Banking regulation benefits should outweigh the disadvantages
Meri Rimmanen, one of the directors at the European Banking Authority, says supervisors are trying to ease the reporting burden on small banks.
European banks have so far kept their feet dry during the COVID-crisis. Their non-performing receivables have remained under control.
In stress tests carried out by the EBA in the summer, the core solvency ratio of banks remained above 10% in the most challenging of scenarios and, thus, at a good level.
“However, it cannot yet be announced that the crisis is over now and everything is fine. We have small indications of this, that risks still need to be closely monitored”, says Meri Rimmanen, the EBA’s Director of Data Analytics.
Rimmanen works in Paris and is a director in the EBA. She says the EBA is now monitoring the accumulation of credit risks, such as in loans to which grace periods or government guarantees apply.
According to Rimmanen, the European banks were in very good shape generally when the COVID-crisis began. They faced into this crisis from a completely different starting point than they did in the financial crisis in 2008.
For the banking supervisors, the COVID-crisis was the first test for the current regulatory framework to see how it performs when it comes to the crunch. The current regulation is structured in such a way that, in good times, banks have stricter rules and, in times of crisis, they can be flexible.
“We postponed stress tests and some other exercises that were not so necessary at that time. We gave banks time to manage their customer relationships and support the economy.”
The supervisors also had to create new rules, such as for determining when a loan grace period can be granted automatically.
The European Union has tightened the regulation of banks considerably since the financial crisis. Many small banks already consider the regulatory burden to be too high. Is there a risk that the EU will slip into overregulation?
Rimmanen says the message from small banks has been heard. Greater attention is now being paid to the principle of regulatory proportionality. This means that the impact of regulation must be proportionate to the objectives pursued.
“We are trying to find a reduced reporting model for smaller banks. On new issues, such as climate risks, we are trying to strike a fine balance between the appropriacy of the regulation and its application in the longer term.”
Completing the Banking Union is one of the European Banking Authority's top priorities. For example, the Banking Union still lacks a common deposit guarantee.
In Finland, the view among the financial sector has been that the systems and banks of the banking union countries must be on a sound footing before solidarity is increased.
Rimmanen says that in 2019 EU legislators published their risk reduction package, which is now more or less implemented in the Member States.
“Now we see that the risk indicators are better and progress has been made. In our view, a common deposit guarantee would be beneficial for consumers. Its funding mechanism is under discussion.”
Finland's financial sector has also been concerned about the finalisation of the Basel III rules and, in particular, the introduction of the so-called total risk weight floor.
It sets a limit on how internal risk models used by banks affect the results of risk calculation and the capital required of banks. The result of this could be that the solvency requirements of Finnish banks will be significantly tightened.
Rimmanen says that the EBA has calculated the impact of finalising Basel III at the request of the European Commission. The authority's view is that regulation must be completed.
“There have been problems with internal risk models because they have produced significant variation in the solvency results. That is why they have caused a lack of trust. A lot of corrective measures have been taken and these are now being completed.”
LESSONS FROM THE PANDEMIC. “We postponed stress tests. We gave banks time to manage their customer relationships,” Meri Rimmanen says.
European Banking Authority
An independent EU body whose tasks include regulation, market stability and consumer protection.
The aim of the banking sector single rulebook is to impose the same rules on banks in all the EU Member States.
The seat moved from London to Paris after Brexit. It has approximately 215 employees.
Founded after the financial crisis. It celebrates its 10th anniversary this year.