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Financial regulations 03 Nov 2017

More regulatory certainty for European banks

The European Commission has withdrawn its proposal for Banking Structural Reform. Although originally considered fundamental for the sector, its principal objectives have already been addressed by other measures. How should this news be taken? In a recent note, BBVA Research considers this withdrawal —after four years without much progress— to be positive, since it supposes greater regulatory certainty for banks. The BBVA Research note also underscores the negotiation of two large regulatory packages: i) the revision of the prudential banking and resolution framework for European credit institutions and ii) the finalization of the Basil III framework.

In January 2014, the European Commission presented a proposal with structural measures to improve the resilience of the EU’s credit institutions, in an attempt to harmonize the different initiatives that had arisen in Europe in previous years.

Now, four years later, the EC withdraws said proposal. Why? The principal reason is the lack of progress in the negotiation. After the Commission presented its proposal, the negotiations began, both in the Council and in the European Parliament.  After a difficult process, the Council came to an agreement about its internal position in June 2015, with important changes to the proposal. The same did not occur in the Parliament. Now, two years later, without having achieved any progress, the Commission has decided to withdraw the proposal.

The Commission also recognizes that the principal objectives of the proposed regulation have already been addressed by other measures in the banking sector, especially with the entry into force of the Banking Union and its principal characteristics: a single supervision mechanism and a single resolution mechanism.

How does BBVA Research assess the Commission’s decision? It says the withdrawal of the proposal is “reasonable and timely” since “in Europe, a whole new institutional architecture has been successfully launched in record time.” Likewise, it stresses that “the key structure of the Banking Union has been put in place” with the creation of the new Single Supervision Mechanism (SSM) in the European Central Bank (BCE) and a Single Resolution Mechanism (SRM) in charge of the recovery and resolution tasks, “that cover a large part of the projects objectives of structural reform.”

Additionally, BBVA Research estimates that this regulation could have had negative effects on other important projects in the EU, such as the Capital Markets Union and the Banking Union. The proposal that it included to separate activities would have generated higher operational costs that would have affected the functioning of the market.

BBVA Research says that “the Banking Union and the Capital Markets Union are key to the future of the Economic and Monetary Union (EMU) of Europe, whose essence is to underpin financial integration in the Eurozone through the centralization of powers into supranational authorities and the introduction of risk sharing mechanisms among banks, in the case of crises.

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