What can we expect from 2016 in terms of new banking regulations? The report entitled Financial Regulation Outlook from BBVA Research looks at 10 new regulatory developments that will impact the banks.
Financial Regulation Outlook (January 2016)
1. Reform of the worldwide banking sector
One of the focuses of the presidency of the G20 (the group of the 20 largest economies in the world), this year headed by China, will be to continue implementing the reform of the global finance sector. In other words, standards and regulations to ensure the stability and resistance of the worldwide financial system to avoid crises such as the one experienced over the last eight years. In 2016 the spotlight will be on the emergence of new risks and vulnerabilities in banking, which require a greater macroprudential regulation.
2. Review of risk-weighted assets (RWAs)
RWAs are the denominator of the equation that serves to calculate a bank's capital ratio, a key factor for measuring its financial health. Today each bank calculates its own RWAs, and this information is not compatible between banks. The Basel Committee on Banking Supervision is compiling a new set of regulations to calculate RWAs that be announced at the end of this year, and affect the banks' capital requirements and capital ratios.
3. Sovereign risk
or risk of non-payment of government bonds issued by the different countries could cease to be considered a totally secure asset. The Basel Committee could make a decision in the second half of 2016. This decision would significantly affect public sector financing and could have a knock-on effect on the economy. It is important that Europe should not take the initiative without ensuring that this is applied at the worldwide level, because otherwise this would fragment the financial markets and put Europe at a disadvantage.
4. Banking resolution or how to manage banking crises without representing a cost to citizens
The European Union has taken a giant step forward in this area. But it still needs to ensure that banks have sufficient resources of liquidity (internal, from the private sector, or as a last resort from a public backstop mechanism) and the operational continuity of failed banks. Another key issue this year will be the capacity to absorb losses. Since January 1, when a bank enters resolution, its creditors and shareholders must contribute a quantity equivalent to at least 80% of the bank's assets before receiving aid from the resolution fund. Furthermore, the new MREL standard is already effective in Europe (it is gradually being rolled out over four years) and will be reviewed in October.
5. Shining a light on shadow banking
That is to say, improving the transparency of all financial intermediaries that are not banks and whose activity is therefore out of reach of the banking regulations. The aim is to build a regulatory framework that is global, consistent and harmonized for the non-banking financial sources that sustain the real economy.
6. Forming a perfect supervisory tandem
between the banks at the individual level (microprudential) and the financial system as a whole (macroprudential). The global financial crisis has shown in hindsight that the supervisors did not have a sufficiently broad picture of the global financial system.
7. Restoring society's shattered confidence in the banks and their reputation
The key is responsible banking: banks should be capable of fulfilling the principles of integrity, transparency and prudence, without forgoing profitability.
8. Digital regulation is key
For example in issues such as cybersecurity, the use of personal data or blockchain technology. For the time being the digital transformation of financial services is regulated at the national level. It is a challenge to begin to coordinate digital regulation on a global scale.
9. Easing the pressure after the regulatory tsunami in the banking sector
Since the onset of the crisis the authorities have deployed a large number of national, continental and global regulations that could have an undesired effect on the economy. It is important to maintain the balance between banking regulation and stimulus for economic growth.
10. In Europe, the 10 star regulations for 2016 will be:
- Building the single European capital market.
- Setting up the single market for retail financial services.
- Completing banking union.
- Reaching an agreement on financial transactions tax.
- Designing structural banking reform.
- Placing the focus on the banks' resolution plans and the single resolution fund.
- Moving forward with the single supervisory mechanism
- The priorities of the European Banking Authority (EBA) will be to protect the consumer and analyze the intersector risks.
- Creating the basis for the single digital market with concrete legislative proposals.
- Reconciling the regulatory frameworks of Europe and third countries.