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

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

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

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

Evolution of the financing model

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

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

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

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

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

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

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

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.

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

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

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

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

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