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04 February 2016

ECB: Eurosystem contribution to the Commission’s call for evidence on the EU regulatory framework for financial services

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The European Central Bank provided its comments to the European Commission’s call for evidence on the EU regulatory framework for financial services covering financial crisis, regulatory framework, initiatives to support the financing of the economy or financial stability.

The regulatory framework for banks is largely in place, but a few important initiatives on the regulatory agenda for banks and the non-bank sector still need to be finished. Key elements of the post-crisis regulatory agenda, such as the leverage ratio (LR), the revisions to the standardised approach for credit risk and a reduction in the excessive variability in risk-weighted assets (RWA), need to be finalised and implemented in Europe in order to complete the post-crisis framework for banks. All these elements are expected to be finalised by end-2016 at the international level. In addition, other measures which have been agreed on at the international level still need to be incorporated in the European framework: the net stable funding ratio (NSFR), the total loss absorbing capacity (TLAC) for G-SIBs, and the fundamental review of the trading book (FRTB). This is expected to contribute significantly towards reducing regulatory uncertainty, which the industry considers to be a key element for unlocking funding and avoiding a further postponement of investment decisions. Nevertheless, further efforts at the international and European levels are warranted in order to tackle possible risks emanating from the non-bank sector, notably finalising the work plan on central counterparty (CCP) resilience, recovery and resolution and developing the macroprudential toolkit for non-banks.

Initiatives to support the financing of the economy should maintain the robustness of the regulatory framework resulting from post-crisis reforms. While an assessment of the various regulatory measures introduced since the crisis is needed to ensure that new legislation is achieving its intended objectives, the risks of a possible wave of deregulation, like the one which led to the financial crisis, should be kept in mind.

Reaping long-term benefits implies both assuming temporary costs that emerge in the transition period and complementing regulation with measures to correct any unintended long-term impacts that are identified.  As noted in the ECB’s report entitled “The impact of the CRR and CRD IV on bank financing”, it is important when analysing costs to distinguish between the transition and steady-state impacts of financial services regulation. This is even more the case as market or supervisory pressure to frontload the phase-in arrangements may pose or have posed challenges for certain institutions in meeting the requirements well ahead of the planned phase-in stage. 

Ultimately, it is of the utmost importance to ensure that regulations are able to preserve financial stability, while leaving sufficient room for markets to develop and fully play their role in the economy. While it may be too early to assess the cumulative impact of reforms – as some reforms are still ongoing and as long-term beneficial effects may not yet be tangible – such continuous assessment will be necessary to appreciate the progress achieved and to ensure that markets are able to fully play their role in the financing of the economy. Therefore, where unintended impacts are identified and unjustified barriers are hampering the proper functioning of markets as a result of the recent proliferation of financial regulation, corrective measures should be envisaged while maintaining the aim of financial stability. It is from this perspective that the assessment of the new regulatory framework should take place.

The European exercise should also take into account ongoing initiatives at the international level. One example is the Financial Stability Board’s (FSB’s) first annual report to the G20, published in November 2015, on the implementation and effects of the G20 financial regulatory reforms. The report concludes that the implementation of reforms has been steady but uneven, with most progress achieved in the banking sector, while work still needs to be undertaken to transform shadow banking into resilient market-based finance. It also highlights that reforms have made the global banking sector more resilient, while maintaining the overall provision of credit to the real economy and without having major unintended consequences. Finally, the FSB recognises that the effectiveness of reforms can only be fully assessed over a period of time that includes a full financial cycle and both normal and stressed market conditions. 

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