An motion plan for the ECB | USAEMALL.com

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The writer is chair of Société Générale and a former member of the executive board of the European Central Bank

European central bankers have repeatedly called for accelerating progress towards the long-sought deepening of capital markets unification in the EU.

Such backing for the capital markets union (CMU) project is highly welcome. However, some further concrete action on the part of the European Central Bank to increase financial integration is even more important. At least three lines of action come to mind.

The first is for the ECB to ensure that bank liquidity can circulate freely in the Eurozone. This is a key requisite for any well-functioning financial system. Surprisingly, this is still not the case, especially for banks that operate in different jurisdictions.

The reason is that some national authorities use loopholes in European legislation to prevent banks from using deposits collected in one country to finance credits made in other countries. The governors of national central banks who sit on its ECB governing council should be made to act consistently with the calls for a unified capital market.

The second line of action is to update the EU supervisory toolkit with a view to alleviating the constraints that prevent banks from developing the European capital market. Although one of the objectives of the CMU is to reduce reliance on their financing and encourage more market-based sources of funding, banks remain essential actors in these markets.

The current regulatory and supervisory framework creates an unnecessary burden. It is overly complex, highly unpredictable and limits cross-border consolidation. Consider just a few examples of initiatives that could be taken by the ECB, together with other European authorities, to improve and simplify it.

For example, having different requirements across Eurozone countries on the amount of capital banks need to hold as cyclical buffers does not make much sense. Likewise, the ECB should reconsider its approach to the regulations on the level of debt and equity banks should hold to ensure the orderly wind down of a failed lender — the minimum requirements for own funds and eligible liabilities (MREL). These at present exceed the demands in other parts of the world, notably the US. It also makes European banks unduly dependent on foreign markets that can absorb the issuance of eligible liabilities.

In addition, the ECB should follow through on previous commitments over the calculation of discretionary capital requirements it can impose on banks to manage risk on top of industry-wide stipulations. It should avoid double-counting risk for these requirements, known as the two pillars in regulatory terminology, in line with the practices of other jurisdictions such as the UK and US.

Last, but not least, the ECB should support the postponement of the adoption of the so-called Basel III reforms related to bank trading activities until at least 2027 or when the US Federal Reserve comes up with a clear plan and implementation date for them. This would reduce competitive distortions across the Atlantic and give regulators time to reflect thoroughly on the soundness of these rules and their undesired effects, including the increasing shift of a large part of capital market activities to the non-regulated sector.

The third line of action is for the ECB to engage more directly with the financial industry — not only banks — to better understand the concerns that have been expressed against the creation of a “European SEC”. The main fear is the addition of yet another layer of regulation and supervision with no accountability and regard for the competitiveness of the European system. This is why most financial players, especially those from third countries, prefer to maintain the current fragmented system that gives them the luxury of choosing which EU country to locate their headquarters, depending on the prevailing rules and prudential practices.

The ECB could be more than just a simple advocate of the savings and investments union (the new wording for CMU). It should lead by example, showing how prudential and regulatory activities can be simplified and be market-friendly.