EACB Key Messages regarding this Call for evidence and general policy orientation: Preserving the diversity of the banking sector and ensuring proportionality together with consumer choice and innovation.
The European Association of Co-operative Banks (EACB) welcomes the opportunity to participate in the EC Call for evidence: EU regulatory framework for financial services. In issuing this call for evidence we understand and appreciate that the EC is taking a step back to look at the bigger picture, test past thinking and consider improvements in the corpus of existing legislation. We strongly support doing such assessment which cuts through different pieces of legislation and takes a holistic approach. Besides providing feedback on past decisions however, we believe that it should also serve in drawing lessons for the future.
There are powerful systemic benefits to be derived from the diversity of business models and the ownership structure in the banking sector. These benefits are notably increased competition and higher resilience . When firms operate with different incentives and goals, the competition for the customer will be even more intense as based on different ways to serve them. This improves consumer choice and innovation. At the same time, it contributes to the system being more resilient: when there is a shock such as the global financial crisis, firms with different business models are affected in different ways and will react differently. The regulatory and supervisory framework should ensure that the diversity of the banking sector is preserved and in doing so that also co-operative banks and building societies are able to continue fulfilling their important role in the economy, especially for the financing of households and SMEs. The specific business models of these entities, mandates a design of rules that are fit to purpose. Business models should be factored in consistently throughout supervision, regulatory practices and approaches, as well as in recovery and resolution strategies. A “one size fits all” approach for all banks, irrespective of the size, business model and activity can cause distortion.
Looking back on the past legislative period and the total package of measure introduced following the crisis, we would observe the following:
- the regulatory compliance costs resulting from the legislative package and its implementing measures generated, and continue to generate an increasingly high burden for all banks. The question arises whether these costs are still proportionate to the purpose the legislative package intended to pursue. This is even more true for smaller and medium sized co-operative banks for which the combined compliance cost start to become unbearable.
- the continued strengthening capital requirements legislation (e.g. Leverage ratio, CRR , BRRD) adversely affects institutions with a low risk activities and creates a risk for the financing of the economy. Prudential requirements should take into account – from inception - the specificities of different banking models and in particular of co-operative banks. The core capital under CRR for example, and the application of bail-in to mutuals and cooperatives under BRRDcreateimportant challenges for co-operative banks.
- in the area of retail banking, more and more product specific legislation is introduced (at level 1) with ever high degrees of detail (at level 1 and 2). The side effect of such legislation is that cost-efficiency and compliance replace customer satisfaction as the primary driver for doing business. This results in reduced access to services (e.g. support of branch/ATM networks becomes too expensive), customer choice and innovation .
- the possibility for the European Supervisory Authorities to develop guidelines on issues that are not mandated by 1 legislation, creates friction. Indeed, their “comply or explain” character de facto create a “top-up” of rules, over and beyond those laid down in the legislation that was decided upon -by the Council and Parliament in co-decision.
In its response the EACB provides an important number of examples of the above issues. In certain instances it has abstained from proposing a specific solution, either because it is still considering solutions that could be appropriate or because even where a measure is criticised as unnecessary or disproportionate, the least bad outcome may be to continue with the current situation. In any case, what the EACB calls for is that the lesson learned on one dossier should inform considerations of new initiatives, so that similar mistakes are avoided in the future.
For further information on this topic or to read the EACB response, please download the PDF.