Smart financial regulation: the balance between stability and growth
The Spanish Institute of Financial Analysts (IEA) has published a report titled “How to improve European competitiveness, growth and innovation through the rationalization of banking regulation.” The regulatory complexity identified by Draghi and Letta as a constraint on Europe’s global competitiveness is creating frictions that limit the financial system’s ability to channel savings into productive investment. According to the report, it is urgent to move from political consensus on regulatory simplification to concrete reforms that explicitly integrate competitiveness and growth objectives into the European regulatory and supervisory framework, while preserving financial stability. The report provides practical recommendations to improve regulation, supervision, and the competitiveness of the European financial sector.
Key highlights:
- Competitiveness and growth mandates in the EU: According to the report, one of the central debates in the EU is whether competitiveness, efficiency, or contribution to growth should be formally incorporated as objectives of regulatory and supervisory authorities, following the UK model.
- The UK model: The UK’s 2023 reform explicitly mandates that the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) consider competitiveness and growth as secondary objectives when setting their policies. This requires regulators to balance the impact of new rules on the sector’s ability to compete internationally and support the economy, without undermining financial stability. This mandate is reinforced through formal tools such as the Chancellor of the Exchequer’s letters, which serve as both a political steering mechanism and an accountability framework. Recent Bank of England decisions, such as the recalibration of optimal capital levels (from 14% to 13%), reflect this shift towards a more balanced regulatory framework between stability and growth.
- The current EU model: At present, financial stability acts as the predominant mandate for supervisory and regulatory authorities in the banking sector. The report raises the question of whether EU authorities should introduce a secondary objective explicitly incorporating competitiveness and growth, in line with the UK approach. According to the report, the current bias prioritising financial stability over competitiveness or economic growth leads authorities to adopt excessively conservative positions, without fully considering unintended costs in terms of credit provision, long-term growth, or innovation.
- A new model: The report proposes introducing a secondary mandate without diluting financial stability, but requiring regulators and supervisors to explicitly manage the trade-off between risk and growth. The proposed framework would be more closely aligned with regulatory developments in the US and the UK, where there is a clear shift towards incorporating competitiveness objectives and enhancing banks’ lending capacity. Europe risks falling behind if it does not act with greater ambition in simplifying regulation and incorporating secondary mandates into its supervisory architecture.
To effectively integrate this secondary mandate, the report puts forward the following recommendations:
- An explicit mandate for competitiveness or contribution to economic growth as a secondary objective for the European regulatory and supervisory.
- Rationalization of Level 2 and Level 3 legislation, whose proliferation has had negative economic impacts.
- Strengthening ex ante and ex post impact assessments with quantifiable metrics on economic impacts, regulatory costs, and effects on credit, margins, and overall competitiveness, including the introduction of a “Level 0 Test” to justify the need for new regulation.
- Simplification of supervisory activity, which will require a cultural shift.
- Simplification of Pillar 1 (capital requirements) and Pillar 2 (supervisory review process), where buffers, rules, and requirements tend to accumulate, overlap, and sometimes override each other.
- Development of vehicles to channel savings into productive investment in Europe.
In conclusion, the objective of this new model is not to weaken financial stability, but to build a more proportionate, coherent, and effective regulatory framework capable of supporting Europe’s strategic autonomy and its welfare model in an increasingly demanding geopolitical environment.
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