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Banking 12 Feb 2016

Digital regulation: the key to promoting economic growth

In 2015, the global economy has possibly grown at its slowest rate since 2009. Economists expect global GDP to increase at a moderate rate, around 3%. Moreover, this year the progress made by emerging markets will not be enough to offset the adjustment in developed countries. How can regulation contribute to reverse this trend?

Through its more digital side. Promoting growth and a greater level of well-being should be the top priority. And one way to achieve it is boosting the digital economy.

Exponential digital technologies are bringing about swift transformations in the economy and in society for the benefit of consumers and also of the banking industry. The financial sector now has the chance to undergo a deep transformation to deal with the changing needs of its customers and make the most of the global dimension of digital technologies.

In this regard, the regulatory response in banking needs to adapt to the pace of technological change. After 8 years of regulatory tsunami, a pause is needed to examine the bigger picture and the cumulative impact of the reforms. It is neccessary to move the focus of financial regulation toward boosting economic growth once the industry’s tail risks have been overcome thanks to the financial reform and the cultural changes in the sector.

The main key to redefining the financial reform now is the digital transformation of banking. In recent years, financial regulation has focused on traditional banking, but the sector’s digital transformation is radically changing the way in which the financial system creates value for its customers.

The regulatory response in banking needs to adapt to the pace of technological change

It is understandable that until now regulators have remained cautious when it comes to addressing digital transformation. However, financial regulators are facing new challenges when redesigning a regulatory framework that balances the promotion of the benefits of the digital world with the protection against its associated risks.

Along with digital transformation, there are 3 aspects for reformulating today’s financial regulation. First, the search for the optimal balance between stability and growth in terms of capital requirements. Excessive requirements can increase the funding costs of banks, which in turn could result in an increase in the interest paid for loans and the cost of capital.

Second, the commitment to resolution schemes, which reduce the moral risks and the cost for taxpayers. Legislators must make sure that banks are viable for tackling a severe crisis, but at the same time they need to be resolved easily when a new financial storm is approaching. For example, starting in January this year any bank bailout in Europe will be borne firstly by shareholders and private investors. This is an incentive for greater market discipline in the sector.

And third, to turn trust and ethics into the pillars of the financial industry. Banks need to assume their leadership through self-regulation in order to restore trust and credibility. But they cannot do it alone, since regulation and supervision are complementary tools for this very purpose.

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