José Manuel Campa interview with Central Banking: EBA’s Campa on simplifying EU regulations and supervising stablecoins

EBA’s Campa on simplifying EU regulations and supervising stablecoins 

The departing pan-European supervision chief speaks about advancing the banking union, streamlining the implantation of new rules, financial resilience and why he is stepping down early

You are due to step down from the European Banking Authority (EBA) in January. How would you reflect on the past six years? 

There are two main elements. First, we managed to make a lot of progress on resilience, the construction of the banking union, the regulatory framework, the EU single market and the single rulebook. The industry has made a lot of progress, and we find ourselves with a robust and resilient banking sector, which is related to the second point: the way in which the industry has been capable of continually serving the economy. Over the past six years, we’ve been confronted with several significant challenges as societies, such as the Covid-19 pandemic, the Russian invasion of Ukraine and the energy crisis. There are also the ongoing geopolitical tensions, as well as the 2023 banking turmoil. In all those situations, the European banking sector has proven resilient and capable of addressing those challenges and continued to serve the economy in a proper manner, which I think is big comfort to all of us. 

You’ve talked about reviewing whether some level 2 (technical standards) and level 3 texts (guidelines) issued by the EBA are still fit for purpose. Can you elaborate more on that? What specific provisions would you consider streamlining?

I think there are two aspects. One is the process by which we go about building the level 2 and 3 legislation and making sure we focus on the important areas. For that, we have developed a methodology to assess all the mandates we receive, and we use that methodology to prioritise different mandates: to put forward those we consider to be more relevant and impactful and less burdensome to the industry. For those that we believe the trade-off between relevance and the potential burden of implementing them is too high, we tend to de-prioritise them. This also applies to the flow of new mandates we receive.

The second aspect is about the existing regulatory framework. Sometimes we hear that it is complex, it is not well integrated, or it is difficult to read as a package. We’re going to assess the framework by broad topic area and make sure that it’s fit for purpose; that every single provision is internally consistent with each other. 

What do I mean by broad areas? For instance, the area of credit risk, which is a very important part of banks’ activity. We’ll look at the number of regulations and make sure they’re all well integrated and understood, be it level 2, level 3 and the interaction with level one, and how supervisors are applying them and all those aspects. 

Market risk is another area. Governance of the institutions, and remuneration and risk management from a solid institutional perspective – that’s another big area we’re working on. Those are topics that we’ll address one at a time over the coming six months to have more of a holistic view.

Have you discussed with EU legislators about lowering the amount of level 2 and 3 mandates that the EBA has to deliver on? As I understand it, there are lot of mandates.

That’s correct. The number of mandates has increased over time. This is an issue the co-legislators themselves are also discussing and trying to assess what’s needed and what’s not. What we’re already doing is applying the methodology that I mentioned to prioritise the different mandates. We are also applying the methodology to the proposals for new mandates, so we can give feedback into the legislation process. Providing feedback to the co-legislators, engaging with them and saying, ‘while you think giving us this mandate may be a good idea, we may think it’s low impact or should be lower priority, so you might want to reconsider that.’ We’ll engage in that conversation before co-legislators finalise the legislation, so we only get those mandates that we think should be prioritised.

So, this methodology is kind of like a way to evaluate the mandate?

It’s a way to evaluate the mandate. We evaluate essentially along two axes: how important we think the mandate is, against how burdensome we think it is to be implemented, either by the firms or by supervisors. Along those two axes, we rank the different mandates. If we think something is not that important from the point of view of the risk it’s trying to manage or control and it’s very burdensome, it will become a low priority.

We’ll look at the number of regulations and make sure they’re all well integrated and understood, be it level 2, level 3 and the interaction with level one, and how supervisors are applying them

In a previous speech, you mentioned that the EBA should be able to advise the European Commission on reviewing the European banking union. Do you believe there should be more communication between the rule-setters and the rule-enforcer?

I think it’s a normal role, from my point of view, for a regulatory authority like ours – that’s an expert in a particular area, in our case banking and payments in the EU – to provide feedback on what we think is working, or what we think is worrying. Sometimes we also issue warnings when we think there are concerns that the commission needs to be aware of. That happened, for instance, on crypto assets.

As we are going through this assessment of the efficiency of the regulatory framework, I think it’s also better for us if we identify areas and provide feedback on that direction, for instance whether some level 1 regulations could be adjusted or reconsidered. It’s very common that the commission, when they are trying to assess the regulatory framework on a new area, send us what they term a ‘call for advice’. This is where they ask us for advice to provide them with our knowledge and experience, so they can get feedback about the regulation. If it’s new, how it should be developed? And if it’s not new, how it should be revised? So, this is a normal process.

Have there been calls for advice in recent months from the commission?

We’ve had exchanges on many different topics. For instance, we will be responding to and helping the new Authority for Anti-Money Laundering by the end of this month. We’ve also had input on issues related to payments and on the implementation of the Basel III, in the past.

Nobody was seeking complexity for the sake of complexity. But complexity was an outcome as a result of negotiations – trying to take into account different priorities and objectives of different stakeholders

How would you recommend cutting the various buffer requirements that EU banks have to follow?

Well, one goal will be to cut them. Another goal, at least a short-term goal, will be to implement them better – because these requirements are complex, as we’ve mentioned in our report, Stacking orders and capital buffers, last summer. A first step is to recognise that they are complex and try to make sure that within this complexity we implement them as smoothly as possible. Another possibility is to try to simplify, which will require change to level 1 regulation to confront some of the difficulties that had created the complexity in the first place. Nobody was seeking complexity for the sake of complexity. But complexity was an outcome as a result of negotiations – trying to take into account different priorities and objectives of different stakeholders. It’s difficult to simplify, as that will require those stakeholders to take a different view.

More open payments architectures are allowing non-bank participants into the financial ecosystem. How do potential benefits from financial inclusion and innovation need to be weighed against ML/TF and fraud concerns?

It’s a balance we need to keep in mind. As innovation comes about, it’s always the case that we want to make sure we foster innovation that brings value and benefits to consumers. At the same time, the risks need to be controlled. Some of those risks could be market power with the new technologies. We know that instant/faster payments will make cross-border payments easier – that’s good. But, at the same time, what is good for citizens can also be good for criminals. So, we need to consider privacy, AML issues, fraud, cyber risk and operational resilience.

Are you concerned a gulf may emerge between US and European regulation and oversight, especially given that any softening of rules (rather than just simplification) may cause greater systemic implication in Europe, given its smaller primary funding alternatives via the capital markets?

I’m optimistic on Basel implementation. I think we, including the US, will be able to implement rules in a solid, Basel-compatible manner in the coming years. The US has not yet put forward its final proposal, but I hope that they will be Basel-compliant, and we can move ahead. In Europe, we have delayed parts of the implementation, particularly the market risk, in the expectation that the other jurisdictions – the US and the UK – will also implement. The UK has already given out a clear timeline. So, in that part, I’m optimistic.

I think there are other areas in which, as we evolve, we need to continue to have further collaboration. European standard-setters in general, and certainly for financial services, have always been very much in favour of multilateral agreements, open financial markets and keeping common rules. But there are two new areas where we now see significant differences. One is sustainability and climate-related risk and challenges, in which the view of Europe and the view of the US are different. And the second area is probably on the innovation related to the crypto world – not just stable currencies, but more broadly on crypto.

The EBA will gain new responsibility in supervising stablecoin providers and other new entities under the Digital Operational Resilience Act (Dora) and the Markets in Crypto-Assets Regulation (Mica). Are you confident the EBA will be able to effectively monitor these entities, and what challenges do you expect the EBA may run into?

I’m confident that we will be able to implement the regulation. Mica was pioneering when it was put in place by the EU. It’s been highly praised and regarded by other jurisdictions. It’s a good step forward. Our role here is limited to issuers of e-money and asset-reference tokens – stable currencies – not to the secondary markets and not the crypto asset service providers. 

It’s an industry that’s developing very fast and globally, and we will continue to monitor while starting the implementation. We are responsible at the EBA for the supervision of what’s considered significant e-money tokens, and that has to be designated. So far, no e-money tokens have been designated yet as significant in the EU. The ones that are operating in Europe are being supervised by the national authorities that have authorised them, perceived to be still small and less significant. But we expect that, as the industry develops in the coming months, some of them will become significant and will come under EBA direct supervision.

Do you believe there is a need for a formalised resolution regime for systemically important issuers, or is it best to leave it publicly as ambiguous while major central banks develop plans that could stabilise the system?

There are different levels. The first one is the multi-issuance aspect – the fact that the currency can be redeemed in different jurisdictions. If redemption happens in a place different from where the currency was issued, there needs to be an ability to transfer those reserves seamlessly across borders. That would require making sure there is good supervisory coordination and convergence to ensure the timely cross-border transfer of those reserves.

The second issue is, as you say, ‘what happens if they also become so systemic they need to be resolved?’ This could apply to multi-issuance or single-issuance currency. I think responses to both these issues are areas we need to develop further. Anything that becomes systemic and needs to be resolved requires regulations and guarantees that the resolution of that institution is done in a way that does not generate systemic risk or vulnerability. So, if these firms or products become systemic, an assessment is needed to determine: ‘what does it mean to be systemic and what are the vulnerabilities if something goes wrong there?’ This is the same thing that happens with systemic banks, central counterparties and other parts of the financial sectors that are systemic. There has to be work on how to resolve an entity in a manner that does not cause systemic risk to the financial system, be it to the banks, counterparties or whoever engages with them. 

I don’t think, at least in Europe, we’re at that level yet, because we don’t have a level of crypto issuers that has become systemic. But if we think with a much further forward-looking horizon, this will have to be done as the industry develops. 

Will Dora apply to the EU branches of foreign banks and what would be the implications of that, if so? 

Dora applies to all EU-based credit institutions. It should apply also to the EU branches operating in the EU, though the European Commission will soon clarify this point [through this Q&A]. Although by definition, the supervision of these EU branches, according to the regulations, is fundamentally done first by the local supervisor at the national competent authority, and also, since they’re part of the consolidated group, mainly by the consolidated supervisor.

Our role here is limited to issuers of e-money and asset-reference tokens – stable currencies – not to the secondary markets and not the crypto asset service providers

It’s been over a year since the Draghi report was released. How would you assess the progress the EU has made with regard to completing the single market and boosting competitiveness?

 I will say that, in terms of deepening the single market in the banking sector, there’s work to be done. Over the last 10 years, we’ve made a lot of progress on the single rule book. We have made progress in having single supervision – more coordinated supervision across the 27 countries in the euro area. However, the degree of cross-border banking activity in the euro area has not increased. Therefore, if we measure the outcome of the single market by the degree of cross-border activity, that is not improving. So, we need to work on that area. I think over the past year, we have not done anything significant yet to change that. So, we need to finish the banking union. 

Your resignation came as a shock to many so early in your second term. Can you tell us a bit more about the reasons behind the decision? Does it have something to do with some of the issues we’ve discussed today? 

It has nothing to do with that. There is absolutely no link at all with any professional issues. On the contrary, I think that working for the EBA has been an exceptional opportunity and a privilege. But at the same time, I know it’s transitory. By definition, this was meant to be my second mandate, which is for five years, with no possibility for further extension. Knowing that it’s transitory, I also have to make sure that I focus on the things that are permanent; my personal life and my family relationship are permanent. I need to make sure that I dedicate more time to that after seven exceptional years.

Do you have any advice for the next EBA chair? 

The work is very exciting, in many ways. As I said, what was accomplished over the last six years – a highly resilient banking sector that’s been able to properly supply the needs of our citizens in difficult moments – that’s a very good starting point. What’s on the horizon? Well, we need to make sure that the banking sector continues to deepen into the single market, continues to be able to introduce the innovations and the potential that is emerging. I think about technology, crypto; but that’s only one part of it. You have AI applications, which are also very important. You have the deepening of the single market. And I think those are areas that are super exciting for the EBA. On top of that, we have these new mandates under Mica and Dora that put new institutions under the EBA’s direct supervision and oversight the first time. And that’s very exciting.

The interview was conducted by Thomas Chow

Central Banking (UK)