13 July 2012

The EBF's answer to the Consultation by the Liikanen High-level Expert Group on possible reforms to the structure of the EU banking sector

The EBF shares the overall aim put forth in the HLEG mandate of ensuring a safe, stable and efficient banking sector serving the need of citizens, the EU economy and the internal market.

In the following section, selected EBF answers to the questions addressed to banks in its capacity of representing the European banking sector are mentioned.

Question 1: To what extent are the current and ongoing regulatory reforms sufficient to ensure a stable and efficient banking system and avoid systemic crises?

It is the EBS' view that the finalisation of the ongoing international regulatory reform agenda – including important measures still in the pipeline – will help reach the regulatory objectives mentioned in the mandate of the HLEG.

The current international approach to ensuring stability, safety and efficiency in the banking sector is based on better capturing and pricing of risk and adjusting regulation concurrently. The EBF is convinced that such an incentive-based approach is an apt answer. It focuses on the identification of negative externalities and the creation of tailored responses, which maintain the overall efficiency of the financial system and ensure consistency across the financial sector (both banking and non-banking sectors). By contrast, structural reform attempts to do the reverse. Instead of adapting regulation to emerging risks, it attempts to change the system itself to avoid the emergence of risks in parts of the system. This is fundamentally an interventionist solution based on prohibition rather than creating incentives to avoid excessive build-up of risk across certain activities.

It should be kept in mind that the ongoing regulatory reform is in itself to be considered a structural change that already has - and will - lead to further restructuring of the European banking sector. Among other things, the new liquidity and capital requirements as well as the expected bank resolution measures will pressure banks to raise cost-effectiveness, improve their capital levels, and at times lead to further divestment away from non-core assets. The European Commission in its recent Financial Integration report shares this forecast of further restructuring of banks spurred by the ongoing regulatory reforms.

EBF finds that there is a need to implement the upcoming regulations first, before pressing ahead with discussions on possible additional structural reforms. A premature decision on structural reforms is likely to complicate and distract from the implementation of ongoing regulatory reforms and will also make it more difficult to evaluate the impact of regulatory reform. Furthermore, EBF firmly believes that the finalisation of the regulatory reform agenda will reach the objectives mentioned in the mandate of the HLEG fully without the necessity of any additional structural measures.

Current and ongoing regulatory reforms will help reach the objectives.

Question 2: Which structural reforms would improve the safety and efficiency of the banking system in the EU in the near term? In the long term?

As stated in the answer to Question 1, the EBF considers the ongoing regulatory reform in itself a change of structural nature that already has - and will - lead to further restructuring of the European banking sector. EBF is therefore not convinced that structural reform will improve the safety and efficiency of the EU banking system.

The EBF believes that in the short term it is indispensable that Europe agrees on an EU-wide crisis management regime that is consistent with the internationally applicable principles. This crisis management regime should put forward the elements for crisis prevention to include bank resolution in an orderly manner.

Question 4: What are the main challenges of your financial institution as regards resolvability? Are you implementing structural changes to your institution in the framework of your recovery and resolution planning?

The main challenge for European banks in regard to resolvability is that there is still no common legal framework for resolution of banks in EU – or globally. Hence, reaching agreement on the EU crisis management framework is absolutely key to strengthening the arrangements for cross-border resolution. While many individual Member States now have bank-specific resolution measures in place on a domestic basis (but not all), there is much to be achieved from the adoption of a harmonised regime which could sit at the heart of enhanced supervisory cooperation across Member States. An EU-level approach would also encourage further progress on the putting in place of reciprocal arrangements on common lines in third countries.

As mentioned in the answer to Questions 1 and 2, the EBF views the use of RRPs as important for resolvability without detrimental side effects upon the functioning of the Single Market and banks’ ability to serve the wider economy. RRPs are preventative in nature and result in structural questions being considered in a close dialogue between individual banks and their lead supervisory authority. A prerequisite to the drawing up of RRPs is the establishment of an appropriate crisis management regime in which the authorities have clear resolution powers. These exist in some Member States but have not as yet been introduced across all in a consistent manner. It is for this reason that the proposed EU Crisis Management Directive is seen as being of vital importance.

A further key challenge arises from the lack of clarity about how different resolution authorities might act in the case of failure of an internationally active bank. The EBF's preferred approach is based on crisis management colleges, with test running supported by comprehensive MOUs, with the aim of avoiding or minimising trapped pools of liquidity and capital. However, it must be stressed that RRPs or other preventive measures should not be used for supervisory intervention in the structure or operation of healthy financial institutions.

Full answer

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