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

Towards a better balance between objectives and costs

By Gual Jordi - Chief Economist and Chief Strategy Officer, CaixaBank

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There is little doubt that the regulatory and supervisory reforms introduced over the past few years have been instrumental to restore financial stability and public confidence in the financial system. The banking sector is now well capitalized and more resilient to unexpected events, governance has been strengthened and improved product distribution regulations provide more security to both consumers and banks.

However, the big push for new regulation has inevitably brought about unintended consequences. Some one-size-fits-all measures clearly suffer from a lack of proportionality and particularly penalize smaller institutions or some business models. At the same time, regulatory complexity and increased reporting requirements have clearly led to excessive compliance costs. Data collection exercises require the submission of large amounts of data that would often be available to authorities from existing data submissions. In general, it has become increasingly difficult, for banks, regulators and supervisors, to assess the cumulative effects and interrelations between sometimes conflicting regulatory measures or reporting requirements. AnaCredit is yet another example of a good idea on paper but with huge implementation and high running costs for financial institutions, at least under its current design.

There also seems to be no end in sight for regulatory changes and this protracted uncertainty is surely having an impact on bank’s behavior. For instance, the ongoing review on the consistency of risk weighted assets is likely to result in changes, such as the introduction of floors, that effectively increase capital requirements. During this period of uncertainty, banks may be reluctant to increase their exposure to those assets for which capital requirements may increase or will demand a higher return –an uncertainty premium- on those investments. Doubts about the continuity of the capital reduction factor on loans to SMEs also effectively increase the (expected) capital requirements on lending to SMEs.

Against this background, the DG FISMA initiative for better regulation –and the associated recent call for evidence- is very welcome. This evaluation of recent reforms and their implementation will surely identify the need for legislative adjustments. Looking forward, such in-depth evaluations trying to assess the balance between goals and costs should be the norm for any piece of legislation.