EU financial regulatory machine sputters as crisis-era urgency wanes

LONDON (Reuters) - An engineered slowdown in European Union financial rulemaking has turned into outright stalling in parts, holding back reforms to boost growth and leaving banks unclear over future business models.

An European Union flag flutters outside the EU Commission headquarters in Brussels, Belgium, January 12, 2016. REUTERS/Francois Lenoir

With EU rules mandatory for banks and markets across the 28-country bloc, the sector wants clarity on the final shape of regulation after the most intensive bout of legislation in living memory.

Draft rules still left in the EU pipeline are among the most contentious, with even the European Central Bank expressing concerns over a proposal to rein in risky trading at banks.

The draft law is stuck in the European Parliament with bankers hoping it will wither on the vine.

“It’s superfluous,” said Wim Mijs, chief executive of the European Banking Federation.

The Association of Financial Markets in Europe, which counts investment banks like Goldman Sachs and Deutsche Bank among its members, said it was very unclear what the outcome of the draft law would be.

“Market participants are increasingly concerned about the political uncertainty,” Jouni Aaltonen, AFME’s director of prudential regulation said.

Banks worry the reform in combination with global moves to review capital charges on bank trading books will harm already stressed liquidity in markets, Aaltonen said.

A slower pace in EU rulemaking is deliberate after Brussels pushed through more than 40 laws to rein in risks at lenders and shine a light on markets like derivatives in the aftermath of the 2007-09 financial crisis.

“I’ve been very clear since I took office: my objective is not to try and legislate as much as I possibly can,” EU financial services commissioner Jonathan Hill told Reuters.

With the “big stuff” done, Hill has so far proposed only three new laws, and bankers are not complaining.

“We are not bored,” Mijs said.

Hill has focused on writing 400 standards to implement laws already approved, and on enforcement, with 120 actions taken against member states last year.

But many of the remaining draft reforms still in the works have become bogged down, making it harder for banks and investors to prepare for changes.

Brussels lobbyists warn it may take some time to approve these remaining reforms as the sense of urgency seen in the crisis has gone and issues like migration now dominate in-trays.

“What was a frenzy has gone back to a new normal,” an EU diplomat said.

With fewer new draft laws, the European Parliament, which has joint say with member states, has more time on its hands.

“Parliament has always objected to legislation going through quickly, and if you haven’t got much to do, you can be like a dog with a bone - you make it last,” said Sharon Bowles, who chaired parliament’s economic affairs committee during the financial crisis.


A draft law to increase the use of securitized or pooled-debt to raise funds for companies to grow is core to Hill’s capital markets union plan to boost funding for growth.

While EU states passed their version in record time, it may not be voted on for months in parliament, much to Hill’s frustration.

“Every extra day this proposal takes to pass into law is one more day of missed opportunity for growth, Hill said.

Germany has expressed doubts about a separate draft law introducing a common bank deposit insurance scheme in the euro zone, the final leg of creating a banking union to put the single currency area on a stabler footing.

The EU’s Dutch presidency is trying to kickstart talks on rules for money market funds, a key sector for bank funding, as financial centers like Luxembourg and Ireland have concerns.

Sweeping changes to securities markets to reflect lessons from the crisis are being put back a year to 2018, a decade after Lehman Brothers bank went bust. Core elements of the MiFID II rules governing firms that provide investment services are also being changed.

Adding to the mix, Hill is reviewing rules passed so far, making some policymakers question if all the outstanding proposals are needed.

Few, however, expect any major easing.

“I wouldn’t call it pushback. It’s righting wrongs, correcting mistakes,” Bowles said, citing new “Solvency II” insurance capital rules as an example.

“The word is tweaks,” Mijs agreed.

Other factors are also affecting momentum in EU rulemaking.

Bowles said easier rulemaking like forcing banks to hold more capital has been done, leaving more difficult issues, such as improving corporate governance and conduct at banks.

Mijs said some new rules will be needed for “fintech” -- the nascent industry of financial technology startups like crowdfunding and investment apps -- though so far the European Commission said it would wait and see how the sector develops.

“I do expect some initiatives going on in the digital transformation of banking to require rules to be changed,” Mijs said.

Reporting by Huw Jones; editing by Peter Graff