growth, which is one of the biggest threats for the financial stability and European businesses.

This is the approach to legislation the Commission would bring forward in 2016 to implement the Total Loss Absorbing Capacity requirement, to approach issues like the Net Stable Funding Ratio, NSFR, and on the Leverage Ratio. The Commission is preparing for preliminary discussions with the member states and the European Parliament on a proposal on these rules’ application.

At the same time, the Commission will check already adopted legislation, the process which lies behind the cumulative impact assessment of the financial services legislation, which was launched in 2015.

Concerns raised

Some rules getting in the way of the diversity of the EU financial sector: compliance burdens linked to the duplication of reporting requirements; and unintended consequences like the impact of the rules on lending and market liquidity. Thus, the Commission is presently reviewing the responses, weighing up the evidence, before deciding whether change is needed and how it shall be done. As part of a separate exercise, the Commission is carrying out a review specific to the Capital Requirements Regulation (CRR).

This regulation and its “sister directive” CRD4, has a prudential objective to impose the lowest possible administrative burden on banks so that they can provide lending to the wider economy. So, the idea is to simplify reporting requirements and costs that are associated with compliance; i.e. to tighten legislation up, correct technical mistakes, and give more certainty to businesses.

The Commission would take a more proportionate approach to smaller banks and take a close look at whether it really makes sense to have the same compliance requirements for all banks and all business models.

Banks’ investments

To encourage investment in infrastructure, the Commission intends to look at whether lower capital requirements (like the ones applied to SME lending) and a better recognition of the risk associated with infrastructure projects, could play a part in improving long term investment.

Another area (as part of the CRR Review) is additional Pillar 2 requirements: some differences are known as to how these rules are applied by supervisors: the Commission wants to make the rules clearer, so that the legislation can work as it was originally intended. 

There needs to be a clear difference between the goals of Pillar 1 requirements that apply to all banks, and Pillar 2 requirements that are bank specific and depend on the level of additional risk that banks bear.  This will help meet the EU goal of preserving financial stability and supporting banks' competitiveness: the recommendations on this and other areas being considered under the CRR Review later in 2016.

Strengthening the Banking Union

At the end of 2015, The Commission came forward with a proposal to put in place a European Deposit Insurance Scheme (EDIS) by 2024 as part of a broader plan to deepen Economic and Monetary Union. It aims to give the Banking Union the “third leg” alongside a single supervisor and a single resolution authority.

The plan is to move from a single system of deposit guarantee schemes to a scheme that will underwrite deposits across the whole Banking Union. Depositors already have the confidence of knowing that their deposits are guaranteed up to €100,000 if their bank goes bust. EDIS is a Banking Union wide scheme that would make banks better protected if there were larger local shocks.

The same level of protection will continue to apply to depositors throughout the EU-28; it should be cost neutral for the banks because contributions to EDIS would be deducted from what banks pay into their national DGS. And there would be strong safeguards against moral hazard.

Alongside EDIS, there are several measures to reduce risks: e.g. keeping up the pressure for the full application of already agreed legislation; the new resolution framework needs to be fully incorporated into national legislation, and the Deposit Guarantee Scheme directive should also be fully transposed.

By the end of 2016, the Commission will bring forward legislation to address the most important barriers to the free flow of capital, building on national regimes; at the same time it will continue to work on national options and discretions. While some are there for a good reason, and are used to take account of specific circumstances in different countries, supervisors need to be able to compare banking services: it is important to avoid differences in rules that stand in the way of competition and trade across the EU single market.

Despite the challenges, the EU banking sector is much stronger today than before the EBA was born five years ago. But efforts to seek stronger financial stability are still needed, e.g. in striking balance to keep banks safe and return them to the mainstream of the member states’ economy and business. For that to happen, the banks have to recognise their obligation to act responsibly, to provide a lead, to drive forward improvements in conduct and behavior.

Working together – banks, supervisors and regulators - can keep the EU banking sector strong, reduce risk, but also support the investment and growth.

Reference: European Commission, press release “Keynote speech by Commissioner Jonathan Hill at the European Banking Authority's 5^th Anniversary Conference”, London, 5 February 2016. In:

http://europa.eu/rapid/press-release_SPEECH-16-250_en.htm?locale=en