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Economic and monetary challenges - Review of EU regulations to support the financing of the EU economy and financial stability

Which areas of the banking regulation are leading to excessive compliance costs, complexity, overlapping, duplicative or inconsistent requirements? What are the key regulatory priorities to allow banks to better finance the economy?

By Allen Chris - Global Head of Regulatory Policy, Barclays PLC


In order to promote a vibrant EU financial services environment to drive growth and to attract global investors, it is important to ensure that the individual services provided by banks and investment firms to support a diversified EU financial services market continue to be viable on a standalone basis, from an operational and return on equity perspective, but also that the availability of services to clients continues to be attractive, both in terms of cost and utility.

At the same time, a legitimate need to de-leverage and “de-risk” parts of the financial services sector has led to the introduction of rules revising the quality and quantum of required capital, stable funding, liquidity and, above all, leverage. This has prompted many banks to reduce fixed income inventory and balance sheet but, in many cases, this has also led to reduced flexibility of those bank balance sheets and the also the resilience of liquidity provision. Reduced availability of repo, driven by leverage rules, NSFR and revised Basel III assessment of RWA has increased cost and scarcity of a significant inventory financing tool which has impacted the capacity for effective risk transmission in the financial system and amplified the impact of market shocks observed over the last eighteen months.

The need to balance aims to reduce “bank risk” while facilitating an environment of investment, growth and market transparency is not straightforward. G20 commitments to mandate the clearing of derivatives have coincided with prudential rules which penalize the clearing of client balances and disincentivise banks from exposing their balance sheets in support of client clearing. Transparency objectives underpinning elements of regulation such as MiFIR, if not calibrated well, further risk liquidity erosion in an environment looking to foster capital market growth. In addition, ongoing challenges relating to the coherence of cross border regulation continue to incentivise geographical silos of locally established and capitalized entities which can drive the inefficient deployment of capital, a reduced diversification of assets and customer choice and, ultimately, increased cost.
Many of these effects are intended. However that does not alter the imperative of taking a step back to assess the aggregate impact of some of these macro-structural and prudential changes. In addition, the scale and ambition of change introduced after the financial crisis has inevitably led to some unintended consequences which include duplication and undue complexity. For example, the inclusion of securitization vehicles in the scope of EMIR risks undermining attempts to revitalize that market, the complexity of the CSDR buy-in regime, the impracticability of the evidential burden relating to hedging under the Short Selling Regulation and a decrease in customer choice likely to flow from the Mortgage Credit Directive all provide microcosmic but telling examples of increasingly constrained market conditions.
Furthermore, the complexity, duplication and inconsistency of approach to reporting (under EMIR, SFTR, MiFIR and REMIT) or asset protection and disclosure requirements under MiFIDII, CSDR, EMIR, AIFMD and SFTR, create significant compliance complexity but also confusion for clients and underline the need for constant vigilance as to the coherence of regulatory changes both contemplated and in flight.
There has been much progress made in revising the regulatory framework of both banks and wider financial market stakeholders and very many aspects of the associated changes are to be welcomed. However, as regulators finalise rules such as those relating to TLAC and MREL, the value of promoting a safe and resilient financial system but one which has the structural capacity to support the formation of credit and the effective transfer of capital should be borne in mind.