Banking, Banks as protagonists of Europe’s competitiveness

Analysis and proposals for improvement of the Italian Banking Association communicated to the EU

Single jurisdiction

Simplification of the rules

CMDI

Sustainable finance

Digital finance

Banks, engines of European competitiveness

The European legislature that is coming to an end was one of the most difficult of those faced by the EU throughout its history. The effects of a two-year Covid 19 pandemic were unleashed on the continental economy, followed by a second two-year period characterized by an ongoing war on the eastern borders of the Union, to which the tensions unleashed by the conflict in the Middle East have now also been added .

A general picture of the crisis which highlighted all the critical issues affecting Europe and which the previous years of growth had masked, starting from the close interconnection with the global supply chain, the vulnerability of which was made evident by the pandemic, to the dependence from energy and raw material supplies from non-EU countries. The effects of all this have been serious: energy crisis, strong increase in inflation with consequent increase in costs for citizens and businesses and, in general, an overall loss of competitiveness in Europe, moreover in a global commercial landscape increasingly defined by protectionism and rivalry.

In this context, European banks, and certainly Italian ones among them, have not only demonstrated notable resilience, but have also played crucial roles in supporting competitiveness and stability, actively collaborating with institutions to address the effects of the crisis on families and companies.

Without strong banks, Europe is weaker

A relationship, that between banks and institutions, which has strengthened even more, during and after the pandemic, in parallel with the reflection that led to the definition of the new Stability Pact, overcoming the encrustations and rigidities typical of the old Maastricht rules. The new Pact is a mature compromise that does not slow down development, reiterates the need to keep public finances under control and takes into account what has happened in the last thirty years, including the birth of the Banking Union.

The role of banks, in such a framework, is even more central and strategic now that Europe must support the joint challenges to emerge from the crisis, keep pace with the technological and digital revolution and carry forward the transition projects towards a sustainable future. An overall effort that needs financing and investments now more than ever and, therefore, a strong, resilient and profitable banking and financial sector, without which Europe’s strategic autonomy itself would be potentially compromised.

Today, among the top ten banks in the world, only two are European and among the top thirty there are only eight. Furthermore, the first bank in the United States is worth, in terms of market capitalisation, as much as all the top ten European banks.

And Europe must be very clear about this if it does not want to entrust the financing of its future only to foreign banks.

For all these reasons, a regulatory framework that allows banks to play their role with respect to the strategic objectives of the EU, to compete in a constantly evolving global market and to guarantee fair competition between all entities that provide financial services is more indispensable than ever.

A simplified and flexible regulatory framework that does not mean deregulated

After the 2008 financial crisis, the revision of the regulatory framework of the financial system, already in great evolution as a result of the various Basel agreements, underwent a strong acceleration which certainly achieved the result of improving the resilience of the banks, so much so that the latest Eba report notes that never have European institutions been so solid and with such a low level of impaired loans.

The very nature of the revision process, often pressured by the emergency climate and oriented above all towards stability, has not led to a cohesive and coordinated development of the rules, but to an excessively complex general framework. Now that the focus must necessarily shift to competitiveness and growth, there is a need not for deregulation, but for a simpler, more efficient and also flexible regulatory and regulatory system because the borderless nature of digital and the evolution of fintech require a rapid adaptation to the constantly changing situation. We believe, therefore, that the European institutions should launch a global evaluation of the existing regulatory framework to verify the impact and efficiency of the regulations, not only in terms of stability and resilience, but above all in terms of the objectives of effectiveness, competitiveness and support to sustainable growth in Europe. A work that should precede the examination of any possible new legislative proposal in the financial services sector.

The evaluation of the overall regulatory framework should also be aimed at finally making the principle of proportionality, always stated but never applied, concrete and current. The effort to simplify regulations should also be accompanied by a profound harmonization of the various national legal systems with the aim of arriving at consolidated laws for banking and finance as soon as possible.

Measures in gestation that can create problems

1. The Banking Package

Parliament has approved a Banking Package which includes the implementation of Basel 3 and other provisions, the implementation measures of which will have to be issued by the competent institutions and authorities (mainly the EBA), or defined through future legislative proposals. Since these are rules that can have heavy impacts on banks in terms of capital absorption and implementation costs, it will therefore be very important to calibrate priorities and implementation times to allow institutions to adapt without compromising the effectiveness of their task of supporting growth.

From this perspective, the revision of some rules on credit restructuring takes on particular importance. In fact, it is absolutely necessary to avoid that the rewriting of these rules ends up hindering the measures to support debtors in difficulty, which are crucial in such an uncertain economic phase.

Particularly critical could be the revision of the “concession measures” (which concern for example the renegotiation or suspension of loan repayment), or the modification of the threshold which, according to the EBA Guidelines, causes a loan to be classified as impaired, with all that comes with it. Currently the default mechanism is triggered when the difference between the current value of the original exposure and the current value of the exposure being restructured is greater than 1%; this is an already very stringent and rigid threshold which must be raised and made flexible (parameterised to the rates and duration of the loan) to avoid, in an inflationary context like the current one, profound effects on the real economy and the competitiveness of European companies .

2. Regulation of banking crises and deposit insurance (CMDI)

In April 2023, the European Commission published a complex regulatory package on the management of banking crises and protection of depositors (so-called CMDI package), which should have a strategic value in the completion of the Banking Union, provided, however, that the banks themselves can operate in the eurozone as in a single jurisdiction. Unfortunately this is not the case, despite the intentions declared by the Commission, the proposal in fact does not seem capable of solving the regulatory problems, but leaves many margins of uncertainty and adds further complexity, putting at risk the existing mechanisms at national level (which have demonstrated to function well to manage banking crises), ultimately increasing the costs of crisis management.

It must be remembered that financial stability is also a public good and that, in limited situations, the use of public resources in the event of bailouts must not be dogmatically discarded.

The main critical issues contained in the regulatory proposals concern the failure to resolve some crucial issues in the regulation of banking crises:

in the matter of “public interest assessment” (PIA), the right balance between legal certainty and administrative discretion of the Authorities was not found, ending up effectively widening the scope of application of the resolution which would become the main procedure for crisis management;

conversely, the priority role of the DGS (Deposit Protection Schemes), such as the Interbank Deposit Protection Fund or the Cooperative Credit Depositors’ Guarantee Fund, which should, if anything, have a more active role in the management and prevention of crises, was not recognised. banking, leveraging the principle of lower burden in terms of direct and indirect costs;

the calibration of the MREL (Minimum Requirement for own funds and Eligible Liabilities), i.e. the quantity of own funds and eligible liabilities sufficient to guarantee banks the absorption of any losses and recapitalization; in the case of medium-small banks, it must leave margins of discretion to the national authorities in being able to evaluate the ability of smaller intermediaries to access the market, with the provision of an adequate transition period;

in the light of recent American events, a tool for public intervention and last resort in the event of a serious systemic crisis should also be included in the European framework, along the lines of the US Systemic Risk Exemption;

to ensure overall coherence of the legal system, the DGCOMP 2013 Communication must be revised at the same time as the first level rules, pursuant to the recent rulings of the European Court of Justice.

3. Completion of the Capital Market Union (CMU)

As the ECB’s analyzes demonstrate, large investors, especially outside the EU, are discouraged by European market structures, which are often less liquid, less attractive and fragmented across 27 Member States. Conversely, as a result of Brexit, the Union has lost around a third of its capital market and has found a competitor with deep liquidity pools.

In this complex scenario, it becomes essential to place the proposals and actions for the relaunch of the Capital Market Union within a new overall vision that involves all the main institutions and players, both at European and national level. An important effort which should also lead to connecting the Banking Union project with the Capital Markets Union project, with simple solutions, removing barriers at community and national level, verifying the coherence of the entire regulatory framework (pension funds , insurance, etc.) with the aim of increasing the participation of retail investors in financial markets.

Going into more detail, we believe that the euro area must become an effective single space, i.e. a single jurisdiction, in order to overcome the approach of defending national borders by individual authorities which today creates a strong disincentive to growth of market players, through aggregations at European level; we also believe that the interpretation of rules and regulations must take place in a harmonized and homogeneous manner throughout Europe, unlike what happens now; finally, we ask that the regulatory process leads to a simpler, less detailed and less micro-regulation oriented framework.

In this context, securitization takes on particular importance, as a tool for connecting the capital market to corporate debt financing. The development of the securitization market would contribute to the growth of the Capital Markets Union and would also allow banks to significantly increase their funding volumes.

4. Retail investment strategy

The participation of retail investors is fundamental for the growth of the capital market and in this regard Parliament and the Council have already started the examination of a proposal for regulatory revision, which although acceptable in its purpose, presents significant critical aspects of method and substance , first of all because thirty years after the first regulation (ISD) and also taking into account the two subsequent revisions (MIFID and MIFID2), there have been no market failures or other particular events that justify such a radical intervention, nor has there been previously conducted an adequate assessment of the impact of the proposals, which appear to be cumbersome and complex. The concrete risk, therefore, is that with rules of this type we will achieve a result contrary to the declared objectives, i.e. distancing the retail component from the capital markets.

5. Macroprudential framework

After the public consultation launched in 2021, a legislative proposal aimed at redesigning the European macroprudential framework should be defined in the next European legislature. In this regard, it is essential that the prudential framework as a whole is considered and not just the strictly macroprudential measures, ensuring the coherence of the overall system and the clarity of the roles of each instrument (also in order to avoid duplication), as well as the powers attributed to each Authority (with appropriate coordination between them), avoiding costly duplications between prudential requirements and clearly identifying which risks are covered by the different “capital buffers”.

The macroprudential framework of the European Union is, in fact, excessively complex and the COVID-19 crisis has highlighted evident shortcomings especially regarding the use of capital reserves; therefore, the revision of the framework should first of all provide clarity on the regulation of buffers, without leading to higher capital requirements for banks.

Sustainability, an objective and a method

Environmental protection is by far the most relevant challenge for the European economy and society but also the one that requires the most substantial investments. Achieving the zero emissions goal in 30 years will require the transfer of 23 trillion euros from investments in carbon-intensive technologies to green ones and the use of a further 5 trillion euros in additional investments. Sustainable finance is, therefore, a fundamental priority for the European banking sector which for this purpose is reviewing internal systems, in particular those relating to data collection, risk management and credit definition and approval processes, to guarantee alignment with EU sustainability objectives.

Banks are ready to assist customers in the transition, helping them to obtain the necessary financing and advising them at every stage of this complex sustainability transformation journey, however, they cannot lead this process alone, nor can they take primary responsibility for enforcing climate policies. It is up to the institutions to define clear and coherent policies that incentivize all sectors and companies to progress in this transition, and this entails the need to clarify two aspects:

1)  EU institutions should establish a clear transition financial framework, outlining sectoral paths and roadmaps against which companies can adapt development plans and banks can define their transition financing strategies. The revision of the Taxonomy Regulation, scheduled for June 2024, should therefore integrate the transitional aspect into the current taxonomy of sustainable activities.

2)  To enable banks to best support their customers’ transition, it is essential that businesses publish their transition plans according to the standards outlined by the ESRS (European Single Reporting Standard). Therefore, it is essential that every company, beyond the thresholds established by the CSRD, is required to develop a high-quality transition plan, which includes at least the information required by the ESRS.

Also in this area, it will be important to verify the effectiveness of the rules already passed before proceeding with further initiatives. This applies with reference to environmental policies (“E”) and is even more relevant for any policies in the social field (“S”) and corporate governance (“G”).

Digital finance: opportunities and risks

Technological innovation is opening up unthinkable scenarios, such as the entry into the financial market of the Over the Top, the large technological companies, mostly American, with powerful networks, almost unlimited investment capacity and data archives of planetary dimensions. In short, the challenge is such that it would require a strategic vision and a consequent balanced legislative approach that promotes and supports European innovation while maintaining strategic autonomy, while in the last five years horizontal and sectoral policy proposals have overlapped in Europe, suits disconnected from each other.

In the general field of economic policy there have been: the Data Governance Act, the Digital Markets Act, the Data Act, the Financial Data Access Regulation; three proposals concerned payment systems (instant payments, PSD3 and PSR, legal tender of euro banknotes and coins); four other proposals concerned cybersecurity and resilience (the NIS2 directive, the Cyber ​​Resilience Act, the Cyber ​​Solidarity Act, the Digital Operational Resilience Act), and the regulation for the establishment of the digital euro, the Markets in Crypto Assets Regulation (MICA), the Digital Identity Regulation, the AI ​​Act.

At this point, a pause for reflection is necessary to evaluate together with the banking industry whether there are deficiencies, overlaps, excessive interventions or omissions and to redefine the general plan accordingly.

There are regulatory initiatives, such as the Digital Markets Act (DMA) and the Crypto-Asset Markets Regulation (MICA), which could play an important role in countering the phenomenon of Shadow banking, but at the same time the Financial Data Access proposal ( FIDA), which requires the sharing of data by banks, risks putting banks in an even more inferior position compared to new competitors, because it is clear that allowing free access to financial sector data to big tech giants , which already have a dominant position in the field of individual and corporate data, without guaranteeing the correct reciprocity and remuneration of investments, can only make competition even more unbalanced.

The digital Euro

In this context, the form that the digital euro project will take is of fundamental importance, to which the banks have had a positive and constructive approach from the beginning.

However, to avoid the risk of encouraging a substantial disintermediation of banks and a consequent destabilization of the system, some precise limits must be established:

1)  setting ceilings is essential to prevent the digital euro from becoming a store of value, thus causing risks to financial stability, liquidity and financing of the economy;

2)  transaction and time limits must be set that distinguish free use from value-added services, so as not to disintermediate banks and crowd out existing payment services, given that no compensation model would be able to compensate for an excessive erosion of revenues which allow the payment system to be kept active;

3)  distribution must in any case be firmly anchored to the banks;

4)  it will be necessary to adequately reflect on the methods of “offline” use of the digital euro, limiting them temporally and to exceptional cases, while at the moment, this method presents itself as a further version of the digital euro, equipped with completely distinct infrastructures. In addition to representing a further huge cost, it could open the way to risks of fraud, illegal activities and money laundering.

The fight against financial crime

The presence of money in digital form and sensitive data makes the banking sector the subject of continuous cyber attacks and potentially vulnerable to illegal activities, such as fraud, money laundering and terrorist financing. For this reason, banks are the first safeguard to protect legal economic activities and from the infiltration of crime into the economy and are the main ally of the Authorities in fighting financial crime through due diligence requirements, monitoring transactions and reporting activities. suspicious. The banking sector is in fact the main place for identifying money laundering operations. As a result, the European banking sector has supported the revision of the AML/CFT (Anti-Money Laundering/Countering the Financing of Terrorism) legal framework with the introduction of a new package of measures during the current legislature, including the establishment of a new European sector authority. (AMLA).

To make the system truly effective, it is essential that the new framework allows the use of the most appropriate means and tools to fight effectively, such as the use, in full compliance with personal data protection requirements, of new technologies and AI to facilitate the exchange of information on risks and threats between authorities and banks. As for the European Anti-Money Laundering Authority (AMLA), the ABI considers it a crucial component of the future European framework for combating money laundering and terrorist financing and believes that Italy has the right skills to host it and in fact immediately supported the national candidacy, as will continue to follow the development of the implementing regulations to ensure full coordination between the AMLA and the national supervisory authorities.

January 24, 2024

Source Italian Banking Association