1. Politicians and supervisory authorities often refer to complex regulations. What exactly does this mean?
After the financial crisis in 2008, changes were made to supervisory regulations for banks with the goal of ensuring financial stability. Since then, these new regulations have been proven effective and the European banking system has proved its stability, for example during the turbulence seen in the US banking system in spring of 2023.
So far, so good. Unfortunately, simultaneously, regulations have become extremely complex over the years. How?
- Too many national and European institutions are involved in regulating and supervising banks. The result is contradictory requirements and an increasing number of inconsistencies
- Laws, regulations and technical standards are constantly subject to expansion. The number of rules has simply become unmanageable
- Specifications are excessively detailed
2. Why are complex regulations a problem?
“When the forest of traffic signs becomes so dense that we can no longer see the path, we are bound to lose our way.” This is BaFin President Mark Branson’s description of the state of the current regulation framework, in which he warns of the need for change.
The people responsible for following the regulations and those responsible for enforcing them are pushed to their limits when attempting to practically implement the many, many detailed rules and procedures. This is a problem for banks and supervisors, but also for investors. In their current constellation, the regulations simply do not function like the cogs in a machine, working smoothly together to achieve a desired result. Instead, they interfere with one another, slow processes and in some cases even clog up the works entirely.
The deficits in current regulations are having a negative effect on ratings for European banks: in other words, regulations have become a critical competitiveness factor. European banks can only act as reliable partners for the interwoven international economy if they are able to hold their own on the global stage. Competitiveness is thus not simply a means in and of itself. It is essential for ensuring long-term stability and growth within the economy.
3. Is there a way to reduce complexity in regulations?
Europe’s banks need a consistent, efficient and competitive regulatory framework. That means getting rid of duplications, contradictions and redundancies. The goal must be to ensure that regulations are not regulating even the minutest of details.
Smarter regulations would
- Ensure financial stability
- Promote investments, in particular those focused on green and digital transformations
- Strengthen the economy
And of course, the European Commission must, within the framework of their work programme, review financial system rules starting in 2024. They should not waste this opportunity.
