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

Time for regulatory consistency

By Brunel Jérôme - Corporate Secretary, Crédit Agricole S.A.

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We agree that, following the financial crisis, regulatory changes were necessary, especially on market activities, to strengthen financial institutions’ resilience and stability. To promote growth and economic financing, we now need a clear and stable environment which can allow banks to fulfil their normal role of providing liquidity and supporting investment in the real economy, and to provide confidence and create a positive outlook for investors and businesses.

The policy priority is to foster economic growth and investment. However, banks are increasingly constrained by regulatory requirements to carry on their core activity. For instance:
– Although liquidity is needed to finance the corporate bond market, corporate and investment banks (CIB) are prevented or disincentivised from engaging in market-making by regulations which negatively impact their inventories and repo activities.
– Although competition is needed, regulation penalizes European CIBs to the benefit of US investment banks, allowing them to strengthen their predominant position and leaving market-based financing of the EU economy to the US CIBs.
Although large banks are needed to finance the economy and provide comprehensive services to clients, the debate on universal banks’ structure is still on.
– Although the Capital Markets Union project aims at fostering market-based financing and competitive financial markets in Europe, a European financial transaction tax is hanging over it that would distort competition between European financial centres.

Furthermore, the regulatory framework is a source of increasing complexity and costs. At European level only, since 2010 there have been over 30 level 1 texts and hundreds of level 2 measures, not to mention when the ESAs decide to develop rules on issues not considered at Level 1 or to go beyond their Level 1 mandates. In addition, national legislators set their own rules. This is all the more complex that these rules are not consistent and constantly evolving. Implementation for banks is a lengthy and expensive process and compliance costs keep rising. The following three areas are examples where complexity should and could be addressed or avoided:
– pre-contractual documentation: PRIIPs, MiFID, Solvency 2 and UCITS all provide elements to be disclosed prior to the contract signature. Such multiplicity of pre-contractual documentation creates complexity which affects retail investors’ and branch networks’ understanding, and the marketability of retail investment products. As a result, retail investors may turn away from such products although they are useful to manage their savings and contribute to the real economy.

Provide confidence and create a positive outlook for investors and businesses.

– TLAC: while the MREL already exists in the EU and must be met by end 2016, the international standard TLAC will need to be implemented at EU level and apply as of 2019; both serve the same purpose but they are not aligned. This is already creating confusion within the investors’ community so it is essential that the European Commission quickly communicate on the MREL/TLAC articulation. We believe that to ensure European banks’ competitiveness and a clear legal framework, European G-SIBs should only be required to comply with TLAC. A juxtaposition of the two ratios must be avoided.
– More anecdotal but truly burdensome, transaction reporting requirements under EMIR and MiFIR are based on over 80 reporting fields each but contain a wide number of common fields. However, as they serve different purposes and are not 100% aligned they cannot simply be duplicated and submitted to the respective bodies (trade repository and supervisor).

Europe now needs to clarify the regulatory environment and the respective mandates of the standard-setters to give banks some space to implement the new rules and operate in their new environment and for investors and companies to assess business opportunities. It is not time to create new layers of legislation but time to create consistency.