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Banking Updated: 11 Jan 2019

What will be the trends in financial regulation in 2019?

Several initiatives were launched in 2018 that will lead to new legislative developments - primarily related to the implementation of the Basel framework and the completion of two major European projects: the Banking Union and  the Capital Markets Union. These are some of the regulatory trends for 2019 that BBVA Research principal economist María Victoria Santillana explores in an op-ed published in the newspaper, Expansión.

“In 2018, the financial regulatory reform approved after the crisis by the G20 and the Financial Stability Board (FSB) was considered virtually complete and the focus was supposed to be on implementing the reforms already initiated,” Santillana begins. “Nevertheless, various initiatives have emerged throughout the year that will entail new legislative developments, mostly related to the implementation of the Basel framework and to the completion of two of the major European projects already under way: the Banking Union and the Capital Markets Union. In addition, lines of work have emerged in other fields, including the reform of the Euribor and Eonia reference indices, the use of new technologies and the departure of the United Kingdom from the European Union,” she continues.

Less international cooperation

According to the BBVA Research economist, despite regulators’ efforts to take a global approach to regulation and supervision, there were signs of declining global cooperation and coordination in 2018, with jurisdictions that allow regulations to applied in a more lax (like the U.S.) or stricter manner (like regulations that apply to foreign banks in some countries). “These asymmetries, which are partly the result of the ever diminishing pressure exerted by the effect of crises on decision-making, are a common concern for the parties involved: regulators, supervisors, the financial services industry and end-users,” explains the expert.

María Victoria Santillana underscores Europe’s regulatory efforts, in particular its attempt to move toward a more unified financial market, with legislative initiatives to complete the Banking Union, the Capital Market Union and the Digital Single Market. These efforts were focused, with notable success, on finalizing the negotiation of the Banking Package, which includes the review of prudential measures and the proposed recovery and resolution framework to reduce and share risks in the banking industry.  Progress has also been made in debating the package of measures for the proper recognition and valuation of bad loans, in which the two backstops of provisions proposed by the European Central Bank and the Commission stand out.

Consolidation of the financial sector’s digital transformation was a clear priority for European authorities in 2018

Limited progress in the Banking Union

“However, limited progress has been made in the area of the Banking Union, regarding which at European level it was only agreed to establish a common support mechanism for the Single Resolution Fund, through the European Stability Mechanism (ESM),” notes the economist, who stresses that no agreements were reached nor concrete progress was made on the European Deposit Insurance Scheme (EDIS), which has been postponed until June 2019. “As regards completing the Capital Markets Union, the Commission has made progress on some outstanding action plans, notably the one on sustainable finance, but there are still many other initiatives stalled in the long and complex European negotiation process,” she adds.

Finally, Santilla emphasizes that the consolidation of the financial sector’s digital transformation was a clear priority for European authorities in 2018, which is reflected in the actions plans for the Commission and the European Banking Authority. At the same time, in global terms, the regulatory debate intensified, encouraging greater international cooperation in defining a new regulatory framework for digital financial services.

2019, a year of continuity

María Victoria Santillana hopes that 2019 will be a year of continuity in regulatory terms. Europe’s top priority for the first half of the year will be finalizing the legislative initiatives to complete the Banking Union, the Capital Markets Union and strengthen the EMU. This should be done before the European Parliament elections in May 2019.

“In short, 2019 will be an interesting year in the field of financial regulation, which will be marked by the capacity to respond globally to the challenge posed by domestic initiatives, tending towards less regulation and cooperation in the absence of a sense of urgency after the crisis; and at European level, by the impact of the electoral calendar on the various initiatives which are under way,” she concludes.