The European Commission has launched a reform agenda to strengthen the competitiveness of the banking sector of the EU bloc. According to Claudia Buch, Chair of the Supervisory Board of the European Central Bank (ECB), and Dominique Laboureix, Chair of the Single Resolution Board (SRB), this program opens the door to moving toward the full completion of the Single Market for financial services, although they warn that regulatory simplification “cannot come at the expense of resilience.”
In an article signed jointly, both officials from the EU financial authorities acknowledge that certain elements of the regulatory framework “have become unnecessarily complex” and that the segmentation of banking markets by national borders generates significant costs. Among them, they mention that it makes it difficult for companies and families to take advantage of the cross-border provision of services, limits the international diversification of risks, and reduces the capacity of institutions to deploy business models based on economies of scale.
“We firmly support efforts to reduce unnecessary complexity, safeguarding resilience,” Buch and Laboureix underline, who see in the Commission’s strategy to deepen banking integration a potentially transformative lever. In their view, it could help break down the obstacles that still hold back a genuine European banking market, with significant gains in terms of integration and economic growth.
That said, they stress that the legislator must respect certain principles when lightening the regulatory framework, since “simplification cannot come at the expense of resilience,” as this would undermine the sector’s capacity to absorb future disruptions and would transfer negative effects to the broader real economy.
Along these lines, they emphasize that simplifying does not mean abandoning the standards agreed at the international level. They note that Europe benefits from maintaining a framework aligned with global rules, which strengthens market confidence in European banking and facilitates coordination with supervisors and resolution authorities in other jurisdictions.
They also focus on the fact that the rationalization of the rules "must not blur institutional responsibilities". They recall that supervisors, macroprudential and resolution authorities have distinct but complementary mandates, and that precision in the allocation of functions avoids overlaps and gaps, while also ensuring a clear accountability that makes it possible to act quickly and effectively, especially in situations of tension.
In this context, the top officials of the Single Supervisory Mechanism (MUS) and of the JUR stand out as a key piece in taking advantage of the potential of greater banking integration in the EU: the creation of a common European deposit insurance scheme, the third pillar still pending to complete the banking union.
"A common framework would strengthen confidence that depositors are equally protected regardless of where their bank is located, reducing incentives to restrict the allocation of capital and liquidity across national borders", they argue.
At the same time, they call for facilitating a smoother use of capital and liquidity within banking groups. This, they note, would increase efficiency in normal circumstances and allow institutions to absorb adverse shocks with greater flexibility.
To ensure that resources are available where they are required, even in phases of instability, they consider it essential to strengthen safeguards. The objective is to provide greater certainty that capital and liquidity can be mobilized when necessary, without undermining the capacity of authorities to react with room for maneuver in a crisis episode.
Likewise, they raise the need to strengthen the liquidity framework in banking resolution processes. They recall that, even after the recapitalization of an entity through resolution, it may continue to face significant liquidity outflows or difficulties accessing financing in the markets. "A deposit guarantee system at the European level, intragroup arrangements with appropriate safeguards and credible support for liquidity in the event of resolution would strengthen confidence in the ability to manage crises at the European level, reducing incentives to restrict the cross-border use of capital and liquidity for fear of the stability of national banking systems", they say.
For this reason, the president of the MUS and the president of the JUR argue that the Commission’s agenda on simplification and integration must be addressed jointly and coherently. Although simplification can make the regulatory framework more agile and efficient, they emphasize that it is deep integration that is in a position to deliver economic benefits of greater significance.
Accordingly, they warn that moving forward only with simplification, leaving integration for later, would mean wasting a large part of the potential of this reformist agenda. They also insist that the priority must be to preserve the solidity of the system, since "weakening the standards would only increase the costs of ongoing fragmentation".
"By promoting simplification and integration simultaneously, we can make European banking more competitive and resilient, both in times of prosperity and, fundamentally, in times of crisis", they conclude.