1. 4/13/2018
Banking Regulation for stimulation of economic development: opportunities and limitations
ACPR – SSM Coordination Division
26th International Financial Congress
July 13, 2017, St. Petersburg, Russia

2. Outline
Evolution of financial systems (market financing vs banking intermediation) and associated policy responses
EU Banking Union and economic development
III. Financial Innovation and regulation: the case of digital finance

3. Outline
Evolution of financial systems (market financing vs banking intermediation) and associated policy responses
II. EU Banking Union and economic development
III. Financial Innovation and regulation: the case of digital finance

4. Factors behind the evolution of financial system
From 2007 onwards, EU economies were affected by a number of shocks (internal and external imbalances, 2008 financial crisis, European sovereign debt crisis)
A combination of factors triggered changes in corporate financing
Context of a protracted period of low interest rates and low volatility environment
Implementation of Basel III prudential framework
Repricing of banks’ refinancing costs
From corporates’ perspective: need to rely on a mix of market based as well as banking based financing

5. Evolution of the financing model

6. Key policy objectives stemming from these changes
4/13/2018
Key policy objectives stemming from these changes
Amid this complex economic context, corporate financing has been a major area of concern for many Member States
In France, public authorities have shown their commitment to
Ensuring a steady flow of credit to corporates
Enabling corporates access to new financing sources (including SMEs)
Shifting toward more balanced and resilient financing models
Being mindful of financial stability consideration

7. Major policy initiatives
The French public authorities have supported the evolution of the financing model through different initiatives:
Establishment of BPIfrance : improved consistency of public interventions
Creation of the « Médiation du Crédit »
Building new financing solutions in order to diversify financing sources in debt for SMEs
Fostering equity financing

8. Outline
I. Evolution of financial systems (market financing vs banking intermediation) and associated policy responses II. EU Banking Union and economic development III. Financial Innovation and regulation: the case of digital finance

9. EU banking regulation and supervision
The establishment of the Banking Union aims at ensuring a resilient banking system
Completion of a comprehensive EU legal framework pertaining to both banking supervision and resolution
Setting-up of a new institutional architecture and common standards to supervision
From a policy perspective, numerous strands of work conducted under the aegis of the ECB contribute to levelling the playing field for all banks
As regards resolution, significant progress has been made with the setting of the Single Resolution Mechanism and Internal Resolution teams in 2016
The “tough but fair” supervision promoted by the ECB, based on vigilant impartiality and supervisory dialogue, does not primarily aim to tackle economic development issues

10. Impact assessment of SSM supervisory measures
These objectives notwithstanding, the ECB conducts regular impact assessments of its individual capital decisions
SREP decisions refer to individual capital decisions adopted for SSM significant institutions (SIs), consisting of a Pillar 2 requirement (P2R) and a Pillar 2 guidance (P2G)
Focus on corporate lending as an activity that may allow short-term portfolio adjustments
Combination of a quantitative approach with bank-specific supervisory knowledge
No reduction in corporate lending to be expected out of the recent SREP decisions

11. Broader impact assessment of capital requirements
A broader picture: assessment of the impact of higher capital requirements on the economy
The average of the SREP CET1 capital demand (incl. P2G) is around 10% for SIs and the average of the actual CET1 ratio is around 13.5%
Consensus in empirical literature suggests that optimal capital requirements are generally above the ones observed at this point in time
Costs
Since equity is more expensive than other sources of funding, higher capital requirements might translate into higher funding costs.
Banks might pass on higher cost of funding which has a negative impact on lending in the short run.
Benefits
Better capitalised banks (lower probability of default) benefit from a lower cost of funding.
Better capitalised banks can provide more stable lending, especially in times of crisis, and the systemic risk is reduced.
On banks
On lending

12. The specific issue of NPLs
The magnitude of NPL ratios in some European countries can hamper bank lending capacity to the economy.

13. Policy responses to address the NPL issues
Current work on NPLs aims to restore the intermediation capacity of the most affected banks
Addressing asset quality issues: SSM 2014 comprehensive assessment
Release of the ECB NPL guidance with the aim to help banks to handle the NPL issue (strategy, governance, provisioning, disclosure etc.)
Development of other policy responses in several EU fora (Commission, EBA, ESRB): development of secondary markets, setting-up of asset management vehicles, regulation of securitization practices.

14. Outline
I. Evolution of financial systems (market financing vs banking intermediation) and associated policy responses
II. EU Banking Union and economic development
III. Financial Innovation and regulation: the case of digital finance

15. Principles surrounding the regulation of digital finance
Which risks and benefits of digital innovation?
Opportunities
Risks
For the consumer: price decreases and improvement of products and services
For the financial actors: decrease of costs and improvement of internal processes
Better compliance with regulatory requirements (RegTech)
Decline of banks’ revenues
Increase of Operational risks (cybersecurity, cloud computing)
Heightened vigilence at AML-CTF and consumer protection
More difficult implementation of supervision and regulation

16. Principles surrounding the regulation of digital finance
Which center of gravity? Supervisory power and political choices
INNOVATION
“Trilemma”
REGULATION
FINANCIAL STABILITY

17. Principles surrounding the regulation of digital finance
Key principles of digital finance regulation
Absolute guarantee of payment and transaction security
Promotion of innovative, effective and safe payment solutions
Monitoring the development of initiatives concerning blockchain technology
Proportionate adaptation of regulations and supervision to address the development of fintechs
Gradual adjustment of regulatory intensity
Strong incentives for regulatory authorities to coordinate their policies at the international level
Need for setting dedicated supervisory teams: in France, creation of a Joint Unit by the ACPR and the AMF

18. Thank you for your attention