After a 2022 shaped by the developments in the Basel III framework, post-COVID regulation or the first European banking climate stress tests, 2023 is looking set to be a key year in terms of digital regulation. Thus, the regulatory framework for cryptoassets and the digital euro will be two of the major issues on the agenda in the coming months. There are also expectations that the Basel III regulation will be finalized, that progress will continue to be made in sustainability and that proposals will be presented in Europe to improve the crisis management framework.
Santiago Fernández de Lis, Head of Regulation at BBVA, forecasts the keys to financial regulation in the year that has just begun.
Cryptoassets (MiCA approval in the European Union)
One of the main regulatory focuses of the year will be the approval of the Market in Crypto Assets (MiCA) regulation. The legislation is nearing completion and is only awaiting approval in the plenary session of the European Parliament, expected in the first half of 2023. The regulation would be applicable as of 2024. “We value MiCA very positively. It is the first step to provide regulatory certainty in crypto-related services,” says Santiago Fernández de Lis. The expert considers that having a regulatory framework for cryptoassets will allow for clear ground rules to be defined for all those companies that want to offer these services, including banks. All this will favor consumer protection and reduce the risk of fraud.
The digital euro, in the realization phase
One of the topics generating the most attention in Europe in the field of digital finance is the so-called ‘Digital Euro’, a virtual currency to be issued by the European Central Bank. In October 2021, it initiated a 2-year investigation process on a possible Central Bank Digital Currency (CBDC) for retail payments. In 2022, the ECB published reports detailing different design options for the development of this digital currency and the European Commission (EC) opened a consultation on this topic. Indeed, it is precisely on the basis of this consultation that the EC will present a legislative proposal in the second quarter of 2023.
This proposal will be the legal basis for the ECB's ‘Digital Euro’ project. It is foreseeable that the central bank will decide by the end of 2023 on the start of a “realization phase” of such a currency. On this matter, Fernández de Lis stresses that “it is important that the design of the digital euro provides added value over the existing payment schemes and does not generate financial stability risks”.
Open finance and review of PSD2 in Europe
The approval of the European Payment Services Directive, better known as PSD2, was a regulatory milestone in 2015. In 2023, this Payment Services Directive will be reviewed by European bodies. This review could address new payment services (e.g., e-wallets) or the imposition of new customer protection and transparency requirements. “In our view, PSD2 has generally performed well in terms of consumer protection, so the review should focus on regulating products and services that currently fall outside its scope, to avoid regulatory loopholes,” he says.
The European Commission will also propose new open finance legislation in the second quarter of this year, with the aim of promoting data sharing in the financial sector beyond payment data access, which is already regulated in PSD2. On this subject, he stresses that "it is important to remember this previous experience and not to make the same mistakes. A framework developed by the market, with appropriate incentives for all players, would allow the development of advanced services that are better adapted to the real needs of users”.
The regulation of large platforms
In recent years, the entry of new players in the financial sector (fintechs and bigtechs) has triggered regulatory and supervisory imbalances, as these platforms are not subject to the same rules and controls as financial institutions. “We have always advocated that the same activity that generates the same type of risk should be subject to the same regulation. In general, banking regulation tends to be bank-based, i.e, it is applied due to the fact of being a bank, while other players, however, are only subject, at best, to specific activity-based regulations, even if they combine several significant activities,” explains Fernández de Lis. This is why BBVA believes it is necessary to move towards a more level playing field.
Fernández de Lis believes that the debate on the regulation of these new players in 2023 should focus on two aspects. On the one hand, the difference in terms of supervision should be reduced, as although some regulations are the same, banks have a very powerful supervisor - the ECB - which is in charge of ensuring that the regulation is complied with, and other entities do not. On the other hand, progress must be made in the design of new regulatory structures for those non-bank players that, due to their size and mix of activities, require some type of regulation and supervision at a consolidated level.” Finally, beyond financial regulation, this year will be key for the implementation of the new European Digital Markets regulation, which will ensure a fairer competitive environment for large digital platforms.
The European transposition of Basel III
2022 saw some progress in relation to Basel III, however, it will be in 2023 when the transposition of this regulation into European law will be finalized. The most significant pending issue is the harmonization of the use of the internal models that banks use to estimate the risks of the different assets for the calculation of capital requirements. “In general, it is a reasonable regulation, although some aspects remain to be polished, which we hope will be addressed in the so-called “trialogues” between the Commission, the Council, and the European Parliament,” says the regulatory expert.
The multiple angles of sustainable regulation
In recent years, regulation has evolved as sustainable finance has gained ground. In the opinion of BBVA's regulatory expert, the great unresolved issue in this field is coordination between the different regulatory bodies. “There are many bodies interacting at the same time and there is perhaps a need for more order and coordination,” says Fernández de Lis. He also believes that one of the keys to regulating sustainable finance is to consider its impact on risk. “Whatever is done must be done through risk management. The point we are making with capital requirements is that obligations should not be imposed on banks that don't go through risk analysis,” he adds.
The challenge of managing European banking crises
The international financial crisis prompted the creation of the European resolution framework as one of the pillars of the banking union, to enable the problems faced by banks to be dealt with in a homogeneous manner across Europe. Until now, bank crisis management has been very fragmented and national. “This is why the Commission is working on the reform of the framework, which is expected to be published in 2023, so that the management of banking crises will become more homogeneous and based on Community rules, befitting of an integrated market,” says Santiago Fernández de Lis.