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Europe’s drive to simplify and streamline financial regulation is making top supervisors nervous about the risk of key safeguards being watered down.
Two of the EU’s most senior financial supervisors told the Financial Times they were determined to avoid crisis prevention measures being swept away in the push to revive the region’s sluggish economic growth.
“If it is about deregulating and lowering the bar on financial protections, we will not be ready to tackle volatility.’’ said Dominique Laboureix, head of the Single Resolution Board — which handles failing Eurozone banks. ‘‘That means crises, which means less growth.”
The pointed intervention, which is uncommon for the watchdogs, comes after the European Commission recently announced plans to drastically cut the scope of business sustainability disclosure rules it introduced two years ago. It is also reviewing capital rules for banks and insurers as part of plans to boost financial market activity and growth.
Some officials want Brussels to go further. The heads of the German, French, Spanish and Italian central banks wrote to the commission recently calling on it to remove “unduly complex” areas of financial rules that distort international competition without improving financial stability.
Laboureix said he was “absolutely ready” to engage with calls for the burden of regulation to be eased. But he warned policymakers not to forget the lessons of the last big banking sector meltdown. “Don’t forget the 2008 crisis. What did that mean? Bailouts everywhere.”
“I am ready to discuss simplification, but I am not ready to lower the bar in terms of protecting financial stability,” Laboureix said in an interview.
Frank Elderson, vice-chair of the ECB supervisory board, pointed out that after the 2008 financial crisis Eurozone governments spent €1.5tn in capital support and €3.7tn in liquidity support for the financial system. Europe’s economy shrank 4.3 per cent in 2009 as the crisis took its toll.
“It’s good to remember why we did that in the first place,” Elderson said in an interview, adding: “We need not be complacent and say the next decade will be rosy — so we have to be wary about doing away with supervisory functions that could lead to this situation repeating itself.”
Elderson told a banking conference in London last week: “The debate on competitiveness should not be used as a pretext for watering down regulation.”
Instead of lowering regulatory requirements he said the EU should focus on harmonising them across its 27 members. “Don’t cut rules, harmonise them,” he said.
The ECB executive told the FT he supported “simplification in a nuanced way” of sustainability disclosure rules, but he warned if this went too far it could deprive banks of the information they need from companies to assess their own exposure to climate change risks.
“Was all this perfect? Probably not,” he said. “Can we do better without paying too much of a price? Possibly.” But he added: “If it were to lead to banks not having the data they need to assess these risks, that would be a problem for banks and would make our work as a supervisor more difficult.”
The ECB has been pushing Eurozone banks to address risks from floods, droughts, wildfires and the transition away from fossil fuels, threatening to fine those that drag their feet.
The central bank has the power to impose “periodic penalty payments” on lenders worth up to 5 per cent of their average daily turnover every day for up to six months.
Elderson said there were “a few banks” for which such penalties were still “a concrete possibility” after they missed the first of a series of deadlines to take steps to tackle climate risks in their balance sheets.
“There are a small number” of other banks that have been told they could also face penalties for missing the ECB’s second deadline on climate action set for the end of 2023, he said. A final deadline expired so recently it is “too early to say” if any banks could be fined over this.
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