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Forthcoming challenges to banking regulation (sovereign risk, RWA variability, trading book…) - Resilience of the EU financial sector in the global context

Banking rules and business in the post-crisis world

By Linde Luis M. - Governor, Bank of Spain

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Banks perform a key role as financial intermediaries in the economy. Their critical functions were put at risk during the financial crisis. To address the roots of the crisis prudential regulation has been reviewed in depth and tightened accordingly. The new regulatory framework focuses not only on the situation of individual banks but also adopts a systemic perspective, seeking to mitigate the vulnerabilities of the banking system as a whole.

In the prudential regulation area, the new capital framework, namely Basel III, has reinforced the regulatory capital structure of banks by requiring more and better-quality capital. In addition, Basel III has introduced new requirements such as those on liquidity and leverage. Overall, the new framework has been designed to tackle the major shortcomings highlighted by the financial crisis. Many of these new rules have already been implemented in many jurisdictions. The solvency situation of banks is today sounder than a few years ago.

On the resolution front, additional requirements will be implemented to ensure that banks have sufficient resources to cover losses and meet their recapitalization needs under a gone concern procedure. In this regard the FSB standard for “total loss-absorbing capacity” (TLAC), which will apply to Global Systemic International Banks, and the European minimum requirement for own funds and eligible liabilities (MREL), which already applies to all European banks, aim at ensuring an orderly resolution of banks that will preserve financial stability and not require taxpayers’ money.

Banks need to be solvent and robust to perform their main economic functions.

Financial stability is a pre-requisite for sustainable economic growth; banks need to be solvent and robust in order to be able to perform their main economic functions; the design and implementation of the European regulation on resolution and bail-in should play a key role aiming at reinforcing the confidence and functioning of the financial system.

Recent developments in bank equity prices and in the valuation of other bank financing instruments have been adverse for European banks. To some extent, they reflect uncertainties from market participants with regard to some elements of the regulation on resolution, as these might be viewed as excessively stringent or rigid, in particular vis-à-vis other non-European jurisdictions. These market concerns give room for reflection by authorities who are really interested in and committed to the good functioning of the European financial sector.