Daily Management Review

Europe becomes the world leader in banking regulation


Europe is becoming the world leader in banking regulation. At least five new sets of rules should soon enter into force in the EU. They will open the banking sector of the Old World for greater competition, tighten the rules of trading, reduce the reporting profit and raise capital requirements.

Despite the fact that the innovations will make the financial system of Europe stronger, the bankers - after ten years of strict regulation - show no particular enthusiasm for change.

Let's start with the expansion of competition. On January 13, a new version of the European Union's Payment Services Directive (PSD2) comes into force. It defines the terms of cooperation between banks (which have a monopoly on bank customer data and control payments) and other market participants (financial technology companies and competing banks).

Payment service providers allow people to pay for purchases by direct transfer from their bank accounts. Aggregators collect data from accounts in several banks so that EU citizens can see the overall picture of their finances at once and, possibly, find the best offers on insurance, mortgages and other services.

New participants need not only permissions of their clients to receive money and data from their accounts, but also cooperation with their banks. They are afraid that banks will not play fair. Banks, for their part, fear that the discovery of data may expose customers to fraud, and them themselves - to lawsuits.

On November 27, the European Commission approved technical standards designed to balance competition and security. Although this directive will enter in effect from January, the standards will not come into force until September 2019. Banks and their competitors will have to find a common language before that time.

The rules require that customers provide two of three types of identity cards before the transaction is approved: what they know (password or secret code), what they own (card or phone), and physical identification (fingerprints). This approach is already applied, although not universally, on the Internet.

While retail banks are preparing for PSD2, investment banks and asset management companies are closely studying MiFID2, an updated version of the Financial Markets Directive, which comes into force on January 3.

Aimed at making the financial market more transparent, and therefore more secure and competitive, MiFID2 restricts the trading of securities on domestic banking platforms and requires trading derivatives, which are currently distributed on the OTC market, only on centralized exchanges.

MiFID2 also obliges banks to charge customers a separate fee for research, rather than include it in general fees. Some banks will assume these costs, others, in all likelihood, will completely abandon the analysts.

Three more innovations affect safety in one way or another. Since January, the banks of Europe (and also in many other places, but not in America) will have to adhere to the new standards of financial reporting (IFRS 9), within which it is necessary to reserve funds for expected losses on loans. Most likely, this will negatively affect their profits as early as 2018.

Most banks interviewed by the European Banking Supervision Service expect their profits to be more volatile. The same can happen with credit, according to the British magazine The Economist.

Another important thing is to complete the development of Basel III, the third part of the Basel Accord, which strengthens the requirements for bank capital and introduces new regulatory requirements for liquidity. It is expected that its implementation will take several years.

This week, the European Commission should voice proposals for strengthening the economic and monetary union. As part of these efforts in October, Brussels urged national governments to finally complete the formation of the banking union.

Although the euro area now has a single supervisor in the person of the European Central Bank and a single body dealing with insolvent banks, it still lacks a single deposit insurance scheme, mainly because German taxpayers do not want to be responsible for the failures of the creditors of Southern Europe.

The Commission hopes that the Germans will agree to a gradual introduction of the scheme and it will be possible to find a solution to the problem of "bad" debts, which continue to burden the banks of Italy and other countries.

European regulators want a tougher attitude towards "bad" loans in the future: the ECB requires that banks have a reserve fund equal to all unsecured loans in two years and secured - in seven years.

Having all these challenges (to which Brexit should also be added), European bankers look with envy at the United States. American banks and regulators had put things in order much earlier, and after the coming to power of Donald Trump began to weaken regulatory pressure.

source: economist.com