It's Complicated
What to make of the ECB's new regulatory simplification task force?
Perils of Saying No
I’ve written several times about ECB Banking Supervision’s vehement opposition to relaxing regulatory standards - and how this has only intensified since the new European Commission put growth and competitiveness at the top of its agenda last autumn. For example:
I have also described how ECB leaders have repeatedly touted reforms to supervisory policy and practice that they say will make supervision simpler and more efficient. This emphasis on supervisory reform has always appeared crafted to show that while the ECB opposes softer regulation, it is willing to consider how it can reduce the burden of supervision and thus provide some relief to banks. However, as I wrote last month it is not clear that the ECB’s reforms are yet having this impact. (Indeed, many banks fear that the most significant reform the ECB has announced - to how Pillar 2 capital requirements are calculated - will actually increase regulatory burdens.)
I also warned that if ECB banking supervision is seen as having nothing positive to contribute to the EU debate on competitiveness and growth, this could weaken its influence.
Task Force
Is this now happening within the ECB itself? Last week it emerged that the ECB has set up a High-Level Task Force on Regulatory Simplification. So far, there has been no formal announcement of the Task Force or its terms of reference - but ECB Vice-President Luis de Guindos confirmed its existence in an interview at the start of May.
Importantly, de Guindos said that the task force (which will reportedly include the central bank governors of Germany, France, Italy and Finland, three of whom called for regulatory simplification in a joint letter to the European Commission in February) will report to him. So it will likely be staffed by officials from the ECB’s Financial Stability division (which works to de Guindos) - not from the ECB’s supervisory arm. And it would be the ECB Governing Council, on which Supervisory Board Chair Claudia Buch does not sit, that would sign off its recommendations - which de Guindos said are due by the end of the year - as an official ECB Opinion.
I’ve noted previously how in some public statements ECB President Lagarde has taken a much more pro-growth stance than Buch. The way the new task force has been set up now looks like a move by the ECB central leadership to take over control of the discussion on regulation from the supervisors.
Donnery Plants a Stake
That is not to say that ECB banking supervision will have no input. Sharon Donnery - one of the new members of the Supervisory Board, with responsibility for supervisory strategy - will also be part of the task force, according to media reports. At the end of April Donnery gave a speech in Frankfurt that was clearly designed to influence the task force’s thinking.
Donnery set out three tests for any regulatory simplification, arguing that policymakers should ask if it:
actually simplifies rules;
compromises on resilience; and
advances European market integration.
A few thoughts on each point:
Real Simplification
It may seem obvious to argue that simplification must simplify. But Donnery pointed out that some of the complexities in existing rules are the product of industry lobbying for tweaks to support or favour particular activities. (For as long as there has been lobbying banks have argued both for common international standards and rules tailored to specific local conditions, and both for simplicity and special provisions.) For example, EU legislation already gives specific capital reductions for loans to SMEs or infrastructure projects.
Insisting that simplification must simplify provides an argument against further carve-outs, such as for green or defence-related assets. Both have been mooted by industry spokespeople in the context of recent environmental and geopolitical debates. (And by extension it would also be an argument against just lowering key regulatory ratios, which would certainly cut regulatory costs for banks but would not reduce the complexity of regulation overall.)
Protect Resilience
On this point Donnery was at her firmest and most uncompromising. Europe ‘must never sacrifice the resilience that was so hard-won in the aftermath of the global financial crisis’, she argued. ‘This is a red line. And it must remain one.’
This is entirely consistent with previous statements from Donnery herself, as well as Buch and other leading ECB supervisors. Indeed, the only surprise for me was that Donnery did not rank this objective first. How far she will be able to maintain the red line in the task force’s discussions will, of course, be a key question for the coming months.
Market Integration
More intriguing was Donnery's third objective. On the face of it, there is no obvious logical link between regulatory simplicity and market integration. (Indeed, while promoting European financial integration is part of the ECB's overall mission, in the past ECB supervisors have been clear that it is secondary to protecting financial stability.)
Donnery, however, argued that different national rules are an important driver of regulatory complexity across the EU - reprising an argument she made in an earlier speech, where she described the resulting higher compliance burden for cross-border firms as part of the ‘cost of non-regulation’. Greater harmonisation of not just banking regulation but also insolvency rules, accounting standards, securities law and corporate disclosure requirements (interestingly, she did not mention tax rules - reflecting her Irish background, perhaps?) would both benefit financial stability and boost banks' ability to lend.
The need to deepen the EU internal market has been emphasised repeatedly by Buch and other leading ECB supervisors in recent months. And it is practically an article of faith in the EU institutions. Greater market integration has been central to virtually every proposal for pro-growth reform (most recently Mario Draghi’s September 2024 report) as well as the European Commission’s Capital Markets Union project, launched in 2015. So this is extremely safe territory for Donnery and the ECB. Helpfully for opponents of financial deregulation, talking about wider market integration also shifts the focus away from banking rules and on to wider policy issues, for which supervisors are not responsible.
Where Next?
The ECB is not a regulator. So as de Guindos acknowledged in his interview the new task force is limited to making recommendations to EU lawmakers. So once the task force has reported, it will be for the European Commission, European Parliament and EU governments to decide whether to amend existing regulations. (Some media reports have suggested the task force could consider whether the thresholds for banks to be directly supervised by the ECB should be changed.) So there is no guarantee that any ECB proposals will be accepted. Indeed, the EC appears not to have been aware in advance that the task force was being set up. That could be a sign that the task force was set up more to manage internal tensions within the ECB (or to corral the national central banks) than to drive real change in EU regulation.
Time will tell, but at the ECB simplification has got off to a complicated start.