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Five challenges for a balanced regulatory framework
That said, I will be careful not to be utopian about these new regulations. We are still faced with five challenges and if I may, I would like to consider each of them in turn.
1) The first challenge is to complete the rules for banks' minimum capital requirements by finalising the Basel III reform. The majority of the work - let's say 80% - has already been done: its main aspects were approved in 2010-2011 and are now widely implemented. However, discussions remain ongoing on the question of risk weighting in bank balance sheets. The goal is to limit any unjustified variability in the weighting between banks or countries. However, this must not result in a standardisation, as the variability of results is also a reflection of different risk profiles. The risk sensitivity allowed for in banks' internal models represents a huge step forward, as it ensures that requirements are proportionate to risk-taking. Naturally, we must reinforce confidence in internal models by supervising them closely, as the ACPR has long done and as the Single Supervisory Mechanism in Frankfurt does today. But the task at hand is to finalise Basel III, not to build a new Basel IV based mainly on the standard approach that by definition would not take account of differences between countries and banks.
It is in the strategic interests of France, which has always promoted international rules, to conclude a final agreement on Basel III. We have made significant progress, particularly during the latest Basel Committee meeting last month on 4 and 5 October, but we are not there yet, even though I hope that an agreement will be reached as quickly as possible. If we are to reach an agreement, two conditions must be met. First, the agreement must be fair - it must be applied by all jurisdictions, in all its components, including by the Americans in the measurement of market risks, i.e. the "fundamental review of the trading book" (FRTB). Second, the agreement must be reasonable, in terms of the increased capital requirements that will apply to French and European banks - including through the introduction of the so-called "output floor" on capital requirements for banks that use internal models. On the one hand, these capital requirements would have to be met over time through "normal" allocations of profits to reserves, without any bank having to resort to a dedicated capital increase. On the other hand, these new rules must be fully compatible with the smooth financing of the French and European economy and sound credit growth. In particular, our mortgage lending model, based on guaranteed loans, and our financing of SMEs cannot be called into question. In my view, these are the principles that will determine whether any future agreement can be accepted.
2) The second challenge is to finalise measures that target non-banks. First, progress must continue on the "resolution" of central counterparties - their treatment in the event of difficulties -, as they have become systemically more important with compulsory centralised clearing for derivative instruments. Above all, we must ensure a balance between financing channels. All discussions on the shadow banking system must continue in order to take account of the risks that may have moved into this sector as a result of the ramping up of requirements in the regulated sector, and for banks and insurers in particular. It has been estimated that the segments that may pose financial stability risks represented a total of USD 34 trillion.14 The priority has now shifted from the solvency of banks, which has improved substantially, to the liquidity of the shadow banking sector, particularly funds and asset management companies that are exposed to the risks of sudden panic-driven runs. Lastly, progress is required on FinTechs and above all on the major digital platforms and businesses, which, if they carry out financial activities, will have to comply with similar regulations sooner or later.
3) The third challenge is evaluation. Evaluation is essential to the credibility of the financial reforms that have been adopted worldwide, and to this end, the G20 adopted a post-implementation evaluation framework this summer. This framework should allow us to determine whether the reforms have actually achieved their desired results, without any unexpected, adverse effects, and to make adjustments if this is not the case. Two initial evaluations are already underway: the first deals with the effectiveness of reforms that encourage the use of central clearing while the second assesses the impact of G20 reforms on access to financing, which will begin by looking at infrastructure financing before focusing on credit to small and medium-sized enterprises (SMEs). The first evaluation reports are expected to be made public by the end of 2018.
4) The fourth challenge, in order to consolidate the progress we have made, is to ensure that the new regulatory framework is implemented consistently across the board while remaining vigilant to avoid backtracking. In The Country Doctor, Balzac wrote "...in all things human, is not constancy the highest expression of strength?", rightly reserving this virtue for the great men of his day. Now, as you know, the new US government has raised the possibility of reviewing their national banking regulations.15 Certain national adjustments could be considered appropriate and justified, as is the case, for example, for regulations that concern entities whose operations are only local in scale, or regulations that are purely American in scope such as the Volcker rule on proprietary trading portfolios. But the same cannot be said for abandoning the minimum requirements agreed internationally that apply to entities operating on a global scale, like the FRTB that I mentioned previously. Unilateral deregulation would be nothing less than a lose-lose scenario with serious consequences for the stability of the global financial system - we would be paving the way for the next financial crisis - as well as the competitive landscape for US and European banks. International cooperation on financial reforms is a common good that has been extremely precious during these past eight years and is crucial to our future.
5) The fifth challenge is to complete the European framework and ensure greater consistency between regulation, supervision and resolution. Since 2014, the euro area has taken decisive steps with its Banking Union, which now ensures the uniform supervision of the banks of 19 countries. But in order to complete it, further progress is needed on three levels. First, with regard to concrete mechanisms, the second pillar of the Banking Union, which deals with "resolution" in the event of difficulty, must be finalised and simplified. Second, laws and requirements, which all too often accumulate diverse additional regulations and amendments, should be coordinated in a consistent manner. Moreover, cross-border banking mergers in Europe are still too difficult. Lastly, as regards the interaction between institutions, we should develop a better interaction between the various European authorities, and even envisage, going forward, a single authority that would strive to enhance the soundness of the European banking sector. And in addition to the regulatory aspect, we must endeavour to implement what I call the Financing Union for Investment and Innovation. The goal is to better channel the euro area savings surplus of EUR 350 billion to the areas where investment is needed, and encourage the pooling of private risks, particularly through the development of corporate equity.
I would like to conclude by mentioning a sixth and final challenge: the inherent limitations of any regulation, no matter how worthy it may be. First, financial stability is not simply a question of regulation; it rests on a trifecta of regulation, microprudential supervision and macroprudential policies, and relies on each of these components in equal measure. What's more, and above all, there must be complementarity between collective rules and individual behaviour - ethics. Prior to 2007, self-regulation was the norm, especially in Anglo-Saxon countries, placing excessive trust in codes of conduct and business ethics. Today, let's make sure we don't tip the scales too much in the other direction.