A Pragmatic Approach to Simplification: The Case of Banking Regulation in the EU

The debate on the level of complexity of EU financial regulation has gained momentum in recent months, with both policymakers and industry stakeholders highlighting the need for a simpler and more stable framework. This paper aims to contribute to this debate by making pragmatic suggestions with specific regard to prudential regulation in the EU, where we identify a number of initiatives that could be pursued in the short to medium term. In the short term, the paper proposes, among others: streamlining the mandates of the European Banking Authority (EBA) for developing implementing rules under the CRR3-CRD6 package; simplifying the market risk rules (Fundamental Review of the Trading book, FRTB), particularly in the area of internal models; reviewing due diligence and transparency provisions for some types of securitizations. In the medium term, we see scope for launching a broader discussion on reforming the EU’s legislative approach to make it more efficient, as well as for addressing fundamental issues in the prudential framework, such as the structure of capital requirements. The main message of our analysis is that the ambitious objective of establishing simpler and more stable rules in the financial sector is a unique opportunity at the current juncture for EU policymakers to improve the quality of banking regulation – making it easier for supervisors to enforce and for financial institutions to implement – without compromising the overarching objectives of avoiding deregulation and ensuring that the financial system remains highly resilient to potential shocks.