Europe’s overly complex banking rules increase risk, watchdogs warn


The thousands of pages of European banking rules and guidelines have become so cumbersome to enforce that they threaten the ability of regulators to see real risks build up in their financial systems, the chief financial supervisors of Denmark and the United Kingdom have warned. Norway.

In separate interviews with the Financial Times, Morten Baltzersen, head of Norway’s Financial Supervisory Authority (FSA), and Jesper Berg, head of the Danish counterpart, sharply criticized the extent and complexity of banking regulations. .

“The [2008] The global financial crisis justified more complexity in order to remove loopholes and deal with the interconnection of financial institutions, ”Baltzersen said. “Over time, the pendulum swings too much in the direction of complexity. ”

Berg argued: “It’s too much, and you risk getting lost in the details instead of thinking about the real risks.”

Global banking regulations were overhauled in the aftermath of the financial crisis, mainly through the Basel III accord, which significantly increased banks’ capital requirements and made regulators much more vigilant in monitoring risk. The latest version of the framework has 1626 pages.

The EU now has more than 80 financial services directives, which also apply to members of the European Economic Area like Norway. They include several hundred pages of proposals for transposing the latest Basel measures into Community law.

In the euro area, the control burden is shared between the national supervisors and the European Central Bank.

Norwegian FSA chief Morten Baltzersen says bank supervisors spend too much time dealing with complex legislation © Terje Bendiksby / NTB Scanpix / Reuters

Baltzersen – who has headed the Norwegian FSA since 2011 and oversees 300 employees overseeing a wide range of financial services, including banks, auditors, accountants and real estate brokers – said complex banking rules meant supervisors had “less in fewer resources for supervision. [because] we have to spend so much time dealing with complex legislation and legal disputes [about regulation]”.

Regulators also risked “not seeing the wood of the trees,” or identifying the real risks in their financial systems and markets, as they oversee so many rules, he said. The very prescriptive nature of European regulations left “less and less room” for regulators to exercise the discretion necessary for good supervision.

“The complexity has increased while the prudential substance has not increased,” he added. Measures such as the EU’s decision to introduce relief for bank lending to small and medium-sized enterprises were an example of “partially diluted capital requirements, which undermines financial stability”.

Berg said his 400-person agency could not oversee the implementation of complex EU rules and be successful in its primary function of safeguarding the Danish financial system.

Jesper Berg, Director of the Danish FSA

Jesper Berg, director of the Danish FSA, says banks are partly responsible for the complex rules, as they have pushed for additional measures to benefit their own operations © Carsten Snejbjerg / Bloomberg

The Danish FSA has taken a ‘risk-based approach’ where ‘we don’t give up [certain] requirements, but we don’t necessarily pursue and oversee all the different points of the requirement if we don’t think that’s where the risks are, ”he said.

“I guess most EU supervisors, and especially the smaller ones, have pursued a [similar strategy] as opposed to a legalistic approach in recent years. For large banks active internationally, you will probably be much more diligent than for small banks, ”he added.

Berg said the banks also bore some of the blame, as they had pushed for additional rules to benefit their own operations.

“The banks are not innocent here,” he said. “All banks want to have regulations suited to their competitive advantage. “

Part of the operational burden comes from the EU’s decision to apply the Basel standards to all of its banks, not just the biggest ones like in the US.

Isabelle Vaillant, director of prudential regulation and supervisory policy at the European Banking Authority, which creates the single banking rulebook for the EU and EEA, said she saw no problem with the “Over-regulation” in general, but that the EBA was trying to make the rules “more accessible and digestible” to less complex and less risky banks.

The Basel Committee on Banking Supervision has also reviewed its regulations to see if they can be simplified.

A European Commission official said regulatory complexity was “to some extent inevitable” given the complexity of finances.

“We are aware of the administrative burden associated with regulation, which must of course be reduced to the minimum possible”, added the official. “But, this is the price to pay to ensure that the financial system is prudently prudent. . . The EU regulatory framework is subject to regular review. If necessary, we will revise the rules ”


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