The following commentary by Chris De Noose, managing director of Brussels-based European Savings and Retail Banking Group (ESBG) appeared in the latest edition of The Banker.
7 October 2016
The UK referendum vote to leave the EU on June 23 sent shockwaves across the UK, Europe and the world.
For 1000 European savings and retail banks, the referendum made us pause and think about the role we play as locally focused banks that convert deposits from households, public bodies and small- and medium-sized businesses into loans for the jobs-creating real economy. Part of a diverse banking landscape, it is a unique model compared with those banks who seek funding primarily through the markets.
The backlash in the UK made us more convinced than ever of the need for EU policymaking that reflects better the diverse nature of the banking landscape. It also made clear the need to beef up the member states' role versus the increasingly heavyweight EU institutions like the European Commission and European Parliament. The mind-set of policymakers and regulators needs to change too. Throwing out the "one-size-fits-all" policy playbook and shifting towards the principle of proportionality would help. When these elements take hold, a diverse and innovative banking landscape thrives and serves society better.
A case for diversity
For banks and policymakers, diversity means many things. First, a healthy level of competition within the overall banking system. Second, a banking market that stays leaner and meaner and shows greater resistance to financial shocks. Third, it means the savings and retail banking model continues to play an essential role within the banking mix. Built on trust and being really close to customers, forty per cent of all Europeans call on savings and retail banks every day, in rural areas, within the heart of a metropolis or anywhere in between. ESBG sees diversity also taking on a new dimension as the digital revolution takes hold. EU policy should aim to boost innovation, not hamper it.
Subsidiarity: beefing up Member States' role
A diverse, single market for Europe should adhere to subsidiarity, Brussels parlance that describes EU action occurring only when an EU member state cannot sufficiently do so. Criticised as ambiguous, subsidiarity means decisions made at the "lowest" or least centralised level of "competent authority". Fears have boiled over, however, that power has veered to EU bodies in Brussels and Strasbourg, which subsidiarity can help address. Restoring the balance with member states could help quell citizen angst.
Proportionality: mind-set change
Consistent policy goals remain a challenge for EU policymakers. That's where the principle of proportionality can work. A mind-set that forces policymakers to balance costs and benefits of regulation, proportionality is reflected in more recent legislation. But so much more can be done.
One stark example is how the EU call for more growth and jobs from the real economy is undercut by a recent wave of regulation that suppresses appetite to lend by locally focused banks.
There is real need for current and new legislation being applied in a proportionate way to all financial institutions, taking into account their size, complexity and the type of business model they follow. Each piece of legislation should be assessed on a case by case basis, as no simple set of criteria can be used to apply the proportionality principle. Locally-focussed, less-complex financial institutions need to provide bespoke services in regions where they operate. We have seen a bit of progress on this front, but more must be done. The principle could be better applied to supervisory reporting too.
Europe needs better coordination
Europe's future hinges on honest debate firmly anchored on how well member states and their citizens actively help to decide how the EU is to evolve in future. The EU is the essential framework to help savings and retail banks nourish real economy SMEs and households.
Despite the recent bump in the road, the European project should continue on a path of further integration. It is in the self-interest of the 27 remaining member states, and the savings and retail banks residing and serving within them. The trick will be, however, to integrate better by setting proportionate regulation, boosting the member states' role, and promoting a diverse banking landscape. The sooner the better.