The Commission is throwing the principles of good regulation to the wind – new obstacles for economic growth on the way?

The European economy has hit recession, but the word in Brussels is that the European Commission is proposing new regulation for the banking sector. In doing so, it is throwing the principles and processes of good regulation to the wind.

The Commission is planning a potential proposal about the additional capital requirements set for banks under macroprudential regulation. The Commission was originally supposed to undertake a comprehensive reform of the macroprudential framework, involving a careful evaluation of how the different macroprudential tools work together and fit in with the overall prudential framework. A legislative process this significant would require extensive impact assessments and consultations, and in Finland, also the Parliament’s position. The reform would have a direct effect on banks’ loan-granting ability and thereby also on wider matters such as economic growth.

The Commission would now push this comprehensive reform to the side and take shortcuts to advance parts of it. It is asking member states if it can bring significant parts of the macroprudential framework – at short notice and without proper preparation – to the negotiation table that discusses the implementation of the final Basel III standards in the EU.

The Basel Committee began to prepare the Basel III reform almost 15 years ago, and its implementation in the EU has also taken years to prepare. Last autumn, the Basel Committee published a newsletter on enhancing the macroprudential regulatory framework, stating that the matter requires further investigation. The Basel III reform and macroprudential regulation have almost nothing in common, except for the fact that the Basel Committee has traditionally set standards in both.

Introducing macroprudential regulation out of the blue
and fast-forwarding it straight into the legislative process
would violate the basic principles of democratic law-making.

Selling the macroprudential framework’s reform in the EU as an accessory to Basel III would be to mislead political decision-makers. Introducing matters such as this out of the blue and fast-forwarding them straight into the legislative process would violate the basic principles of democratic law-making. It would also violate the Commission’s publicly announced principles and objectives of good regulation.

In this and other legislative preparation processes, Finland must stay alert and demonstrate that it is not just a cork bobbing in the EU waves. Finland must demand due preparation and legislative processes. The Commission must carefully prepare its proposal on banks’ additional capital requirements and other macroprudential instruments in accordance with the normal principles and processes of legislative drafting. Member states must also be given enough time to familiarise themselves with the reform and form their national position after consulting various stakeholder groups.

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Financial and Prudential Regulation

Olli Salmi

Head of Banking Regulation